<PAGE>
THE QUADRA FUNDS
QUADRA LIMITED MATURITY TREASURY FUND
QUADRA VALUE EQUITY FUND
QUADRA INTERNATIONAL EQUITY FUND
QUADRA OPPORTUNISTIC BOND FUND
Supplement Dated June 9, 1997 to
Prospectus Dated January 1, 1997
1. Insert the following text on page 5, above "Investment Objectives and
Policies."
FINANCIAL HIGHLIGHTS
The following table represents selected data for a single outstanding share of
the Quadra Limited Maturity Treasury Fund for the period shown. This information
has been audited in connection with an audit of the Fund's financial statements
by Coopers & Lybrand, LLP independent auditors. The Fund's financial statements
and independent auditors' report thereon are contained in the Fund's Annual
Report and are incorporated by reference into the SAI. Further information about
the Fund's performance is contained in the Annual Report, which may be obtained
from the Trust without charge.
QUADRA LIMITED MATURITY
TREASURY FUND
For the year ending
MARCH 31, 1997 (A)
Net Asset Value per Share, Beginning of $10.00
Period (a)
Investment Operations
Net Investment Income (Loss) 0.08
Net Realized and Unrealized Investment
Gain (Loss) on Investments (0.02)
------
Total from Investment Operations 0.06
Distributions from Net Investment Income (0.08)
------
Net Asset Value per Share, End of Period $9.98
=====
Total Return 0.63%
Net Assets at the End of Period (000's $847
Omitted)
Ratios to Average Net Assets:
Expenses including reimbursement/waiver 0.45% (b)
Expenses excluding reimbursement/waiver 70.40% (b)
Net investment income (loss) including
reimbursement/waiver 4.74% (b)
Portfolio Turnover Rate 0%
<PAGE>
(a) For the period January 28, 1997 (commencement of operations) through
March 31, 1997.
(b) Annualized.
2. Delete the last paragraph on page 27 and insert the following text:
From time to time, certain shareholders may own a large percentage of the shares
of a 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. At times when certain
shareholders have 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 a shareholder vote. As of May 27, 1997
the following shareholder owned 25% or more of the shares of Quadra Limited
Maturity Treasury Fund: Shareholder - Lansdowne Parking, c/o Meredith
Management, 29 Crafts Street, # 300, Newton, MA 02158, Interest - 99.8%.
<PAGE>
PROSPECTUS
THE QUADRA FUNDS
QUADRA LIMITED MATURITY TREASURY FUND
QUADRA VALUE EQUITY FUND
QUADRA INTERNATIONAL EQUITY FUND
QUADRA OPPORTUNISTIC BOND FUND
01.01.97
<PAGE>
THE QUADRA FUNDS
QUADRA LIMITED MATURITY TREASURY FUND
QUADRA VALUE EQUITY FUND
QUADRA INTERNATIONAL EQUITY FUND
QUADRA OPPORTUNISTIC BOND FUND
FUND INFORMATION,
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICES:
QUADRA Capital Partners, L.P.
270 Congress Street
Boston, Massachusetts 02210
617.426.0900
800.595.9291
PROSPECTUS
January 1, 1997
- --------------------------------------------------------------------------------
This Prospectus offers shares of the QUADRA Limited Maturity Treasury Fund,
QUADRA Value Equity Fund, QUADRA International Equity Fund, and QUADRA
Opportunistic Bond Fund (each a "Fund" and collectively the "Funds"). The Funds
are each diversified portfolios of Forum Funds (the "Trust"), a registered,
open-end, management investment company.
This prospectus contains important information about the Trust,
the Funds and their investments, and the services available to their
shareholders that a prospective investor should know before investing.
PLEASE READ IT BEFORE INVESTING IN ANY OF THE FUNDS, AND RETAIN
IT FOR FUTURE REFERENCE.
The Trust has filed with the Securities and Exchange Commission a Statement of
Additional Information dated January 1, 19976 ("SAI"). It contains more detailed
information about the Funds and the Trust and is incorporated into this
Prospectus by reference. The SAI is available along with other related materials
for reference on the SEC's Internet Web Site (http://www.sec.gov). To obtain a
free copy of the SAI, please call The QUADRA Funds at 800.595.9291.
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>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information contained in this Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the Funds are described more fully in
this prospectus under "Investment Objectives and Policies."
QUADRA LIMITED MATURITY TREASURY FUND seeks a high level of income with maximum
credit protection and moderate fluctuation in principal value by investing
primarily in a portfolio of U.S. Treasury bills and notes maturing within 5
years.
QUADRA VALUE EQUITY FUND seeks capital appreciation by investing primarily in a
diversified portfolio of common and preferred stock and securities convertible
into common stock and preferred stock.
QUADRA INTERNATIONAL EQUITY FUND seeks long term capital appreciation by
investing, directly or indirectly, in companies based outside the United States.
QUADRA OPPORTUNISTIC BOND FUND seeks total return, consistent with prudent
investment risk, by investing primarily in a portfolio of domestic and foreign
debt securities.
RISK FACTORS AND INVESTMENT CONSIDERATIONS
There can be no assurance that any of the Funds will achieve its investment
objective, and each Fund's net asset value and total return will fluctuate based
upon changes in the value of its portfolio securities. Upon redemption, an
investment in a Fund may be worth more or less than its original value.
All investments made by the Funds entail some risk. Certain investments and
investment techniques, however, entail additional risks, such as the potential
use of leverage by certain Funds through borrowings or securities lending. For
more information about the risks of investing in the Funds, please see
"Investment Objectives and Policies," "Additional Investment Practices" and
"Appendix A: Investments, Investment Strategies and Risk Considerations."
The QUADRA VALUE EQUITY FUND invests in securities that its investment advisers
believe may be undervalued by the market. This investment policy entails certain
risks in addition to those normally associated with investment in equity
securities, such as the potential for a high degree of volatility and price
fluctuations. See "Investment Objectives and Policies."
The QUADRA INTERNATIONAL EQUITY FUND and the QUADRA OPPORTUNISTIC BOND FUND each
invest in the securities of foreign issuers, including issuers domiciled in
countries with smaller, emerging capital markets, and may invest a significant
portion of their assets in securities denominated in currencies other than U.S.
dollars. Investments in such securities involve certain risks not associated
with domestic investing, including fluctuations in foreign exchange rates,
uncertain political and economic developments, and the possible imposition of
exchange controls or other foreign laws or restrictions. See "Investment
Objectives and Policies Considerations and Risks of Investments in Foreign
Securities."
Normally, the value of the investments made by the QUADRA LIMITED MATURITY
TREASURY FUND and the QUADRA OPPORTUNISTIC BOND FUND will vary inversely with
changes in interest rates. In addition, the Quadra Opportunistic Bond Fund's
investments are subject to "credit risk," which is the risk that an issuer of
securities that the Fund holds will become unable to honor its obligation under
those securities. The QUADRA OPPORTUNISTIC BOND FUND, however, invests only in
investment grade securities (those rated in the top four grades by a nationally
recognized statistical rating organization ("NRSRO") such as Standard & Poor's).
See "Investment Objectives and Policies."
2
<PAGE>
For information regarding the experience of the investment advisers of the Funds
with respect to the management of investment companies, see "Management -
Investment Advisory Services."
MANAGEMENT
INVESTMENT ADVISER. QUADRA Capital Partners, L.P. ("Quadra" or the "Adviser"),
is each Fund's investment adviser. Quadra is responsible for, among other
things, developing and reviewing the investment strategies and policies of each
Fund. See "Management - Investment Advisory Services."
INVESTMENT SUBADVISERS. To assist it in carrying out its responsibilities, the
Adviser has retained the following subadvisers ("Subadvisers") to render
advisory services and make daily investment decisions for each Fund:
- - The portfolio of the QUADRA LIMITED MATURITY TREASURY FUND is managed by
Anhalt/O'Connell, Inc.
- - The portfolio of the QUADRA VALUE EQUITY FUND is managed by Carl Domino
Associates, L.P.
- - The portfolio of the QUADRA INTERNATIONAL EQUITY FUND is managed by McDonald
Investment Management, Inc.
- - The portfolio of the QUADRA OPPORTUNISTIC BOND FUND is managed by LM Capital
Management, Inc.
Quadra is also responsible for monitoring the investments and the performance of
the Subadviser on behalf of each of the Funds. Quadra and the Subadvisers may be
referred to herein as the "Advisers." See "Management Investment Advisory
Services."
ADMINISTRATOR AND DISTRIBUTOR. Forum Financial Services, Inc. is the distributor
of each Fund's shares. Its affiliate, Forum Administrative Services LLC, is each
Fund's administrator. See "Management - Administrator and Distributor."
PURCHASES AND REDEMPTIONS
Shares of the Funds are offered to investors without any sales charge. The
minimum initial investment is $100,000. The Trust reserves the right to waive
the minimum investment requirement. There is no minimum for subsequent
investments.
Shares may be purchased or redeemed on days that the New York Stock Exchange is
open for trading, normally weekdays except customary business holidays and Good
Friday ("Fund Business Day"). Purchase and redemption orders are accepted by the
transfer agent between 9:00 a.m. and 6:00 p.m. (Eastern Time) on each Fund
Business Day. See "Purchases and Redemptions of Shares."
EXCHANGE PRIVILEGES
Shareholders of a Fund may exchange their shares without charge for shares of
any other Quadra Fund or Daily Assets Cash Fund, a money market fund of the
Trust offered by a separate prospectus. See "Purchases and Redemptions of Shares
- - Exchanges."
DIVIDENDS
The Funds distribute substantially all of their net investment income and
capital gains, if any, to shareholders each year. 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."
QUADRA VALUE EQUITY FUND AND QUADRA INTERNATIONAL EQUITY FUND. Dividends
representing the net investment income of the Funds are declared and paid at
least annually. Net capital gains realized by the Funds, if any, also will be
distributed annually.
QUADRA LIMITED MATURITY TREASURY FUND AND QUADRA OPPORTUNISTIC BOND FUND.
Dividends representing the net investment income of the Funds are declared daily
and paid monthly.
3
<PAGE>
EXPENSES OF INVESTING IN THE FUND
The following table should help you understand the various costs and expenses
that you will bear directly or indirectly if you invest in the Fund.
SHAREHOLDER TRANSACTION EXPENSES
(APPLICABLE TO EACH FUND)
Maximum Sales Load Imposed on Purchases.....................................None
Maximum Sales Load Imposed on Reinvested Dividends..........................None
Deferred Sales Load.........................................................None
Redemption Fees.............................................................None
Exchange Fees...............................................................None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
Quadra Quadra Quadra Quadra
Limited Maturity Value International Opportunistic
TREASURY EQUITY EQUITY BOND
<S> <C> <C> <C> <C> <C>
Advisory Fees (after fee waivers)(1)...... 0.25% 0.80% 1.05% 0.50%
12b-1 Fees................................ None None None None
Other Expenses (after
expense reimbursements)(2)............. 0.20% 0.20% 0.20% 0.20%
----- ----- ----- -----
Total Fund Operating Expenses
(after fee waivers and
expense reimbursements)(3)............. 0.45% 1.00% 1.25% 0.70%
</TABLE>
(1)The contractual Advisory Fees are 0.45% for the Quadra Limited Maturity
Treasury Fund, 1.00% for the Quadra Value Equity Fund, 1.25% for the Quadra
International Equity Fund, and 0.70% for the Quadra Opportunistic Bond
Fund. Until May 1, 1997, however, the Adviser has agreed to waive its fees
and/or reimburse each Fund's expenses in order to cap each Fund's expenses
at the amount of Total Operating Expenses stated above.
(2)Absent expense reimbursements, Other Expenses for Quadra Limited
Maturity Treasury Fund, Quadra Value Equity Fund, Quadra International
Equity Fund and Quadra Opportunistic Bond Fund would be 0.25% with respect
to each Fund. The amount of the Other Expenses is an estimate for the
Funds' first fiscal year of operations ending March 31, 1997.
(3)Absent expense reimbursements and fee waivers, Total Fund Operating
Expenses for Quadra Limited Maturity Fund, Quadra Value Equity Fund, Quadra
International Equity Fund, and Quadra Opportunistic Bond Fund,
respectively, would be 0.70%, 1.25%, 1.50% and 0.95%. For a further
description of the various costs and expenses incurred in the Funds'
operation, SEE "Management."
4
<PAGE>
EXAMPLE
The following is an example of the expenses you would pay on a hypothetical
$1,000 investment, assuming a 5% annual return, the reinvestment of all
dividends and distributions and redemption at the end of each period. The
Example is based on the expenses listed in the table.
ONE YEAR THREE YEARS
Quadra Limited Maturity Treasury Fund.....................$5 $15
Quadra Value Equity Fund..................................10 32
Quadra International Equity Fund..........................13 40
Quadra Opportunistic Bond Fund.............................7 22
The 5% annual return is not predictive of and does not represent the funds'
projected returns; rather, it is required by government regulation. This example
should not be considered a representation of past or future expenses or return;
actual expenses or return may be more or less than these examples.
INVESTMENT OBJECTIVES AND POLICIES
QUADRA LIMITED MATURITY TREASURY FUND
INVESTMENT OBJECTIVE. The Fund seeks a high level of income with maximum credit
protection and moderate fluctuation in principal value. There can be no
assurance, of course, that the Fund will achieve its investment objective.
INVESTMENT POLICIES. The Fund will seek to attain its investment objective by
investing primarily in a portfolio of U.S. Treasury bills and notes maturing
within 5 years. Under normal circumstances, the Fund intends to invest at least
65% of its assets in U.S. Treasury bills and notes. The Fund may invest up to
35% of its assets in other government securities. For a further description of
the Fund's investment policies see "Additional Investment Practices" below.
INVESTMENT CONSIDERATIONS AND RISKS. The Fund's yield and share price change
daily in response to changes in interest rates and market conditions and other
economic and political news. In general, the value of the Fund's investments
will rise when interest rates fall, and vice versa. The Fund will restrict its
portfolio maturity and duration in order to limit its exposure to this interest
rate risk. The Fund may also employ various investment techniques to hedge a
portion of its risk; there is no guarantee that these strategies will work as
intended. Neither the Fund's share price nor its yield is guaranteed by the
United States Government.
QUADRA VALUE EQUITY FUND
INVESTMENT OBJECTIVE. The investment objective of the Quadra Value Equity Fund
is to seek capital appreciation. The Fund seeks to achieve its investment
objective by investing primarily in a diversified portfolio of equity
securities, including common and preferred stock and securities convertible into
common and preferred stock. There can be no assurance, of course, that the Fund
will achieve its investment objective.
INVESTMENT POLICIES. Except 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. The Fund intends to invest
principally in the equity securities of companies that the Subadviser believes
are undervalued in comparison to similar companies. To identify these companies,
the Subadviser will employ a number of valuation measures, including but not
limited to, an analysis of price/earnings ratios, price/book ratios, dividend
yield and measure of current profitability. The Fund also may invest in warrants
and the obligations of financial institutions and purchase securities on a
when-issued or forward commitment basis. The Fund may purchase and sell futures
contracts and options on futures contracts. For a further description of the
Fund's investment
5
<PAGE>
policies, see "Additional Investment Practices" below and
"Appendix A: Investments, Investment Strategies and Risk Considerations" which
is attached to this Prospectus.
INVESTMENT CONSIDERATIONS AND RISKS. The market price of the equity securities
in which the Fund invests may change rapidly in response to many factors,
including the market's perception of the value of those securities. Because the
Adviser seeks to invest in companies whose fundamental attributes, in the
Adviser's opinion, have not been fully recognized by the investment community,
the Fund's portfolio may exhibit a high degree of volatility or price
fluctuation when compared to market averages.
An investment in the Fund is not by itself a complete or balanced investment
program. Nevertheless, the securities in which the Fund invests may be an
important part of an investor's portfolio, particularly for long-term investors
able to tolerate short-term fluctuations in the Fund's net asset value.
Investors in the Fund should be willing to accept the risks associated with
investments in the stock market and should consider an investment in the Fund
only as a part of their overall investment portfolio.
QUADRA INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE. The investment objective of the Fund is long-term capital
appreciation. The Fund seeks to achieve its objective through investment in
securities markets outside the United States. There is no assurance that the
Fund will achieve its objective.
INVESTMENT POLICIES. The Fund will normally invest at least 65% of its total
assets in equity securities of companies domiciled outside the United States.
The Fund may also invest in the securities of closed-end investment companies
investing primarily in foreign securities and in debt obligations of foreign
governments, international organizations and foreign corporations. The Fund
invests in the securities of issuers in countries with developed markets and
countries with developing or emerging markets. The Fund considers countries
having developing markets to be all countries that are generally considered to
be developing or emerging countries by the International Bank for Reconstruction
and Development (more commonly referred to as the World Bank) or the
International Finance Corporation, as well as countries that are classified by
the United Nations or otherwise regarded by their authorities as developing.
Currently, the countries not in this category include Ireland, Spain, New
Zealand, Australia, the United Kingdom, Italy, the Netherlands, Belgium,
Austria, France, Canada, Germany, Denmark, the United States, Sweden, Finland,
Norway, Japan, Iceland, Luxembourg and Switzerland. In addition, as used in this
Prospectus, developing market equity securities means (i) equity securities of
companies for which the principal securities trading market is a developing
market country, as defined above, (ii) equity securities, traded in any market,
of companies that derive 50% or more of their total revenue from either goods or
services produced in developing market countries or sales made in developing
market countries or (iii) equity securities of companies organized under the
laws of, and with a principal office in, a developing market country. The Fund
will consider the closed-end investment companies in which it invests to be
located in the country or countries in which those companies primarily invest.
The Fund's investments will include common and preferred stock, convertible
securities, American Depository Receipts and European Depository Receipts. The
Fund may also invest in U.S. Government Securities, financial institution
obligations, when-issued securities and forward commitments and may purchase and
sell futures contracts and options on futures contracts. For a further
description of the Fund's investment policies see "Additional Investment
Practices" below and "Appendix A: Investments, Investment Strategies and Risk
Considerations" which is attached to this Prospectus.
6
<PAGE>
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.
The Fund does not currently intend to invest more than 25% of its total assets
in issuers located in any one country, except for Japan. To the extent it
invests in issuers located in one country, the Fund is susceptible to factors
adversely affecting that country. See "Investment Objectives and Policies -
Considerations and Risks of Investments in Foreign Securities."
The Fund may acquire emerging market securities that are denominated in
currencies other than the currency of the country of the issuer. However, the
Fund limits the amount of its total assets that may be denominated in one
currency (other than the U.S. dollar) to 25%.
In recent years, many emerging market countries have begun programs of economic
reform: removing import tariffs, dismantling trade barriers, deregulating
foreign investment, privatizing state owned industries, permitting the value of
their currencies to float against the dollar and other major currencies, and
generally reducing the level of state intervention in industry and commerce.
Important intra-regional economic integration also holds the promise of greater
trade and growth. At the same time, significant progress has been made in
restructuring the heavy external debt burden that certain emerging market
countries accumulated during the 1970s and 1980s. While there is no assurance
that these trends will continue, the Fund's investment adviser will seek out
attractive investment opportunities in these countries.
INVESTMENT CONSIDERATIONS AND RISKS. Investments in issuers located in countries
with smaller, emerging capital markets, involve certain risks not associated
with domestic investing, including fluctuations in foreign exchange rates,
uncertain political and economic developments, and the possible imposition of
exchange controls or other foreign governmental laws or restrictions. An
investment in the Fund is not by itself a complete or balanced investment
program. Because international investments generally involve risks in addition
to those risks associated with investments in the United States, the Fund should
be considered only as a vehicle for international diversification and not as a
complete investment program. Nevertheless, an investment in international equity
securities may be an important part of an investor's portfolio, particularly for
long-term investors able to tolerate short-term fluctuation in the Fund's net
asset value. See "Considerations and Risks of Investment in Foreign Securities."
QUADRA OPPORTUNISTIC BOND FUND
INVESTMENT OBJECTIVE. The Fund seeks total return consistent with prudent
investment risk. 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. The Fund will normally invest at least 65% of its total assets in
such securities. The Fund pursues opportunities for increased returns by
selecting securities on the basis of their capital appreciation as well as
current income potential. The Fund invests in a diversified portfolio of fixed-
and variable-rate U.S. dollar and non-dollar denominated fixed income securities
of a broad spectrum of United States and foreign issuers, including U.S.
Government Securities and the debt securities of financial institutions,
corporations, and others. The Fund also may purchase asset-based securities,
participation interests, zero-coupon securities, inverse floaters, when-issued
securities, forward commitments and engage in dollar roll transactions and swap
agreements. For a further description of the Fund's investment policies see
7
<PAGE>
"Additional Investment Practices" below and "Appendix A: Investments; Investment
Techniques and Risk Considerations."
The Fund may invest any amount of its assets in U.S. Government Securities. The
Fund may not, however, invest more than 30 percent of its total assets in the
securities issued or guaranteed by any single agency or instrumentality of the
U.S. Government, except the U.S. Treasury.
The Fund may invest in investment grade debt securities or unrated securities
determined by the Subadviser to be of equivalent quality. Investment grade
securities are securities that are rated, at the time of purchase, within the
four highest long-term or two highest short-term rating categories assigned by a
NRSRO or which are unrated and determined by the Subadviser to be of comparable
quality. The Fund may also invest in investment grade securities of financial
institutions and corporations. See "Additional Investment Policies - Rating
Matters" below. The Fund may invest up to 10 percent of its total assets in
participation interests purchased from financial institutions in loans or
securities in which the Fund may invest directly.
The Fund may also invest up to 30 percent of its total assets in the following
instruments that the Subadviser believes do not present undue risk: (i) U.S.
dollar denominated and non-U.S. dollar denominated instruments issued or
guaranteed by governments of foreign countries or by those countries' political
subdivisions, agencies or instrumentalities, and (ii) debt obligations of
foreign corporations. The Fund will invest only in U.S. dollar denominated
instruments of emerging market issuers, and will limit its investments in
emerging market issuers to 20 percent of its total assets. Emerging market
countries are defined above with respect to Quadra International Equity Fund. In
addition, the Fund may invest up to 10 percent of its total assets in securities
denominated in Canadian dollars.
The Fund invests in debt obligations with maturities (or average life in the
case of mortgage-backed and similar securities) ranging from short-term
(including overnight) to 50 years. Under normal circumstances, the Fund's
portfolio of securities will have an average dollar-weighted portfolio maturity
between 3 and 7 years and a duration between 3 and 5 years. Duration is a
measure of a debt security's average life that reflects the present value of the
security's cash flow and, accordingly, is a measure of price sensitivity to
interest rate changes ("duration risk"). Because earlier payments on a debt
security have a higher present value, duration of a security, except a
zero-coupon security, is less than the security's stated maturity.
The Fund may also engage in certain strategies involving options (both
exchange-traded and over-the-counter) to attempt to enhance the Fund's return
and may attempt to reduce the overall risk of its investments ("hedge") by using
options and futures contracts. The Fund's ability to use these strategies may be
limited by market considerations, regulatory limits and tax considerations. The
Fund may write covered call and put options, buy put and call options, buy and
sell interest rate futures contracts and buy options and write covered options
on those futures contracts. An option is covered if, so long as the Fund is
obligated under the option, it owns an offsetting position in the underlying
security or futures contract or maintains a segregated account of liquid,
high-grade debt instruments with a value at all times sufficient to cover the
Fund's obligations under the option. See "Appendix A: Investments, Investment
Strategies and Risk Considerations" which is attached to this Prospectus.
INVESTMENT CONSIDERATIONS AND RISKS. In general, the value of the Fund's
investments will rise when interest rates fall, and vice versa. The Fund will
restrict its portfolio maturity and duration in order to limit its exposure to
this interest rate risk. Although the Fund may also employ various investment
techniques to hedge against certain risks, there is no guarantee that these
strategies will work as intended.
8
<PAGE>
In addition to exposure to changes in interest rates, the Fund is subject to the
risk that the issuers of securities in the Fund's portfolio will become unable
to honor their obligations under the debt instruments held by the Fund. This
risk exists even though the Quadra Opportunistic Bond Fund may only invest in
investment grade securities (those rated in the top four grades by a NRSRO.
The Fund's investments in the securities of issuers located in foreign countries
may also involve certain risks, such as the possible imposition of exchange
controls or other foreign governments' laws or restrictions. Because the Fund
may invest up to 30% of its total assets in instruments denominated in
currencies other than U.S. dollars, the Fund is subject to the risk that
fluctuations in the exchanges rates between the U.S. dollar and foreign
currencies may negatively affect its investments. In addition, income from
foreign securities will be received and realized in foreign currencies, and the
Fund is required to compute and distribute income in U.S. dollars. Accordingly,
a decline in the value of a particular foreign currency against the U.S. dollar
will reduce the dollars available to make a distribution. Similarly, if the
exchange rate declines between the time after the Fund's income has been earned
and computed in U.S. dollars and the time it is paid, or between the time the
Fund incurs expenses in U.S. dollars and the time such expenses are paid, the
Fund may have to liquidate portfolio securities to acquire sufficient U.S.
dollars to make a distribution. See "Investment Objectives and Policies
Considerations and Risks of Investments in Foreign Securities."
CONSIDERATIONS AND RISKS OF INVESTMENTS IN FOREIGN SECURITIES.
GENERAL. The Quadra International Equity Fund and the Quadra Opportunistic Bond
Fund may both invest in securities of foreign issuers, including issuers located
in countries with smaller, emerging capital markets. Investments in foreign
securities involve certain risks not associated with domestic investing,
including fluctuations in foreign exchange rates, uncertain political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Because international investments
generally involve risks in addition to those risks associated with investments
in the United States, the Funds should be considered only as a vehicles for
international diversification and not as a complete investment program.
Nevertheless, an investment in international securities may be an important part
of an investor's portfolio, particularly for long-term investors able to
tolerate short-term fluctuations in the Funds' net asset value.
POLITICAL AND ECONOMIC RISKS. In any emerging market country, there is the
possibility of expropriation of assets, confiscatory taxation, nationalization,
foreign exchange controls, foreign investment controls on daily stock market
movements, default in foreign government securities, political or social
instability or diplomatic developments which could affect investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as economic growth rates,
rates of inflation, capital reinvestment, resources, self-sufficiency and
balance of payments positions. Certain foreign investments may also be subject
to foreign withholding taxes, thereby reducing the income available for
distribution to a Fund's shareholders. The economies of developing countries
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade. These economies also have been and may continue to be adversely affected
by economic conditions in the countries in which they trade.
Certain emerging market countries may restrict investment by foreign entities.
For example,
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some of these countries may limit the size of foreign investment in certain
issuers, require prior approval of foreign investment by the government, impose
additional tax on foreign investors or limit foreign investors to specific
classes of securities of an issuer that have less advantageous rights (with
regard to price or convertibility, for example) than classes available to
domiciliaries of the country. These restrictions or controls may at times limit
or preclude investment in certain securities and may increase the costs and
expenses of a Fund.
Substantial limitations may also exist in certain countries with respect to a
foreign investor's ability to repatriate investment income, capital or the
proceeds of sales of securities. The Portfolio could be adversely affected by
delays in, or refusals to grant, any required governmental approvals for
repatriation of capital. If a deterioration occurs in a country's balance of
payments, the country could impose temporary restrictions on foreign capital
remittances. In the event of expropriation, nationalization or other
confiscation, a Fund could lose its entire investment in the country involved.
FINANCIAL INFORMATION AND STANDARDS AND REGULATION OF ISSUERS. Issuers of
securities in foreign jurisdictions are generally not subject to the same degree
of regulation as are U.S. issuers with respect to such matters as insider
trading rules, restrictions on market manipulation, shareholder proxy
requirements and timely disclosure of information. Foreign companies may not be
subject to uniform accounting, auditing and financial reporting standards.
Often, available information about issuers and their securities is less
extensive, and, in certain circumstances, substantially less extensive in
foreign markets, and particularly emerging market countries, than in the United
States. In addition, laws in foreign countries governing business organizations,
bankruptcy and insolvency may provide less protection to security holders such
as the Fund than that provided by U.S. laws.
REGULATION AND LIQUIDITY OF MARKETS. Government supervision and regulation of
exchanges and brokers in emerging market countries is frequently less extensive
than in the United States. Therefore, there is an increased risk of uninsured
loss due to lost, stolen or counterfeit stock certificates. These markets may
have different clearance and settlement procedures. Securities settlements may,
in some instances, be subject to delays and related administrative
uncertainties. In certain cases, settlements have not kept pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could adversely affect or interrupt the Fund's intended
investment program or result in investment losses due to intervening declines in
security values.
The securities markets of many foreign countries, including emerging market
countries, are relatively small, with the majority of market capitalization and
trading volume concentrated in a limited number of companies representing a
small number of industries. Consequently, a Fund whose investment portfolio
includes securities traded in such markets may experience greater price
volatility and significantly lower liquidity than a portfolio invested solely in
equity securities of United States companies. These foreign markets may be
subject to greater influence by adverse events generally affecting the market,
and by large investors trading significant blocks of securities, than is usual
in the United States. Furthermore, reduced secondary market liquidity may make
it more difficult for the Fund to determine the value of its portfolio
securities or dispose of particular instruments when necessary. Brokerage
commissions and other transaction costs on and off of foreign securities
exchanges are generally higher as well.
CURRENCY FLUCTUATIONS AND DEVALUATIONS. Because the Quadra International Equity
Fund and Quadra Opportunistic Bond Fund will invest in non-U.S. dollar
denominated securities, changes in foreign currency exchange rates will affect
the value of each Fund's investments. A decline in the value of currencies in
which a Fund's investments
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are denominated against the U.S. dollar will result
in a corresponding decline in the dollar value of its assets. This risk tends to
be heightened in the case of investing in certain emerging market countries. For
example, some currencies of emerging market countries have experienced steady
devaluations relative to the U.S. dollar, and major adjustments have been made
in certain of such currencies periodically. Some emerging market countries may
also have managed currencies which do not freely float against the U.S. dollar.
Exchange rates are influenced generally by the forces of supply and demand in
the foreign currency markets and by numerous other political and economic events
occurring outside the United States, many of which may be difficult, if not
impossible, to predict.
The Quadra International Equity Fund and the Quadra Opportunistic Bond Fund may
each enter into foreign currency forward contracts to purchase or sell foreign
currencies in anticipation of its currency requirements and to protect against
possible adverse movements in foreign exchange rates. Although such contracts
may reduce the risk of loss to the Fund due to a decline in the value of the
currency which is sold, they also limit any possible gain which might result
should the value of such currency rise. See "Appendix A: Investments, Investment
Techniques and Risk Considerations - Foreign Exchange Contracts and Foreign
Currency Forward Contracts."
INFLATION. Several emerging market countries have experienced substantial, and
in some periods extremely high, rates of inflation in recent years. Inflation
and rapid fluctuations in inflation rates may have very negative effects on the
economies and securities markets of certain emerging market countries. Further,
inflation accounting rules in some emerging market countries require, for
companies that keep accounting records in the local currency, that certain
assets and liabilities be restated on the company's balance sheet in order to
express items in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits for certain emerging market
companies.
GEOGRAPHIC CONCENTRATION. To the extent a Fund invests in issuers located in one
country, it is susceptible to factors adversely affecting that country. In
particular, these factors may include the political and economic developments
and foreign exchange rate fluctuations discussed above. The Quadra International
Equity Fund currently does not intend to invest more than 25% of its total
assets in issuers located in any one country, except for Japan. As a result of
investing substantially in one country, the value of a Fund's assets may
fluctuate more widely than the value of shares of a comparable Fund having a
lesser degree of geographic concentration.
INVESTMENT IN JAPANESE ISSUERS. Investments by the Quadra International Equity
Fund in securities of Japanese issuers involve certain considerations in
addition to those associated with investment in securities of U.S. issuers. Such
risks include, but are not limited to, currency fluctuations, political
instability and economic factors.
In addition to uncertainties in currency stability, Japan's government has seen
several collapses of its ruling coalitions since 1993. The Liberal Democratic
Party is now strongly represented in the country's government after the October
20, 1996 election. These election results may prove to be a significant
determining factor in the economic status of the upcoming year as well. Also,
Japan has consistently recorded large account trade surpluses with the U.S.,
causing difficulties in the relations between the two countries. Although Japan
and the U.S. recently agreed in principle to increase Japanese imports of
American automobiles and automotive parts, the likelihood remains that friction
between the U.S. and Japan will continue in the immediate future. Finally,
Japan's banking industry is undergoing problems related to bad
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loans and declining values of real estate. For further information see
"Investment Policies - Certain Information Concerning Japan" in the SAI.
ADDITIONAL INVESTMENT PRACTICES
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 the Fund's outstanding voting securities. A majority of a
Fund's outstanding voting securities means the lesser of 67 percent of the
shares of the Fund present or represented at a shareholders' meeting at which
the holders of more than 50 percent of the shares are present or represented, or
more than 50 percent 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 without shareholder approval. The
investments and investment techniques identified in this prospectus, and their
associated risks are described in more detail in "Appendix A: Investments,
Investment Strategies and Risk Considerations" which is attached to this
prospectus. Also, the Funds' investment policies, including additional
fundamental policies, are described further in the SAI.
DIVERSIFICATION. Each Fund is a "diversified" portfolio as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). As a fundamental
policy, with respect to 75 percent of its assets, no Fund may purchase a
security (other than a U.S. Government Security) if, as a result, (i) more than
5 percent 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 percent of the outstanding
voting securities of any single issuer. Each Fund reserves the right to invest
all or a portion of its assets in another diversified, open-end investment
company with substantially the same investment objective and policies as the
Fund.
CONCENTRATION. Each Fund is prohibited from concentrating its assets in the
securities of issuers in any single industry. As a fundamental policy, no Fund
may purchase securities if, immediately after the purchase, more than 25 percent
of the value of the Fund's total assets would be invested in the securities of
issuers conducting their principal business activities in the same industry.
This limit does not apply to investments in U.S. Government Securities, foreign
government securities, repurchase agreements covering U.S. Government Securities
or investment company securities.
ILLIQUID SECURITIES. No Fund may knowingly acquire securities if, as a result,
more than 15 percent of the Fund's net assets taken at current value would be
invested in 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, including repurchase agreements maturing in more than
seven days.
BORROWING AND LENDING. As a fundamental policy, each Fund may borrow money from
banks or by entering into reverse repurchase agreements, but the Funds will
limit borrowings to amounts not in excess of 33 1/3% of the value of the Fund's
total assets (computed immediately after the borrowing). Borrowing for other
than temporary or emergency purposes or meeting redemption requests is limited
to 5 percent of the value of each Fund's total assets. When a Fund establishes a
segregated account to limit the amount of leveraging of the Fund with respect to
certain investment techniques, the Fund does not treat those techniques as
involving borrowings (although they may have characteristics and risks similar
to borrowings and result in the Fund's assets being leveraged). See "Appendix A:
Investments, Investment Strategies and Risk Considerations - Borrowing" and
"Techniques Involving Leverage." As a fundamental policy, no Fund may make loans
except for loans of portfolio securities, through the use of repurchase
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agreements, and through the purchase of debt securities that are otherwise
permitted investments for the Fund.
SHORT SALES. The Funds may not enter into short sales of securities except short
sales "against the box." In a short sale against the box, a Fund sells
securities it owns or has the right to acquire at no additional cost. The Fund
does not immediately deliver the securities sold, however. The seller is said to
have a short position in the securities sold until it delivers the securities,
at which time it receives the proceeds of the sale. The Fund's decision to make
a short sale "against the box" may be a technique to hedge against market risks
when the Subadviser believes that the price of a security may decline, causing a
decline in the value of a security owned by the Fund or a security convertible
into or exchangeable for such security. In such case, any future losses in the
Fund's long position would be reduced by an offsetting future gain in the short
position. The Fund's ability to enter into short sales transactions is limited
by certain tax requirements. See "Dividends, Distributions and Taxes" in the
SAI.
TEMPORARY DEFENSIVE POSITION. When business or financial conditions warrant,
each Fund may assume a temporary defensive position and invest all or any
portion of their assets in cash or in cash equivalents, including (i) short-term
U.S. Government Securities, (ii) prime quality short-term instruments of
commercial banks, (iii) prime quality commercial paper, (iv) repurchase
agreements with banks and broker-dealers covering any of the securities in which
the Fund may invest directly and (v) shares of money market mutual funds. Prime
quality refers to the two highest short-term ratings of a nationally recognized
statistical rating organization. During periods when and to the extent that a
Fund has assumed a temporary defensive position, it will not be pursuing its
investment objective. The Funds may from time to time maintain investments in
cash and cash equivalents pending investment in securities. The Quadra
International Equity Fund may hold cash and bank instruments denominated in any
major foreign currency.
COMMON INVESTMENT TECHNIQUES. Each of the Funds may purchase U.S. Government
Securities and enter into repurchase agreements (for reasons other than
temporary defensive purposes) and reverse repurchase agreements, may lend their
portfolio securities and may purchase portfolio securities on a when-issued or
forward commitment basis. It is currently anticipated that the Quadra Value
Equity Fund and Quadra International Equity Fund (the "Equity Funds") will not
enter into reverse repurchase agreements or purchase portfolio securities on a
when-issued or forward commitment basis to any significant extent.
FIXED INCOME SECURITIES AND THEIR CHARACTERISTICS. Investments by the Quadra
Limited Maturity Treasury Fund and the Quadra Opportunistic Bond Fund (the
"Fixed Income Funds") in U.S. Government and investment grade fixed income
securities, including money market instruments, are subject to risk even if all
fixed income securities in the Funds' portfolios are paid in full at maturity.
All fixed income securities, including U.S. Government Securities, can change in
value when there is a change in interest rates or the issuer's actual or
perceived creditworthiness or ability to meet its obligations.
The market value of the interest-bearing debt securities held by the Fixed
Income 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,
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
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creditworthiness will also affect the market value of the debt securities of
that issuer. The possibility exists, therefore, that, the ability of any issuer
to pay, when due, the principal of and interest on its debt securities may
become impaired.
The Quadra Opportunistic Bond Fund may also invest in fixed income securities
issued by the governments of foreign countries or by those countries' political
subdivisions, agencies or instrumentalities as well as by supranational
organizations such as the International Bank for Reconstruction and Development.
To the extent otherwise permitted, the Fund may invest in these securities if
the Subadviser believes that the securities do not present risks inconsistent
with a Fund's investment objective.
RATING MATTERS. The Quadra Opportunistic Bond Fund also may purchase unrated
securities if the Subadviser 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. The Fund may retain a security whose rating
has been lowered below the Fund's lowest permissible rating category (or that
are unrated and determined by the Subadviser to be of comparable quality to
securities whose rating has been lowered below the Fund's lowest permissible
rating category) if the Subadviser determines that retaining the security is in
the best interests of the Fund.
The Quadra Opportunistic Bond Fund's investments are subject to "credit risk"
relating to the financial condition of the issuers of the securities that the
Funds hold. To limit credit risk, the Fund's investments in rated securities are
limited to securities that are investment grade - rated in the top four
long-term investment grades by a NRSRO or in the top two short-term investment
grades by an NRSRO. Accordingly, the lowest permissible long-term investment
grades for corporate bonds, including convertible bonds, are Baa in the case of
Moody's Investor Service ("Moody's") and BBB in the case of Standard & Poor's
("S&P") and Fitch Investors Service, L.P. ("Fitch"); the lowest permissible
long-term investment grades for preferred stock are Baa in the case of Moody's
and BBB in the case of S&P and Fitch; and the lowest permissible short-term
investment grades for short-term debt, including commercial paper, are Prime-2
(P-2) in the case of Moody's, A-2 in the case of S&P and F-2 in the case of
Fitch. A further description of the rating categories of certain NRSROs is
contained in the SAI. All these ratings are generally considered to be
investment grade ratings, although Moody's indicates that securities with
long-term ratings of Baa have speculative characteristics, and issuers whose
securities are rated in the lowest investment grade are more likely to have a
weakened capacity to make principal and interest payments due to changes in
economic conditions or other circumstances than is the case with issuers of
higher grade bonds.
VARIABLE AND FLOATING RATE SECURITIES. The securities in which the Quadra
Opportunistic Bond Fund invests may have variable or floating rates of interest
and, under certain limited circumstances, may have varying principal amounts.
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. Similarly 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 Treasury
or other government securities or indices on those securities as well as any
other rate of interest or index. Certain variable rate securities pay interest
at a rate that varies inversely to prevailing short-term interest
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rates (sometimes referred to as inverse floaters). For example, upon reset, the
interest rate payable on a security may go down when the underlying index has
risen. During periods when short-term interest rates are relatively low as
compared to long-term interest rates, the Fund may attempt to enhance its yield
by purchasing inverse floaters. Certain inverse floaters may have an interest
rate reset mechanism that multiplies the effects of changes in the underlying
index. While this form of leverage may increase the security's, and thus the
Fund's, yield, it may also increase the volatility of the security's market
value.
There may not be an active secondary market for any particular floating or
variable rate instrument; this could make it difficult for the Fund to dispose
of the instrument during periods of market volatility or economic uncertainty or
if the issuer's credit became impaired at a time when the Fund was not entitled
to exercise any demand rights it might have. The Fund could, for this or other
reasons, suffer a loss with respect to the instrument. The Advisers monitor 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 at any
time.
Certain securities may have an initial principal amount that varies over time
based on an interest rate index, and, accordingly, the Fund might be entitled to
less than the initial principal amount of the security upon the security's
maturity. The Funds intend to purchase these securities only when their Adviser
or Subadviser believes the interest income from the instrument justifies any
principal risks associated with the instrument. The Advisers may attempt to
limit any potential loss of principal by purchasing similar instruments that are
intended to provide an offsetting increase in principal. There can be no
assurance that an Adviser will be able to limit the effects of principal
fluctuations and, accordingly, a Fund may incur losses on those securities even
if held to maturity without issuer default.
CORE AND GATEWAY-REGISTERED TRADEMARK-. Notwithstanding the other investment
policies of the Funds, each Fund may seek to achieve its investment objective by
converting to a Core and Gateway structure. Upon future action by the Board of
Trustees and notice to shareholders, a Fund may convert to this structure. As a
result, the Fund would hold as its only investment, shares of another investment
company having substantially the same investment objective and policies as the
Fund.
PORTFOLIO TRANSACTIONS. The Subadvisers place orders for the purchase and sale
of assets they manage with brokers and dealers that they select. The Subadvisers
seek "best execution" for all portfolio transactions, but a Fund may pay higher
than the lowest available commission rates when the Subadviser believes it is
reasonable to do so in light of the value of the brokerage and research services
provided by the broker effecting the transaction.
Commission rates for brokerage transactions are fixed on many foreign securities
exchanges, and this may cause higher brokerage expenses to accrue to a Fund that
invests in foreign securities than would be the case for comparable transactions
effected on United States securities exchanges.
The frequency of portfolio transactions of a Fund (the portfolio turnover rate)
will vary from year to year depending on many factors. From time to time a Fund
may engage in active short-term trading to take advantage of price movements
affecting individual issues, groups of issues or markets. Tax rules applicable
to short-term trading may affect the timing of a Fund's portfolio transactions
or its ability to realize short-term trading profits or establish short-term
positions. An annual portfolio turnover rate of 100% would occur if all of the
securities in a Fund were replaced once in a period of one year. Higher
portfolio turnover rates may result in increased brokerage costs to a Fund and a
possible increase in short-term capital gains or losses. For the fiscal year
ending March 31, 1997,
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the estimated portfolio turnover rate for each of Quadra Limited Maturity
Treasury Fund, Quadra Value Equity Fund, Quadra International Equity Fund, and
Quadra Opportunistic Bond Fund is not expected to exceed 100%.
MANAGEMENT
The business of the Trust and the Funds is managed under the direction of the
Board. The Board formulates the general policies of the Funds and meets
periodically to review each Fund's performance, monitor its investment
activities and practices, and discuss other matters affecting the Funds and the
Trust. Additional information regarding the Trustees, as well as the Trust's
executive officers, may be found in the SAI under the heading "Management -
Trustees and Officers."
INVESTMENT ADVISORY SERVICES
THE ADVISER
QUADRA CAPITAL PARTNERS, L.P. located at 270 Congress Street, Boston,
Massachusetts 02210, serves as investment adviser to the Funds pursuant to an
investment advisory agreement with the Trust. Subject to the general control of
the Board, the Adviser is responsible for among other things, developing a
continuing investment program for each Fund in accordance with its investment
objective and reviewing the investment strategies and policies of each Fund.
Quadra has entered into investment sub-advisory agreements with the Subadvisers
to exercise investment discretion over the assets (or a portion of assets) of
each Fund.
For its services under the Investment Advisory Agreement, Quadra receives, with
respect to the Quadra Limited Maturity Treasury Fund a fee at an annual rate of
0.45 percent of that Fund's average daily net assets; with respect to the Quadra
Value Equity Fund a fee at an annual rate of 1.00 percent of that Fund's average
daily net assets; with respect to the Quadra International Equity Fund a fee at
an annual rate of 1.25 percent of that Fund's average daily net assets; and,
with respect to the Quadra Opportunistic Bond Fund a fee at an annual rate of
0.70 percent of that Fund's average daily net assets.
Quadra is a limited partnership organized under the laws of the State of
Delaware on September 8, 1995, and is a registered investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act"). The general partner of
Quadra is Quadra Capital Partners, Inc., ("General Partner") a Delaware
Corporation. The business address of the General Partner is 270 Congress Street,
Boston, Massachusetts 02210. As a new entity, Quadra has no previous experience
managing an investment company. The managing partners of Quadra have significant
experience, however, in the formation and management of trust and investment
management entities including registered investment companies, registered
investment advisers, and a commingled fund of funds.
Ms. Eileen Delasandro is a founder and Chief Executive Officer of Quadra. She
has over twenty years' experience in the institutional investment management
industry. Prior to founding Quadra, she was a Partner and Chief Operating
Officer at Nicholas-Applegate Capital Management, L.P. Ms. Delasandro has
completed the National Association of Securities Dealers' Series 2, 3, 7, 63 and
65 examinations. Mr. Donald Levi is a founder and Chief Operating Officer of
Quadra. He has over thirty years' experience in the banking and trust
industries. Prior to founding Quadra, he was founder and Chief Executive Officer
of Western Trust Services. Mr. Howard Stevenson is a founder and Chairman of
Quadra. He is also the Sarofim-Rock Professor at Harvard Business School, where
he has taught for over twenty-five years, and is co-chairman of the Baupost
Group, a private registered investment adviser, which he co-founded. Mr. Philip
Hamilton is Director of Strategic Planning at Quadra. Prior to joining Quadra,
he was Senior Researcher in Finance at Harvard Business School. He serves as
compliance officer for the firm.
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SUBADVISERS
To assist it in carrying out its responsibilities under the Investment Advisory
Agreement, Quadra has retained the Subadvisers to render advisory services and
make daily investment decisions for each Fund. Quadra makes recommendations to
the Trust's Board of Trustees regarding the selection and retention of these
Subadvisers. On an ongoing basis, Quadra evaluates the sub-advisers and reports
to the Board concerning their investment results. Quadra also reviews the
investments made for the Funds by the Subadvisers to see that they comply with
the Funds' investment objectives, policies and restrictions.
The following Subadvisers and individuals are primarily responsible for the
day-to-day management of the Funds:
CARL DOMINO ASSOCIATES, L.P., ("CDA"), 580 Village Boulevard, West Palm Beach,
Florida 33409, manages the portfolio of the QUADRA VALUE EQUITY FUND. CDA is a
limited partnership organized under the laws of the State of Delaware, and is
registered as an investment adviser under the Advisers Act. It presently manages
over $1 billion in assets for colleges and universities, retirement funds, state
and local governments, investment companies and other institutions. Mr. Carl
Domino, CFA, founded CDA in 1987 and is presently Managing Partner and Senior
Portfolio Manager of CDA. Mr. Domino has over twenty-five years' equity
investment experience. Prior to that, Mr.Domino was Senior Portfolio
Manager/Chairman of the Investment Strategy Committee at Delaware Management
Company. Mr. Domino holds a Master's Degree in Business Administration from
Harvard Business School. Mr. Paul Scoville, is a Senior Equity Portfolio Manager
at CDA. He has over twenty-seven years' equity investment experience. Prior to
joining CDA, Mr. Scoville was Managing Director and Senior Portfolio Manager at
Criterion Investment Management. He holds a Law Degree from Emory University.
Mr. Stephen Kent, Jr., CFA, is a Senior Portfolio Manager at CDA. He has over
twenty-six years' investment experience, prior to joining CDA, Mr. Kent was a
Portfolio Manager with George D. Bjurman & Associates in Los Angeles. Mr. Kent
holds a degree from Washington & Lee University. Mr. David Roberts is a Research
Analyst at CDA. He joined the firm in 1996 following his graduate studies in
Business Administration at Vanderbilt University. Mr. Roberts is a Chartered
Financial Analyst candidate.
MCDONALD INVESTMENT MANAGEMENT, INC. ("McDonald"), 40 King Street West, Suite
3910, Toronto, Ontario, Canada M5H 3Y2, manages the portfolio of the QUADRA
INTERNATIONAL EQUITY FUND. McDonald was organized in 1990 as a corporation under
the laws of the Province of Ontario. It presently manages approximately $70
million for retirement funds, non-profit organizations, other institutions and
individuals. It is registered in the United States as an investment adviser
under the Advisers Act. Mr. John McDonald, CFA, founded McDonald and is Chief
Investment Officer. He has over twenty years' international financial analysis
and equity investing experience. Prior to founding the firm, Mr. McDonald was a
Vice President at Midland Walwyn. He also served as Adviser to the Treasurer of
the International Monetary Fund and was an Auditor at the United Nations. Mr.
McDonald holds a BBA from the University of New Brunswick and is a Chartered
Accountant. Mr. Ray Di Bernardo, CFA, is Partner/Vice President of Research at
McDonald and has over nine years' equity investment experience. Prior to that,
Mr. Di Bernardo was Vice President of GBC Asset Management and also served as
Portfolio Manager at Royal Trust Co. Mr. Di Bernardo holds a Bachelor's Degree
from the University of Western Ontario. Mr. Ronald Belcot, Partner/Vice
President of Research and Trading, has over 15 years' financial services
industry experience. Prior to joining McDonald, he was with Telerate, Inc. Mr.
Belcot holds a degree in Electronic Technology from the Devry Institute. Mr.
William Hallman, CFA, is Partner/Vice
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President of McDonald, he has over six years' equity research experience. He
holds a baccalaureate degree from George Brown College, Toronto.
ANHALT/O'CONNELL INC. ("Anhalt/O'Connell"), 345 South Figueroa Street, Los
Angeles, California 90071, manages the portfolio of the QUADRA LIMITED MATURITY
TREASURY FUND. Anhalt/O'Connell is a corporation organized under the laws of the
State of California, and is registered as an investment adviser under the
Advisers Act. It was organized in 1975. Anhalt/O'Connell presently manages
approximately $800 million for retirement funds and other institutions. Mr. Paul
Anhalt and Mr. Michael O'Connell are the founders of Anhalt/O'Connell. Prior to
that, Mr.Anhalt was a Portfolio Manager/ Economist with Trust Company of the
West. Mr. Anhalt holds a Master's Degree in Finance from the University of
Minnesota. Mr. O'Connell was a Vice President of Laird & Company. He holds a
Master's Degree in Business Administration from Harvard Business School.
LM CAPITAL MANAGEMENT, INC. ("LM Capital"), 5560 La Jolla Boulevard, Suite E, La
Jolla, California 92037, manages the portfolio of the QUADRA OPPORTUNISTIC BOND
FUND. LM Capital was organized in 1988 under the laws of the State of
California, and is registered as an investment adviser under the Advisers Act.
LM Capital presently manages approximately $350 million for pension funds, state
and local governments, other institutions and individuals. Mr. Luis Maizel and
Mr. John Chalker are the founders of LM Capital. Mr. Maizel is Senior Managing
Director and has over ten years' global fixed-income investment experience.
Prior to founding LM Capital, he was the Vice President of Finance at
Grupoventas, S.A.; faculty member at the Harvard Business School; and President
of Industrial Kuick, S.A. Mr. Maizel holds a Master's Degree in Business
Administration from Harvard Business School. Mr. Chalker has over 15 years'
fixed-income and equity investment experience. Prior to founding LM Capital, he
was with Merrill Lynch & Company as a Vice President/Senior Financial
Consultant. Mr. Chalker holds a Bachelor of Science degree from the United
States Naval Academy.
Although LM Capital and Anhalt/O'Connell have extensive management experience
with respect to funds of other institutions as described above, they do not have
prior experience managing an investment company. McDonald, which has experience
managing Canadian mutual funds, has not managed a domestic investment company.
Quadra performs internal due diligence on each Subadviser and monitors each
Subadviser's performance. Quadra will be responsible for communicating
performance targets and evaluations to the Subadvisers, supervising each
Subadviser's compliance with its Fund's fundamental investment objectives and
policies, authorizing Subadvisers to engage in certain investment techniques for
the Funds, and recommending to the Board of Trustees whether sub-advisory
agreements should be renewed, modified or terminated. Quadra pays a fee to each
of the Subadvisers. These fees are borne solely by Quadra and do not increase
the fees paid by shareholders of the Funds. The amount of these fees may vary
from time to time as a result of periodic negotiations with the Subadvisers and
pursuant to certain factors described in the SAI. As of the date of this
Prospectus, Quadra will pay CDA, McDonald, Anhalt/O'Connell, and LM Capital fees
of 0.31%, 0.375%, 0.15% and 0.18%, respectively, of the average daily net assets
of the corresponding Fund for which the Subadviser provides investment advisory
services.
Quadra also may from time to time recommend that the Board of Trustees replace
one or more Subadvisers or appoint additional Subadvisers, depending on the
Adviser's assessment of what combination of Subadvisers it believes will
optimize each Fund's chances of achieving its investment objectives. In the
event
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that a Subadviser ceased to provide investment advisory services for a Fund,
Quadra would select a similarly qualified investment adviser to replace the
Subadviser but would not manage the Fund's portfolio.
Section 15(a) of the 1940 Act requires that the Trust's shareholders approve its
investment advisory contracts. As interpreted, this requirement applies to the
appointment of the Subadvisers. The Trust is applying to the Securities and
Exchange Commission for a conditional exemption from this shareholder approval
requirement. The Securities and Exchange Commission has granted such
applications in the past, and the Trust expects it will receive the requested
exemption. However, such relief is not guaranteed. If the exemption is granted,
the Board of Trustees would be able to appoint additional or replacement
Subadvisers without Shareholder approval. The Board would not, however, be able
to replace Quadra as investment adviser to any Fund without the approval of that
Fund's shareholders.
ADMINISTRATOR AND DISTRIBUTOR
On behalf of the Fund, the Trust has entered into an Administration Agreement
with Forum Administrative Services LLC ("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 for which it must pay), providing the
Trust with general office facilities and providing persons satisfactory to the
Board of Trustees to serve as officers of the Trust. For these services, Forum
receives from each Fund a fee computed and paid monthly at an annual rate of
0.10% of the first $50 million of the Fund's average daily net assets and 0.05%
of the average daily net assets over $50 million, subject to an annual minimum
of $40,000. Like the Adviser, FAS, in its sole discretion, may waive all or any
portion of its fees.
Pursuant to a Distribution Agreement with the Trust, Forum Financial Services,
Inc. ("Forum") acts as distributor of the Funds' shares. Forum acts as the agent
of the Trust in connection with the offering of shares of the Fund. Forum
receives no compensation for its services under the Distribution Agreement.
Forum may enter into arrangements with banks, broker-dealers or other financial
institutions ("Selected Dealers") through which investors may purchase or redeem
shares. Forum may, at its own expense and from its own resources, compensate
certain persons who provide services in connection with the sale or expected
sale of shares of the Funds. Investors purchasing shares of the Funds through
another financial institution should read any materials and information provided
by the financial institution to acquaint themselves with its procedures and any
fees that it may charge.
Forum and FAS are located at Two Portland Square, Portland, Maine 04101. Forum
was incorporated under the laws of the State of Delaware on February 7, 1986 and
as of the date hereof manages, administers or distributes registered investment
companies and collective investment funds with assets of approximately $22
billion. Forum is a registered broker-dealer and investment adviser and is a
member of the National Association of Securities Dealers, Inc. FAS was
established on December 29, 1995 under the laws of the State of Delaware.
As of the date of this prospectus Forum, FAS, and Forum Financial Corp., the
transfer agent of the Trust, were controlled by John Y. Keffer, president and
Chairman of the Trust.
TRANSFER AGENT
The Trust has entered into a Transfer Agency Agreement with Forum Financial
Corp. ("FFC") pursuant to which FFC acts as the Funds' transfer agent and
dividend disbursing agent. FFC maintains an account for each shareholder of the
Trust (unless such accounts are maintained by sub-transfer agents), performs
other transfer agency functions and acts as dividend disbursing agent for the
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Trust. In addition, FFC performs portfolio accounting services for the Fund,
including determination of the Funds' net asset value.
EXPENSES OF THE TRUST
The Adviser has agreed to reimburse the Trust for certain of the Funds'
operating expenses (exclusive of interest, taxes, brokerage, fees and
organization expenses, all to the extent permitted by applicable state law or
regulation) which in any year exceed the limits prescribed by any state in which
the Funds' shares are qualified for sale. The Trust may elect not to qualify its
shares for sale in every state. For the purpose of this obligation to reimburse
expenses, the Funds' annual expenses are estimated and accrued daily, and any
appropriate estimated payments will be made by the Adviser monthly.
Subject to the above obligations, the Trust is obligated to pay all of the
Trust's other expenses. Each Fund's expenses include Trust expenses attributable
to that Fund, which are allocated to the Fund, and expenses not specifically
attributable to that Fund, which are allocated among the Fund and all other
funds of the Trust in proportion to their average net assets. Quadra and FAS may
each elect to waive (or continue to waive) all or a portion of their fees, which
are accrued daily and paid monthly. Any such waivers will have the effect of
increasing a Fund's performance for the period during which the waiver is in
effect. No fee waivers may be recouped at a later date. Except as expressly
indicated, fee waivers are voluntary and may be reduced or eliminated at any
time.
Subject to the obligation of Quadra to reimburse the Trust for certain excess
expenses, under the Investment Advisory Agreements, the Trust has confirmed its
obligation to pay all the Trust's expenses, including: interest charges, taxes,
brokerage fees and commissions; certain insurance premiums; fees, interest
charges and expenses of the custodian, any subcustodian, transfer agent and
dividend disbursing agent and providers of pricing, credit analysis and dividend
services; telecommunications expenses; auditing, legal and compliance expenses;
costs of maintaining corporate existence; costs of preparing and printing the
Fund's prospectuses, SAI, account application forms and shareholder reports and
delivering them to existing shareholders; costs of maintaining books of original
entry for fund accounting and other required books and accounts and of
calculating the net asset value of shares of each Fund; costs of reproduction,
stationery and supplies; compensation of trustees, officers and employees of the
Fund or Trust who are not employees of Quadra, Forum or their affiliates and
costs of other personnel performing services for each Fund; costs of meetings of
the Trust; SEC registration fees and related expenses; state securities laws
registration fees and expenses; fees and out of pocket expenses payable to
Quadra and Forum; and fees and expenses paid by each Fund pursuant to the
distribution plan.
PURCHASES AND REDEMPTIONS OF SHARES
GENERAL INFORMATION
Shares of a Fund may be purchased or redeemed at a price equal to their net
asset value next-determined after acceptance of an order on each Fund Business
Day. Each Fund's net asset value is calculated at the close of trading on the
NYSE, normally 4:00 p.m. If the NYSE closes early, however, the Trust will
advance the time at which its NAV is calculated. Purchase or redemption orders
are accepted by the transfer agent between 9:00 a.m.
and 6:00 p.m. (Eastern Time).
Investors may purchase or redeem shares of a Fund by following the instructions
set forth below. 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
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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 order for the shares in proper form is
accepted by the Transfer Agent. 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.
REDEMPTIONS. Fund shares may be redeemed without charge at their net asset value
next-determined 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.
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 $25,000. The
Trust will not redeem accounts that fall below that amount solely as a result of
a reduction in net asset value.
SHARE CERTIFICATES. The Transfer Agent maintains a shareholder account for each
shareholder. The Trust does not issue share certificates.
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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 an account application or by contacting Quadra 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 Quadra.
INITIAL PURCHASE OF SHARES
There is a $100,000 minimum for an initial investment in any of the Funds. The
Trust reserves the right to waive the minimum investment requirement. There is
no minimum for subsequent investments.
BY MAIL. Investors may send a check made payable to The Quadra Funds along with
a completed account application to 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 a Fund using the wire system for
transmittal of money among banks, an investor should first telephone Quadra at
800.595.9291 or 617.426.0900 to obtain an account number. The investor should
then instruct a bank to wire the investor's money immediately to:
First National Bank of Boston Boston, Massachusetts
ABA# 011000390
For Credit To: Forum Financial Corp.
Account #: 541-54171 Re: [Name of Fund]
Account #:_________
Account Name:_________
The investor should then promptly complete and mail the account application. Any
investor planning to wire funds should instruct a bank early in the day so the
wire transfer can be accomplished the same day. 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 no 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 Quadra at 800.595.9291
or 617.426.0900 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, pre-selected 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 Quadra.
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
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Quadra. All written requests for redemption must be signed by the shareholder
with signature guaranteed.
BY TELEPHONE. A shareholder that has elected telephone redemption privileges may
make a telephone redemption request by calling Quadra at 800.595.9291 or
617.426.0900 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,
pre-selected 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 Quadra.
OTHER REDEMPTION MATTERS. A signature guarantee is required for any written
redemption request. In addition, a signature guarantee also is required for
instructions to change a shareholder's record name or address, designated bank
account for wire redemptions or automatic investment or redemption, dividend
election, telephone redemption or exchange option election or any other option
election in connection with the shareholder's account. Signature guarantees may
be provided by any eligible institution, including a bank, a broker, a dealer, a
national securities exchange, a credit union, or a savings association that is
authorized to guarantee signatures, acceptable to the Transfer Agent. Whenever a
signature guarantee is required, the signature of each person required to sign
for the account must be guaranteed.
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 Quadra Fund, or
the Daily Assets Cash Fund, a money market fund of the Trust offered through a
separate prospectus, if shares of the Quadra Fund 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 $100,000. 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
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exchanging. 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.
BY MAIL. Exchanges may be accomplished by written instruction to Quadra. All
written requests for exchanges must be signed by the shareholder (a signature
guarantee is not required).
BY TELEPHONE. Exchanges may be accomplished by telephone by any shareholder that
has elected telephone exchange privileges by calling Quadra at 800.595.9291 or
617.426.0900 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
None of the Funds individually should be considered a complete investment
vehicle for the assets held in individual retirement accounts ("IRAs"). The
minimum initial investment for an IRA is $100,000. The Trust reserves the right
to waive this minimum. There is no minimum subsequent investment. Individuals
may make tax-deductible IRA contributions of up to a maximum of $2,000 annually.
However, this deduction will be reduced if the individual or, in the case of a
married individual filing jointly, either the individual or the individual's
spouse is an active participant in an employer-sponsored retirement plan and has
adjusted gross income above certain levels.
PURCHASES AND REDEMPTIONS THROUGH FINANCIAL INSTITUTIONS
Shares may be purchased and redeemed through certain broker-dealers, banks,
trust companies and their affiliates, and other financial institutions,
including affiliates of the Transfer Agent ("Processing Organizations").
Investors who purchase shares through a Processing Organization may be charged a
fee for their services and if the investors effect transactions in Fund shares
through a broker or agent. Investors will be subject to the procedures of their
Processing Organization, which may include limitations, investment minimums,
cutoff times and restrictions in addition to, or different from, those
applicable to shareholders who invest in the Fund directly. These investors
should acquaint themselves with their Processing Organization's procedures and
should read this Prospectus in conjunction with any materials and information
provided by their Processing Organization. Customers who purchase Fund shares
through a Processing Organization may or may not be the shareholder of record
and, subject to their Processing Organization's and the Fund's procedures, may
have Fund shares transferred into their name. Under their arrangements with the
Trust, broker-dealer Processing Organizations are not generally required to
deliver payment for purchase orders until several business days after a purchase
order has been received by a Fund. Certain other Processing Organizations may
also enter purchase orders with payment to follow.
Certain shareholder services may not be available to shareholders who have
purchased shares through a Processing Organization. These shareholders should
contact their Processing Organization for further information. The Trust may
confirm purchases and redemptions of a Processing Organization's customers
directly to the Processing Organization, which in turn will provide its
customers with such confirmations and periodic statements as may be required by
law or agreed to between the Processing Organization and its customers. The
Trust is not responsible for
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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.
DIVIDENDS AND TAX MATTERS
DIVIDENDS
QUADRA VALUE EQUITY FUND AND QUADRA INTERNATIONAL EQUITY FUND. Dividends
representing the net investment income of the Funds are declared and paid at
least annually. Net capital gains realized by the Funds, if any, also will be
distributed annually.
QUADRA OPPORTUNISTIC BOND FUND AND QUADRA LIMITED MATURITY TREASURY FUND.
Dividends representing the net investment income of the Funds are declared daily
and paid monthly. Dividends of net capital gain, if any, realized by a Fund are
distributed annually.
GENERAL. 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 their respective 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 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 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.
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
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dividends and distributions paid during the year by the Funds will be mailed to
shareholders shortly after the close of each year.
Quadra International Equity Fund intends to elect, pursuant to Section 853 of
the Code, if eligible to do so, to pass through to its shareholders the amount
of foreign income taxes paid by the Fund. If the Fund makes this election, each
shareholder should include in his or her report of gross income both cash
dividends received from the Fund and the amount which the Fund advises is his or
her pro rata portion of foreign income taxes paid by the Fund. Each shareholder
then would be entitled, subject to certain limitations, to take a foreign tax
credit against his or her Federal income tax liability for the amount of such
foreign taxes or else to deduct such foreign taxes as an itemized deduction from
gross income.
OTHER INFORMATION
PERFORMANCE INFORMATION
Each Fund's performance may be quoted in advertising in terms of yield or total
return. Both types are based on historical results and are not intended to
indicate future performance. A Fund's yield is a way of showing the rate of
income earned by the Fund as a percentage of the Fund's share price. Yield is
calculated by dividing the net investment income of the Fund for the stated
period by the average number of shares entitled to receive dividends and
expressing the result as an annualized percentage rate based on the Fund's share
price at the end of the period. Total return refers to the average annual
compounded rates of return over some representative period that would equate an
initial amount invested at the beginning of a stated period to the ending
redeemable value of the investment, after giving effect to the reinvestment of
all dividends and distributions and deductions of expenses during the period. A
Fund also may advertise its total return over different periods of time or by
means of aggregate, average, year by year, or other types of total return
figures. Because average annual returns tend to smooth out variations in each
Fund's returns, shareholders should recognize that they are not the same as
actual year-by-year results.
Each Fund's advertisements 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 Forum would permit a bank or bank affiliate to serve
as a Processing Organization or perform sub-transfer agent or similar services
for the Trust and its shareholders. If a bank or bank affiliate were prohibited
from performing all or a part of the foregoing services, its shareholder
customers would be permitted to remain shareholders of the Trust and alternative
means for continuing to service them would be sought. It is not expected that
shareholders would suffer adverse financial consequences as a result of any
changes in bank or bank affiliate service arrangements.
DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the 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.
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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 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
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 has equal dividend, distribution,
liquidation and voting rights, and fractional shares have those rights
proportionately. Generally, shares will be voted in the aggregate without
reference to a particular portfolio, except if the matter affects only one
portfolio or voting by portfolio is required by law. 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. A shareholder of a Fund is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that Fund's assets and,
upon redeeming shares, will receive the portion of the Fund's net assets
represented by the redeemed shares.
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.
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APPENDIX A
INVESTMENTS, INVESTMENT
STRATEGIES AND RISK
CONSIDERATIONS
COMMON STOCK AND PREFERRED STOCK
QUADRA VALUE EQUITY FUND AND QUADRA INTERNATIONAL EQUITY FUND (collectively, the
"Equity Funds"). Common stockholders are the owners of the company issuing the
stock and, accordingly, vote on various corporate governance matters such as
mergers. They are not creditors of the company, but rather, upon liquidation of
the company are entitled to their pro rata share of the company's assets after
creditors (including fixed income security holders) and, if applicable,
preferred stockholders are paid. Preferred stock is a class of stock having a
preference over common stock as to dividends and, generally, as to the recovery
of investment. A preferred stockholder is a shareholder in the company and not a
creditor of the company as is a holder of the company's fixed income securities.
Dividends paid to common and preferred stockholders are distributions of the
earnings of the company and not interest payments, which are expenses of the
company. Equity securities owned by a Fund may be traded on national securities
exchanges, in the over-the-counter market or on a regional securities exchange
and may not be traded every day or in the volume typical of securities traded on
a major national securities exchange. As a result, disposition by a Fund of a
portfolio security to meet redemptions by shareholders or otherwise may require
the Fund to sell these securities at a discount from market prices, to sell
during periods when disposition is not desirable, or to make many small sales
over an extended period of time. The market value of all securities, including
equity securities, is based upon the market's perception of value and not
necessarily the book value of an issuer or other objective measure of a
company's worth.
CONVERTIBLE SECURITIES
THE EQUITY FUNDS. Convertible securities, which include convertible debt,
convertible preferred stock and other securities exchangeable under certain
circumstances for shares of common stock, are fixed income securities or
preferred stock which generally may be converted at a stated price within a
specific amount of time into a specified number of shares of common stock. 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 stream of income with generally higher yields
than those of common stocks of the same or similar issuers. These securities are
usually senior to common stock in a company'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 a convertible
security is, however, also influenced by the value of the underlying common
stock. The Fund may only invest in convertible securities that are investment
grade.
The Fund may invest in equity-linked securities, including Preferred Equity
Redemption Cumulative Stock ("PERCS"), Equity-Linked Securities ("ELKS"), and
Liquid Yield Option Notes ("LYONS"). Equity-Linked Securities are securities
that are convertible into or based upon the value of, equity securities upon
certain terms and conditions. The amount received by an investor at maturity of
these securities is not fixed but is based
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on the price of the underlying common stock, which may rise or fall. In
addition, it is not possible to predict how equity-linked securities will trade
in the secondary market or whether the market for them will be liquid or
illiquid.
WARRANTS
EQUITY FUNDS. A 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. Unlike
convertible securities and preferred stocks, warrants do not pay a fixed
dividend. Investments in warrants involve certain risks, including the possible
lack of a liquid market for the resale of the warrants, potential price
fluctuations as a result of speculation or other factors and failure of the
price of the underlying security to reach a level at which the warrant can be
prudently exercised (in which case the warrant may expire without being
exercised, resulting in the loss of the Fund's entire investment therein).
ADRS AND EDRS
QUADRA INTERNATIONAL EQUITY FUND. 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. ADRs, in registered form, are designed for use in
U.S. securities markets. 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 also
invest in European Depository Receipts ("EDRs"), receipts issued by a European
financial institution evidencing an arrangement similar to that of ADRs, and in
other similar instruments representing securities of foreign companies. EDRs, in
bearer form, are designed for use in European securities markets.
U.S. GOVERNMENT SECURITIES
ALL FUNDS. The Funds may invest in securities issued by the United States
Treasury, such as Treasury bills, notes and bonds, that are fully guaranteed as
to payment of principal and interest by the United States Government. The Funds
may invest in U.S. Government Securities, that is, obligations issued or
guaranteed as to principal and interest by the U.S. Government, its agencies or
instrumentalities. The U.S. Government Securities in which these Funds may
invest include obligations issued or guaranteed by U.S. Government agencies and
instrumentalities and backed by the full faith and credit of the U.S.
Government, such as those guaranteed by the Small Business Administration or
issued by the Government National Mortgage Association. In addition, the U.S.
Government Securities in which the Funds may invest include securities supported
primarily or solely by the creditworthiness of the issuer, such as securities of
the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation and the Tennessee Valley Authority. There is no guarantee that the
U.S. Government will support securities not backed by its full faith and credit.
Accordingly, 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.
ZERO-COUPON SECURITIES
QUADRA OPPORTUNISTIC BOND FUND. The Fund may invest in separately traded
principal and interest components of securities issued or guaranteed by the U.S.
Treasury. These components are traded independently under the Treasury's
Separate Trading of Registered Interest and Principal of Securities ("STRIPS")
program or as Coupons Under Book Entry Safekeeping ("CUBES"). The
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Funds may invest in other types of related zero-coupon securities. For instance,
a number of banks and brokerage firms separate the principal and interest
portions of U.S. Treasury securities and sell them separately in the form of
receipts or certificates representing undivided interests in these instruments.
These instruments are generally held by a bank in a custodial or trust account
on behalf of the owners of the securities and are known by various names,
including Treasury Receipts ("TRs"), Treasury Investment Growth Receipts
("TIGRs") and Certificates of Accrual on Treasury Securities ("CATS").
Zero-coupon securities also may be issued by corporations and municipalities.
Zero-coupon securities are sold at original issue discount and pay no interest
to holders prior to maturity, but a Fund holding a zero-coupon security must
include a portion of the original issue discount of the security as income.
Because of this, zero-coupon securities may be subject to greater fluctuation of
market value than the other securities in which the Funds may invest. The Funds
distribute all of their net investment income, and may have to sell portfolio
securities to distribute imputed income, which may occur at a time when a
Sub-adviser would not have chosen to sell such securities and which may result
in a taxable gain or loss.
CORPORATE DEBT SECURITIES
COMMERCIAL PAPER
QUADRA OPPORTUNISTIC BOND FUND. The corporate debt securities in which the Fund
may invest include corporate bonds and notes and short-term investments such as
commercial paper and variable rate demand notes. Commercial paper (short-term
promissory notes) is issued by companies to finance their or their affiliates'
current obligations and is frequently unsecured. Variable and floating rate
demand notes are unsecured obligations redeemable upon not more than 30 days'
notice. 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 the 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 7 day or shorter demand
feature and there is no readily available market for the obligation, it is
treated as an illiquid security.
FINANCIAL INSTITUTION OBLIGATIONS
EQUITY FUNDS AND QUADRA OPPORTUNISTIC BOND FUND. A Fund may invest in
obligations of financial institutions, including negotiable certificates of
deposit, bankers' acceptances and time deposits of U.S. banks (including
savings banks and savings associations), foreign branches of U.S. banks,
foreign banks and their non-U.S. branches (Eurodollars), U.S. branches
and agencies of foreign banks (Yankee dollars), and wholly-owned
banking-related subsidiaries of foreign banks.
Certificates of deposit represent an institution's obligation to repay funds
deposited with it that earn a specified interest rate over a given period.
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 but may be subject
to early withdrawal penalties which could reduce the Fund's yield. Deposits
subject to early withdrawal penalties or that mature in more than 7 days are
treated as illiquid securities if there is no readily available market for the
securities. A Fund's investments in the obligations of foreign banks and their
branches, agencies or subsidiaries may be obligations of the parent, of the
issuing branch, agency or subsidiary, or both.
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Investments in foreign bank obligations are limited to banks and branches
located in countries which the Advisers believe do not present undue risk.
PARTICIPATION INTERESTS
QUADRA OPPORTUNISTIC BOND FUND. The Fund may purchase participation interests in
loans or securities in which the Fund may invest directly that are owned by
banks or other financial institutions. A participation interest gives the Fund
an undivided interest in a loan or security in the proportion that the Fund's
interest bears to the total principal amount of the security. Participation
interests, which may have fixed, floating or variable rates, may 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. For
certain participation interests the Fund will have the right to demand payment,
on not more than 7 days' notice, for all or a part of the Fund's participation
interest. The Fund will only purchase participation interests from banks or
other financial institutions that the Adviser deems to be creditworthy. The Fund
will not invest more than 10 percent of its total assets in participation
interests in which the Fund does not have demand rights.
ILLIQUID SECURITIES
RESTRICTED SECURITIES
ALL FUNDS. Each Fund may invest up to 15 percent of its net assets in securities
that at the time of purchase are illiquid. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933
("restricted securities"), securities which are otherwise not readily
marketable, such as over-the-counter options, and repurchase agreements not
entitling the holder to payment of principal in 7 days. Limitations on resale
may have an adverse effect on the marketability of portfolio securities and a
Fund might also have to register restricted securities in order to dispose of
them, resulting in expense and delay. A Fund might not be able to dispose of
restricted or other securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions. There can be no assurance
that a liquid market will exist for any security at any particular time.
An institutional market has developed for certain securities that are not
registered under the Securities Act of 1933, including repurchase agreements,
commercial paper, foreign securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on the issuer's ability to honor
a demand for repayment of the unregistered security. A securities contractual or
legal restrictions on resale to the general public or to certain institutions
may not be indicative of the liquidity of the security. If such securities are
eligible for purchase by institutional buyers in accordance with Rule 144A under
the Securities Act of 1933 or other exemptions, the Advisers may determine that
such securities are not illiquid securities, under guidelines or other
exemptions adopted by the Board. These guidelines take into account trading
activity in the securities and the availability of reliable pricing information,
among other factors. If there is a lack of trading interest in a particular Rule
144A security, a Fund's holdings of that security may be illiquid.
BORROWING
ALL FUNDS. Each Fund may borrow money from banks or by entering into reverse
repurchase agreements, but the Funds will limit borrowings to amounts not in
excess of 33 1/3% of the value of the Fund's total assets (computed immediately
after the borrowing). B orrowing for other than temporary or emergency purposes,
including the meeting of redemption requests, may not exceed an amount equal to
5% of the value of the Fund's net assets. Borrowing involves special risk
considerations. Interest costs on borrowings may fluctuate with changing market
rates of interest and may partially offset or exceed the return earned on
borrowed funds (or on the assets that were retained
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rather than sold to meet the needs for which funds were borrowed). Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when investment considerations would
not favor such sales. No Fund may purchase securities for investment while any
borrowing equal to 5 percent or more of the Fund's total assets is outstanding
or borrow for purposes other than meeting redemptions in an amount exceeding 5
percent of the value of the Fund's total assets. A Fund's use of borrowed
proceeds to make investments would subject the Fund to the risks of leveraging.
Reverse repurchase agreements, short sales not against the box, dollar roll
transactions and other similar investments that involve a form of leverage have
characteristics similar to borrowings but are not considered borrowings if the
Fund maintains a segregated account; the use of these techniques in connection
with a segregated account may result in a Fund's assets being 100 percent
leveraged. See "Appendix A - Techniques Involving Leverage."
TECHNIQUES INVOLVING LEVERAGE
ALL FUNDS. Utilization of leveraging involves special risks and may involve
speculative investment techniques. The Funds may borrow for other than temporary
or emergency purposes, lend their securities, enter reverse repurchase
agreements, and purchase securities on a when issued or forward commitment
basis. In addition, Quadra Opportunistic Bond Fund may engage in dollar roll
transactions and may purchase securities on margin and sell securities short
(other than against the box). Each of these transactions involves the use of
"leverage" when cash made available to the Fund through the investment technique
is used to make additional portfolio investments. In addition, the use of swap
and related agreements may involve leverage. The Funds use these investment
techniques only when the Adviser to a Fund believes that the leveraging and the
returns available to the Fund from investing the cash will provide shareholders
a potentially higher return.
Leverage exists when a Fund achieves the right to a return on a capital base
that exceeds the Fund's investment. Leverage creates the risk of magnified
capital losses which occur when losses affect an asset base, enlarged by
borrowings or the creation of liabilities, that exceeds the equity base of the
Fund.
The risks of leverage include a higher volatility of the net asset value of the
Fund's shares and the relatively greater effect on the net asset value of the
shares caused by favorable or adverse market movements or changes in the cost of
cash obtained by leveraging and the yield obtained from investing the cash. So
long as a Fund is able to realize a net return on its investment portfolio that
is higher than interest expense incurred, if any, leverage will result in higher
current net investment income being realized by the Fund than if the Fund were
not leveraged. On the other hand, interest rates change from time to time as
does their relationship to each other depending upon such factors as supply and
demand, monetary and tax policies and investor expectations. Changes in such
factors could cause the relationship between the cost of leveraging and the
yield to change so that rates involved in the leveraging 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.
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SEGREGATED ACCOUNT. In order to limit the risks involved in various transactions
involving leverage, the Trust's custodian will set aside and maintain in a
segregated account cash, U.S. Government Securities and other liquid, high-grade
debt securities in accordance with SEC guidelines. The account 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 "Appendix A - 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, SECURITIES LENDING, REVERSE REPURCHASE AGREEMENTS,
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS AND DOLLAR ROLL TRANSACTIONS
A Fund's use of repurchase agreements, securities lending, reverse repurchase
agreements and forward commitments (including dollar roll transactions) 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 while these transactions remained open 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 Advisers monitor the
creditworthiness of counterparties to these transactions 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. Counterparty insolvency risk with respect to repurchase
agreements is reduced by favorable insolvency laws that allow the Fund, among
other things, to liquidate the collateral held in the event of the bankruptcy of
the counterparty. Those laws do not apply to securities lending and,
accordingly, securities lending involves more risk than does the use of
repurchase agreements. As a result of entering forward commitments and reverse
repurchase agreements, as well as lending its securities, a Fund may be exposed
to greater potential fluctuations in the value of its assets and net asset value
per share. See "Appendix A - Techniques Involving Leverage."
REPURCHASE AGREEMENTS - ALL FUNDS. A Fund may enter into repurchase agreements,
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 1 to 7 days later. The resale price of a repurchase
agreement reflects a market rate of interest that is not related to the coupon
rate or maturity of the purchased security. The Trust's custodian maintains
possession of the collateral underlying a repurchase agreement, which has a
market value, determined daily, at least equal to the repurchase price, and
which consists of the types of securities in which the Fund may invest directly.
Quadra International Equity Fund and Quadra Opportunistic Bond Fund may enter
into repurchase agreements with foreign entities.
SECURITIES LENDING - ALL FUNDS. A Fund may lend securities from its portfolios
to brokers, dealers and other financial institutions. Securities loans must be
continuously secured by cash or U.S.
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Government Securities with a market value, determined daily, at least equal to
the value of the Fund's securities loaned, including accrued interest. A Fund
receives interest in respect of securities loans from the borrower or from
investing cash collateral. A Fund may pay fees to arrange the loans. No Fund
will lend portfolio securities in excess of 33 1/3 percent of the value of the
Fund's total assets.
REVERSE REPURCHASE AGREEMENTS - QUADRA OPPORTUNISTIC BOND FUND. The Fund may
enter into reverse repurchase agreements, transactions in which the 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.
Because certain of the incidents of ownership of the security are retained by
the Fund, reverse repurchase agreements may be viewed as a form of borrowing by
the Fund from the buyer, collateralized by the security sold by the Fund. The
Fund will use the proceeds of reverse repurchase agreements to fund redemptions
or to make investments. In most cases these investments either mature or have a
demand feature to resell to the issuer on a date not later than the expiration
of the agreement. 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. Any significant commitment of the Fund's assets to the
reverse repurchase agreements will tend to increase the volatility of the Fund's
net asset value per share.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS - ALL FUNDS. A Fund may purchase
fixed income securities on a "when-issued" or "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 3 months after the transaction. During the period between a
commitment and settlement, no payment is made for the securities purchased and
no interest on the security accrues to the purchaser. 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 a security purchased by a Fund may result in a loss or a missed
opportunity to make an alternative investment.
The use of when-issued transactions and forward commitments enables a Fund to
hedge against anticipated changes in interest rates and prices. If the Adviser
or a Subadviser were to forecast incorrectly the direction of interest rate
movements, however, a Fund might be required to complete these transactions when
the value of the security is lower than the price paid by the Fund. Except for
dollar-roll transactions, a Fund will not purchase securities on a when-issued
or forward commitment basis if, as a result, more than 15 percent (35 percent in
the case of Quadra Opportunistic Bond Fund) of the value of the Fund's total
assets would be committed to such transactions.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Funds purchase securities on a when-issued and forward
commitment basis only with the intention of actually receiving the securities.
When-issued securities may include bonds purchased on a "when, and if issued"
basis under which the issuance of the securities depends upon the occurrence of
a subsequent event. Commitment of a Fund's assets to the purchase of securities
on a when-issued or forward commitment basis will tend to increase the
volatility of the Fund's net asset value per share.
DOLLAR ROLL TRANSACTIONS - QUADRA OPPORTUNISTIC BOND FUND. The Fund may enter
into
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dollar roll transactions wherein the Fund sells fixed income securities,
typically mortgage-backed securities, and makes a commitment to purchase
similar, but not identical, securities at a later date from the same party. Like
a forward commitment, during the roll period no payment is made for the
securities purchased and no interest or principal payments on the security
accrue to the purchaser, but the Fund assumes the risk of ownership. The Fund is
compensated for entering into dollar roll transactions by the difference between
the current sales price and the forward price for the future purchase, as well
as by the interest earned on the cash proceeds of the initial sale. Like other
when-issued securities or firm commitment agreements, dollar roll transactions
involve the risk that the market value of the securities sold by the Fund may
decline below the price at which a Fund is committed to purchase similar
securities. In the event the buyer of securities under a dollar roll transaction
becomes insolvent, the Fund's use of the proceeds of the transaction may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
The Fund will engage in roll transactions for the purpose of acquiring
securities for its portfolio and not for investment leverage. The Fund will
limit its obligations on dollar roll transactions to 35 percent of its net
assets.
SWAP AGREEMENTS
QUADRA OPPORTUNISTIC BOND FUND. To manage its exposure to different types of
investments, the 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 "Appendix A - 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 Subadviser monitors the
creditworthiness of counterparties to these transactions and intends to enter
into these transactions only when they believe the counterparties present
minimal credit risks and the income expected to be earned from the transaction
justifies the attendant risks.
SHORT SALES
ALL FUNDS. Each of the Funds may make short sales of securities it owns or has
the right to acquire at no added cost through conversion or exchange of other
securities it owns (referred to as short sales "against the box"). In a short
sale "against the box", the Fund does not immediately deliver the securities
sold and would not receive the proceeds from the sale. The seller is said to
have a short position in the securities sold until it delivers the securities
sold, at which time it receives the proceeds of the sale. The Fund's decision to
make a short sale "against the box" may be
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a technique to hedge against market risks when the Subadviser believes that the
price of a security may decline, causing a decline in the value of a security
owned by the Fund or a security convertible into or exchangeable for such
security. In such case, any future losses in the Fund's long position would be
reduced by an offsetting future gain in the short position. The Fund's ability
to enter into short sales transactions is limited by certain tax requirements.
See "Dividends, Distributions and Taxes" in the SAI.
ASSET-BACKED SECURITIES
QUADRA OPPORTUNISTIC BOND FUND. 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. The
Fund may not invest more than 10 percent of its net assets in asset-backed
securities that are backed by a particular type of credit, for instance, credit
card receivables. 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.
FOREIGN EXCHANGE CONTRACTS AND FOREIGN CURRENCY FORWARD CONTRACTS
QUADRA INTERNATIONAL EQUITY FUND AND QUADRA OPPORTUNISTIC BOND FUND. Changes in
foreign currency exchange rates will affect the U.S. dollar values of securities
denominated in currencies other than the U.S. dollar. The rate of exchange
between the U.S. dollar and other currencies fluctuates in response to forces of
supply and demand in the foreign exchange markets. These forces are affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. When
investing in foreign securities a Fund usually effects currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange market. The Fund incurs foreign exchange expenses in converting
assets from one currency to another.
A Fund may enter into foreign currency forward contracts or currency futures or
options contracts for the purchase or sale of foreign currency to "lock in" the
U.S. dollar price of the securities denominated in a foreign currency or the
U.S. dollar value of interest and dividends to be paid on such securities, or to
hedge against the possibility that the currency of a foreign country in which a
Fund has investments may suffer a decline against the U.S. dollar. The Funds
have no present intention to enter into currency futures or options contracts
but may do so in the future. A forward currency contract is an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set
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at the time of the contract. This method of attempting to hedge the value of a
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. Although
the strategy of engaging in foreign currency transactions could reduce the risk
of loss due to a decline in the value of the hedged currency, it could also
limit the potential gain from an increase in the value of the currency. The
Funds do not intend to maintain a net exposure to such contracts where the
fulfillment of the Fund's obligations under such 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. A Fund
will not enter into these contracts for speculative purposes and will not enter
into non-hedging currency contracts. These contracts involve a risk of loss if
the Subadviser fails to predict currency values correctly.
FUTURES CONTRACTS AND OPTIONS
ALL FUNDS. A Fund may seek to enhance its return through the writing (selling)
and purchasing of exchange-traded and over-the-counter options on fixed income
securities or indices. A Fund may also to attempt 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 use of those options and the purchase and
sale of interest rate futures contracts and options on those futures contracts.
A Fund may only write options that are covered. An option is covered if, so long
as the Fund is obligated under the option, it owns an offsetting position in the
underlying security or futures contract or maintains cash, U.S. Government
Securities or other liquid, high-grade debt securities in a segregated account
with a value at all times sufficient to cover the Fund's obligation under the
option. Certain futures strategies employed by a Balanced Fund in making
temporary allocations may not be deemed to be for bona fide hedging purposes, as
defined by the Commodity Futures Trading Commission. A Fund may enter into these
futures contracts only if the aggregate of initial margin deposits for open
futures contract positions does not exceed 5 percent of the Fund's total assets.
RISK CONSIDERATIONS. A Fund's use of options and futures contracts subjects the
Fund to certain investment risks and transaction costs to which it might not
otherwise be subject. These risks include: (1) dependence on the Subadviser's
ability to predict movements in the prices of individual securities and
fluctuations in the general securities markets; (2) imperfect correlations
between movements in the prices of options or futures contracts and movements in
the price of the securities hedged or used for cover which may cause a given
hedge not to achieve its objective; (3) the fact that the 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, which, among other things, may hinder a Fund's ability to limit exposures
by closing its positions; (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 or writing options for which an offsetting position is not held.
Other risks include the inability of the Fund, as the writer of covered call
options, to benefit from any 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, the futures exchanges may limit the amount
of fluctuation permitted in certain futures contract prices during a single
trading day. A Fund may be forced, therefore, to liquidate or close out a
futures contract position at a disadvantageous price.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures position or that a counterparty in an
over-
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the-counter option transaction will be able to perform its obligations. There
are a limited number of options on interest rate futures contracts and exchange
traded options contracts on fixed income securities. Accordingly, hedging
transactions involving these instruments may entail "cross-hedging." As an
example, a Fund may wish to hedge existing holdings of mortgage-backed
securities, but no listed options may exist on those securities. In that event,
the Subadviser may attempt to hedge the Fund's securities by the use of options
with respect to similar fixed income securities. The Fund may use various
futures contracts that are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active secondary
market in those contracts will develop or continue to exist.
LIMITATIONS. The Funds have no current intention of investing in futures
contracts and options thereon for purposes other than hedging. No Fund may
purchase any call or put option on a futures contract if the premiums associated
with all such options held by the Fund would exceed 5 percent of the Fund's
total assets as of the date the option is purchased. No Fund may sell a put
option if the exercise value of all put options written by the Fund would exceed
50 percent of the Fund's total assets or sell a call option if the exercise
value of all call options written by the Fund would exceed the value of the
Fund's assets. In addition, the current market value of all open futures
positions held by a Fund will not exceed 50 percent of its total assets.
OPTIONS ON SECURITIES. A call option is a 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. The amount of premium received or paid is based upon certain factors,
including the market price of the underlying security or index, the relationship
of the exercise price to the market price, the historical price volatility of
the underlying security or index, the option period, supply and demand and
interest rates.
OPTIONS ON STOCK INDICES. 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 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.
INDEX FUTURES CONTRACTS. Bond and stock index futures contracts are bilateral
agreements 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 bond or 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 securities comprising the index is made. Generally, these futures
contracts are closed out prior to the expiration date of the contract.
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
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the futures position to the holder of the option will be accompanied by transfer
to the holder of an accumulated balance representing the amount by which the
market price of the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the future.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE SAI AND THE
FUNDS' OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFERING OF FUND SHARES,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT
LAWFULLY BE MADE.
<PAGE>
TABLE OF CONTENTS
Page
1. Prospectus Summary......................................2
2. Expenses of Investing in the Fund.......................4
3. Investment Objective and Policies.......................5
4. Additional Investment Practices........................12
5. Management.............................................16
6. Purchases and Redemptions of
Shares................................................20
7. Dividends and Tax Matters..............................25
8. Other Information......................................26
Appendix A: Investments,
Investment Stategies
and Risk Considerations...............................28
<PAGE>
THE QUADRA FUNDS
QUADRA LIMITED MATURITY TREASURY FUND
QUADRA VALUE EQUITY FUND
QUADRA INTERNATIONAL EQUITY FUND
QUADRA OPPORTUNISTIC BOND FUND
INVESTMENT ADVISER, ACCOUNT INFORMATION
AND SHAREHOLDER SERVICES
QUADRA Capital Partners, L.P.
270 Congress Street
Boston, Massachusetts 02210
800.595.9291
617.426.0900
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1997,
as amended June 9, 1997
This Statement of Additional Information ("SAI") supplements the Prospectus
dated January 1, 1997, supplemented June 9, 1997, offering shares of QUADRA
Limited Maturity Treasury Fund, QUADRA Value Equity Fund, QUADRA International
Equity Fund, and QUADRA Opportunistic Bond Fund (each a "Fund" and collectively
the "Funds"). The Funds are each diversified portfolios of Forum Funds (the
"Trust"), a registered open-end, management investment company. This SAI should
be read only in conjunction with the Prospectus, which you may obtain without
charge by contacting the Trust's Distributor, Forum Financial Services, Inc.,
Two Portland Square, Portland, Maine 04101.
TABLE OF CONTENTS
PAGE
1. Investment Policies.....................3
2. Investment Limitations.................15
3. Performance Data.......................17
4. Management.............................19
5. Determination of Net Asset Value.......24
6. Portfolio Transactions.................24
7. Additional Purchase and................25
Redemption Information..............26
8. Taxation...............................26
9. Other Information......................28
10. Financial Statements...................29
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.
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH
THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY AN INVESTOR WITHOUT CHARGE.
<PAGE>
As used in this SAI, the following terms shall have the meanings listed:
"Adviser" shall mean Quadra Capital Partners, L.P. ("Quadra"). "Advisers"
shall mean Quadra and each of the investment subadvisers that provide
investment advice and portfolio management for one or more of the Funds
pursuant to an investment subadvisory agreement with Quadra Capital
Partners, L.P.
"Board" shall mean the Board of Trustees of the Trust.
"CFTC" shall mean the U.S. Commodities Futures Trading Commission.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Custodian" shall mean First National Bank of Boston, or its successor,
acting in its capacity as custodian of a Fund.
"Equity Funds" shall mean the Quadra Value Equity Fund and the Quadra
International Equity Fund.
"FFC" shall mean Forum Financial Corp., the Trust's fund accountant.
"Fitch" shall mean Fitch Investors Service, L.P.
"Fixed Income Funds" shall mean each of the Quadra Limited
Maturity Treasury Fund and the Quadra Opportunistic Bond Fund.
"Forum" shall mean Forum Financial Services, Inc., the distributor of the
Trust's shares.
"Forum Administrative" shall mean Forum Administrative Services, LLC, the
Trust's administrator.
"Fund" shall mean each of the separate portfolios of the Trust to which
this Statement of Additional Information relates as identified on the
cover page.
"Moody's" shall mean Moody's Investors Service, Inc.
"NRSRO" shall mean a nationally recognized statistical rating
organization.
"Quadra" shall mean Quadra Capital Partners, L.P., the investment adviser
to the Funds.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's Rating Group.
"Subadviser" shall mean each of the investment advisers that provide
investment advice and portfolio management for the Funds pursuant to an
investment subadvisory agreements with Quadra.
"Transfer Agent" shall mean Forum Financial Corp. acting in its
capacity as transfer and dividend disbursing agent of the a Fund.
"Trust" shall mean Forum Funds, an open-end management investment company
registered under the 1940 Act.
"U.S. Government Securities" shall mean obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
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1. INVESTMENT POLICIES
The following discussion is intended to supplement the disclosure in the
Prospectus concerning each Fund's investments, investment techniques and
strategies and the risks associated therewith. No Fund may make any investment
or employ any investment technique or strategy not referenced in the Prospectus
which relates to that Fund. For example, while the SAI describes "swap"
transactions below, only those Funds whose investment policies, as described in
the Prospectus, allow the Fund to invest in swap transactions may do so.
SECURITY RATINGS INFORMATION
Moody's, S&P and other NRSROs are private services that provide ratings of the
credit quality of debt obligations. A description of the range of ratings
assigned to various types of bonds and other securities by several NRSROs is
included in Appendix A to this SAI. The Funds may use these ratings to determine
whether to purchase, sell or hold a security. 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. If an issue of securities ceases to be rated or if
its rating is reduced after it is purchased by a Fund (neither event requiring
sale of such security by a Fund), the Investment Adviser of the Fund will
determine whether the Fund should continue to hold the obligation. To the extent
that the ratings given by a NRSRO may change as a result of changes in such
organizations or their rating systems, the Investment Adviser will attempt to
substitute comparable ratings. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value. Also, rating agencies may fail to make timely changes in credit
ratings. An issuer's current financial condition may be better or worse than a
rating indicates.
A Fund may purchase unrated securities if its Investment 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.
A Fund may retain securities whose rating has been lowered below the lowest
permissible rating category (or that are unrated and determined by its
Investment Adviser to be of comparable quality to securities whose rating has
been lowered below the lowest permissible rating category) if the Investment
Adviser determines that retaining such security is in the best interests of the
Fund.
To limit credit risks, the Funds may only invest in securities that are
investment grade (rated in the top four long-term investment grades by an NRSRO
or in the top two short-term investment grades by an NRSRO.) Accordingly, the
lowest permissible long-term investment grades for corporate bonds, including
convertible bonds, are Baa in the case of Moody's and BBB in the case of S&P and
Fitch; the lowest permissible long-term investment grades for preferred stock
are baa in the case of Moody's and BBB in the case of S&P and Fitch; and the
lowest permissible short-term investment grades for short-term debt, including
commercial paper, are Prime-2 (P-2) in the case of Moody's, A-2 in the case of
S&P and F-2 in the case of Fitch. All these ratings are generally considered to
be investment grade ratings, although Moody's indicates that securities with
long-term ratings of Baa have speculative characteristics.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment and settlement,
no payment is made for the securities purchased by the purchaser and, thus, no
interest accrues to the purchaser from the transaction. At the time a Fund makes
the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction as a purchase and thereafter reflect
the value each day of such securities in determining its net asset value.
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<PAGE>
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 Fund's Adviser were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward commitment transactions at prices
inferior to the current market values.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the 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 Trustee's ("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
Advisers, pursuant to guidelines approved by the Board. The Advisers take into
account a number of factors in reaching liquidity decisions, including but not
limited to: (1) the frequency of trades and quotations for the security; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; and (4) the nature of the marketplace trades, including
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of the transfer. The Adviser monitors the liquidity of the
securities in each Fund's portfolio and reports periodically on such decisions
to the Board.
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Although no securities investment is without some risk, investment
in convertible securities generally entails less risk than in the issuer's
common stock. However, the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed income security. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to
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<PAGE>
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 Fund's Subadviser to be of comparable quality, (iv) repurchase
agreements covering any of the securities in which the Fund may invest directly
and (v) money market mutual funds.
The Funds may invest in the securities of other investment companies within the
limits proscribed by the 1940 Act. 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. The Value Equity Fund and the International Equity Fund
(collectively, the "Equity Funds") may buy or sell stock index futures
contracts, such as contracts on the S&P 500 stock index. The Opportunistic Bond
Fund may buy and sell bond index futures contracts. In addition, all of the
Funds may buy or sell futures contracts on Treasury bills, Treasury bonds and
other financial instruments. The Funds may write covered options and buy options
on the futures contracts in which they may invest.
In addition, the Funds may write (sell) covered put and call options and may buy
put and call options on debt securities and bond indices. An option is covered
if, so long as the Fund is obligated under the option, it owns an offsetting
position in the underlying security, currency or futures contract or maintains
cash, U.S. Government Securities or other liquid, high-grade debt securities in
a segregated account with a value at all times sufficient to cover the Fund's
obligation under the option.
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<PAGE>
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.
The Funds have no current intention of investing in futures contracts and
options thereon for purposes other than hedging. No Fund may purchase any call
or put option on a futures contract if the premiums associated with all such
options held by the Fund would exceed 5 percent of the Fund's total assets as of
the date the option is purchased. No Fund may sell a put option if the exercise
value of all put options written by the Fund would exceed 50 percent of the
Fund's total assets or sell a call option if the exercise value of all call
options written by the Fund would exceed the value of the Fund's assets. In
addition, the current market value of all open futures positions held by a Fund
will not exceed 50 percent of its total assets.
A Fund will only invest in futures and options contracts after providing notice
to its shareholders and filing a notice of eligibility (if required) and
otherwise complying with the requirements of the Commodity Futures Trading
Commission ("CFTC"). The CFTC's rules provide that the Funds are permitted to
purchase such futures or options contracts only (1) for bona fide hedging
purposes within the meaning of the rules of the CFTC; provided, however, that in
the alternative with respect to each long position in a futures or options
contract entered into by a Fund, the underlying commodity value of such contract
at all times does not exceed the sum of cash, short-term United States debt
obligations or other United States dollar denominated short-term money market
instruments set aside for this purpose by the Fund, accrued profit on the
contract held with a futures commission merchant and cash proceeds from existing
Fund investments due in 30 days; and (2) subject to certain limitations.
INTEREST RATE PROTECTION TRANSACTIONS
Certain Funds may enter into interest rate protection transactions, including
interest rate swaps, caps, collars and floors. Interest rate swap transactions
involve an agreement between two parties to exchange interest payment streams
that are based, for example, on variable and fixed rates that are calculated on
the basis of a specified amount of principal (the "notional principal amount")
for a specified period of time. Interest rate cap and floor transactions involve
an agreement between two parties in which the first party agrees to make
payments to the counterparty when a designated market interest rate goes above
(in the case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which the payments are
made when a designated market interest rate either goes above a designated
ceiling or goes below a designated floor on predetermined dates or during a
specified time period.
A Fund expects to enter into interest rate protection transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. The Funds intend to use these transactions as a
hedge and not as a speculative investment.
A Fund may enter into interest rate protection transactions on an asset-based
basis, depending on whether it is hedging its assets or its liabilities, and
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these interest rate
protection transactions are entered into for good faith hedging purposes, and
inasmuch as segregated accounts will be established with respect to such
transactions, the Funds believe such obligations do not constitute senior
securities. The net amount of the excess, if any, of a Fund's obligations over
its
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entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash, U.S. Government Securities or other liquid high
grade debt obligations having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by a custodian that
satisfies the requirements of the 1940 Act. The Funds also will establish and
maintain such segregated accounts with respect to its total obligations under
any interest rate swaps that are not entered into on a net basis and with
respect to any interest rate caps, collars and floors that are written by the
Fund.
A Fund will enter into interest rate protection transactions only with banks and
other institutions believed by the Investment Adviser to the Fund to present
minimal credit risks. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized and,
accordingly, they are less liquid than swaps.
HEDGING AND OPTION INCOME STRATEGIES
Other than the Money Market Funds, each Fund may (i) purchase or sell (write)
put and call options on securities to enhance the Fund's performance and (ii)
seek to hedge against a decline in the value of securities owned by it or an
increase in the price of securities which it plans to purchase through the
writing and purchase of exchange-traded and over-the-counter options on
individual securities or securities or financial indices and through the
purchase and sale of financial futures contracts and related options. Certain
Funds currently do no not intend to enter into any such transactions. Whether or
not used for hedging purposes, these investments techniques involve risks that
are different in certain respects from the investment risks associated with the
other investments of a Fund. To the extent a Fund invests in foreign securities,
it may also invest in options on foreign currencies, foreign currency futures
contracts and options on those futures contracts. Use of these instruments is
subject to regulation by the SEC, the several options and futures exchanges upon
which options and futures are traded or the CFTC.
No assurance can be given, however, that any hedging or option income strategy
will succeed in achieving its intended result.
Except as otherwise noted in the Prospectus or herein, the Funds will not use
leverage in their option income and hedging strategies. In the case of
transactions entered into as a hedge, a Fund will hold securities, currencies or
other options or futures positions whose values are expected to offset ("cover")
its obligations thereunder. A Fund will not enter into a hedging strategy that
exposes it to an obligation to another party unless it owns either (i) an
offsetting ("covered") position or (ii) cash, U.S. Government Securities or
other liquid securities (or other assets as may be permitted by the SEC) with a
value sufficient at all times to cover its potential obligations. When required
by applicable regulatory guidelines, the Funds will set aside cash, U.S.
Government Securities or other liquid securities (or other assets as may be
permitted by the SEC) in a segregated account with its custodian in the
prescribed amount. Any assets used for cover or held in a segregated account
cannot be sold or closed out while the hedging or option income strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation involving a large percentage
of a Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
OPTIONS STRATEGIES
A Fund may purchase put and call options written by others and sell put and call
options covering specified individual securities, securities or financial
indices or currencies. A put option (sometimes called a "standby commitment")
gives the buyer of the option, upon payment of a premium, the right to deliver a
specified amount of currency to the writer of the option on or before a fixed
date at a predetermined price. A call option (sometimes called a "reverse
standby commitment") gives the purchaser of the option, upon payment of a
premium, the right to call upon the writer to deliver a specified amount of
currency on or before a fixed date, at a predetermined price.
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The predetermined prices may be higher or lower than the market value of the
underlying currency. A Fund may buy or sell both exchange-traded and
over-the-counter ("OTC") options. A Fund will purchase or write an option only
if that option is traded on a recognized U.S. options exchange or if the
Investment Adviser believes that a liquid secondary market for the option
exists. When a Fund purchases an OTC option, it relies on the dealer from which
it has purchased the OTC option to make or take delivery of the currency
underlying the option. Failure by the dealer to do so would result in the loss
of the premium paid by the Fund as well as the loss of the expected benefit of
the transaction. OTC options and the securities underlying these options
currently are treated as illiquid securities by the Funds.
Upon selling an option, a Fund receives a premium from the purchaser of the
option. Upon purchasing an option the Fund pays a premium to the seller of the
option. The amount of premium received or paid by the Fund is based upon certain
factors, including the market price of the underlying securities, index or
currency, the relationship of the exercise price to the market price, the
historical price volatility of the underlying assets, the option period, supply
and demand and interest rates.
Certain Funds may purchase call options on debt 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. A Fund may similarly purchase put options
in order to hedge against a decline in market value of securities held in its
portfolio. The put enables the Fund to sell the underlying security at the
predetermined exercise price; thus the potential for loss to the Fund is limited
to the option premium paid. If the market price of the underlying security is
lower than the exercise price of the put, any profit the Fund realizes on the
sale of the security would be reduced by the premium paid for the put option
less any amount for which the put may be sold.
An Investment Adviser may write call options when it believes that the market
value of the underlying security will not rise to a value greater than the
exercise price plus the premium received. Call options may also be written to
provide limited protection against a decrease in the market price of a security,
in an amount equal to the call premium received less any transaction costs.
Certain Funds may purchase and write put and call options on fixed income or
equity security indexes in much the same manner as the options discussed above,
except that index options may serve as a hedge against overall fluctuations in
the fixed income or equity securities markets (or market sectors) or as a means
of participating in an anticipated price increase in those markets. The
effectiveness of hedging techniques using index options will depend on the
extent to which price movements in the index selected correlate with price
movements of the securities which are being hedged. Index options are settled
exclusively in cash.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS
A 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 "Hedging and Option Income
Strategies -- Options Strategies" and "Foreign Currency 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, a 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.
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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
A Fund may effectively terminate its right or obligation under an option
contract by entering into a closing transaction. For instance, if the Fund
wished to terminate its potential obligation to sell securities or currencies
under a call option it had written, 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 Investment Adviser's
ability to forecast the direction of price fluctuations in the underlying
securities or currency markets, or in the case of an index option,
fluctuations in the market sector represented by the index.
(2) Options normally have expiration dates of up to nine months. Options
that expire unexercised have no value. Unless an option purchased by a
Fund is exercised or unless a closing transaction is effected with
respect to that position, a loss will be realized in the amount of the
premium paid.
(3) A position in an exchange-listed option may be closed out only on an
exchange 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, a Fund would have to exercise the option which it purchased
in order to realize any profit. The inability to effect a closing
transaction on an option written by a Fund may result in material losses
to the Fund.
(4) A Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
(5) When a Fund enters into an over-the-counter contract with a
counterparty, the Fund will assume the risk that the counterparty will
fail to perform its obligations in which case the Fund could be worse off
than if the contract had not been entered into.
FUTURES STRATEGIES
A futures contract is a bilateral agreement wherein one party agrees to accept,
and the other party agrees to make, delivery of cash, an underlying debt
security or the currency as called for in the contract at a specified future
date and at a specified price. For futures contracts with respect to an index,
delivery is of an amount of cash equal to a specified dollar amount times the
difference between the index value at the time of the contract and the close of
trading of the contract.
A Fund may sell interest rate futures contracts in order to continue to receive
the income from a fixed income security, while endeavoring to avoid part of or
all of a decline in the market value of that security which would accompany an
increase in interest rates.
A Fund may purchase index futures contracts for several reasons: to simulate
full investment in the underlying index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce transactions costs, or to
seek higher investment returns when a futures contract is priced more
attractively than securities in the index.
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A Fund may purchase call options on a futures contract as a means of obtaining
temporary exposure to market appreciation at limited risk. This strategy is
analogous to the purchase of a call option on an individual security, in that it
can be used as a temporary substitute for a position in the security itself.
A 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, a Fund may sell foreign currency futures contracts when its
Investment Adviser anticipates a general weakening of foreign currency exchange
rates that could adversely affect the market values of the Fund's foreign
securities holdings. A 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. A Fund may also purchase call or put
options on foreign currency futures contracts to obtain a fixed foreign exchange
rate at limited risk. A 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, a Fund is
required to deposit (typically with its custodian in a segregated account in the
name of the futures broker) an amount of cash or U.S. Government Securities
generally equal to 5% or less of the contract value. This amount is known as
initial margin. Subsequent payments, called variation margin, to and from the
broker, 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.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for a Fund to close a position,
and in the event of adverse price movements, it would have to make daily cash
payments of variation margin. In addition:
(1) Successful use by a Fund of futures contracts and related options
will depend upon the Investment Adviser's ability to predict movements in
the direction of the overall securities and currency markets, which
requires different skills and techniques than predicting changes in the
prices of individual securities. Moreover, futures contracts relate not
to the current level of the underlying instrument but to the anticipated
levels at some point in the future; thus, for example, trading of stock
index futures may not reflect the trading of the securities which are
used to formulate an index or even actual fluctuations in the relevant
index itself.
(2) The price of futures contracts may not correlate perfectly with
movement in the price of the hedged currencies due to price distortions
in the futures market or otherwise. There may be several reasons
unrelated to the value of the underlying currencies which causes this
situation to occur. As a result, a correct forecast of general market
trends may still not result in successful hedging through the use of
futures contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In such event, it may not
be possible to close a position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash
payments of variation margin.
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(4) Like other options, options on futures contracts have a limited life.
A Fund will not trade options on futures contracts on any exchange or
board of trade unless and until, in the Adviser's opinion, the market for
such options has developed sufficiently that the risks in connection with
options on futures transactions are not greater than the risks in
connection with futures transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that
is at risk. Sellers of options on futures contracts, however, must post
an initial margin and are subject to additional margin calls which could
be substantial in the event of adverse price movements.
(6) A Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of
added brokerage commissions.
(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, a Fund must accept or
make delivery of the underlying foreign currency in accordance with any
U.S. or foreign restrictions or regulations regarding the maintenance of
foreign banking arrangements by U.S. residents, and the Fund may be
required to pay any fees, taxes or charges associated with such delivery
which are assessed in the issuing country.
COMMODITY FUTURES CONTRACTS AND COMMODITY OPTIONS
A Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. A Fund
will only invest in futures contracts, options on futures contracts and other
options contracts that are subject to the jurisdiction of the CFTC after filing
a notice of eligibility and otherwise complying with the requirements of Section
4.5 of the rules of the CFTC. Under that section a Fund will not enter into any
futures contract or option on a futures contract if, as a result, the aggregate
initial margins and premiums required to establish such positions would exceed
5% of the Fund's net assets.
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve the currencies of foreign
countries. In addition, a Fund may temporarily hold funds in bank deposits in
foreign currencies pending the completion of certain investment programs.
Accordingly, the value of the assets of a Fund, as measured in U.S. dollars, may
be affected by changes in foreign currency exchange rates and exchange control
regulations. In addition, the Fund may incur costs in connection with
conversions between various currencies. A 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 by entering into foreign
currency forward contracts ("forward contracts") to purchase or sell foreign
currencies. A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
(usually less than one year) from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers and involve the risk that the other
party to the contract may fail to deliver currency when due, which could result
in losses to the Fund. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades. Foreign exchange dealers
realize a profit based on the difference between the price at which they buy and
sell various currencies.
A 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
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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, a Fund may enter into forward contracts in connection with existing
portfolio positions. For example, when an Investment 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 investment 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 Advisers do not
intend to enter into forward contracts on a regular or continuous basis and will
not do so if, as a result, a Fund will have more than 25 percent 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 investment securities or other assets denominated in that currency.
At or before the settlement of a forward contract, a 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, it will realize 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.
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, a Fund will set aside cash,
U.S. Government Securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount.
CERTAIN INFORMATION CONCERNING JAPAN
The following information is not intended to provide a complete description of
Japan, its economy or the risks of investing in Japanese securities. Information
in this section was compiled from Japanese governmental and various other
sources. Although the information is believed to be accurate, none of the
information obtained from these sources has been independently verified.
Japan, located in eastern Asia, consists of four main islands: Hokkaido, Honshu,
Kyushu and Shikoku, and many small islands. Its population is approximately 125
million. The Japanese government is a representative democracy the principal
executive of which is the Prime Minister. Japan's legislature (known as the
Diet) consists of two houses, the House of Representatives (the lower house) and
the House of Councillors (the upper house).
From 1955 to 1993, Japan's government was controlled by the Liberal Democratic
Party (the "LDP"), the major Conservative party. In August 1993, after a main
faction left the LDP over the issue of political reform, a non-LDP coalition
government was formed consisting of centrist and leftist parties and was headed
by Prime Minister Morihiro Hosokawa. In April 1994, Mr. Hosokawa resigned due to
allegations of personal financial irregularities. The coalition members
thereafter agreed to choose as prime minister the foreign minister, Tsutomu
Hata. As a result
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of the formation of a center-right voting bloc, however, the Social Democratic
Party of Japan (the "SDPJ"), a leftist party, withdrew from the coalition.
Consequently, Mr. Hata's government was a minority coalition, the first since
1955, and was therefore unstable. In June 1994, Mr. Hata and his coalition were
replaced by a new coalition made up of the SDPJ, the LDP and the New Party
Harbinger. This coalition was led by Tomiichi Murayama, the first Socialist
prime minister in 47 years. The present coalition government is led by a Liberal
Democrat, prime minister Ryutaro Hashimoto. With the national elections held on
October 20, 1996, the LDP has established strong representation in the country's
government. The election results may prove to be a significant determining
factor in the upcoming year's economic condition.
The Japanese economy maintained an average annual growth rate of 2.1% in real
GDP terms from 1990 through 1994, compared with 2.4% for the United States
during the same period. In 1995, Japan's real GDP growth was less than 1% for
the third consecutive year. The government has forecasted GDP to increase to
more than 3% for 1996. Inflation has remained low, 1.3% in 1993, 0.7% in 1994
and 0% in 1995. As a result of the growing economy and low inflation, private
consumer demand is growing strongly. Unemployment, however, is still at its
highest level in forty years and is not expected to full in the foreseeable
future. In addition, employment has been shifting from the manufacturing sector
to the service sector, a trend expected to continue in 1996.
Japan's post World War II reliance on heavy industries has shifted to higher
technology products assembly and, most recently, to automobile, electrical and
electronic production. Japan's success in exporting it's products has generated
sizable trade surpluses. Japan is in a difficult phase in its relations with its
trading partners partly due to the concentration of Japanese exports in products
such as automobiles, machine tools and semiconductors and the resulting large
trade surpluses, recent large and visible Japanese real estate investments in
the United States, and an overall trade imbalance as indicated by Japan's
balance of payments. Although the recent improvement of the United States
economy and an increased competitiveness and success in manufacturing, such as
with the U.S. automobile industry, likely has had a negative effect on Japan's
growth, Japan's overall trade surplus for 1994 was the largest in its history,
amounting to almost $121 billion. Exports totaled $396 billion, up 9.68 from
1993, and imports were $275 billion, up 14.2% from 1993. The current account
surplus in 1994 was $129 billion, down 2% from a record high in 1993. In 1995,
Japan's overall trade surplus amounted to $107 billion. Exports totaled $443
billion, up 11.98 from 1994, and imports were $336 billion, up 22.28 from 1994.
In 1995, the current account surplus decreased 278 to $94 billion. Japan remains
the largest creditor nation and a significant donor of foreign aid. On October
1, 1994, the U.S. and Japan reached an agreement that may lead to more open
Japanese markets with respect to insurance, glass and medical and
telecommunications equipment. In June 1995, the two countries agreed in
principal to increase Japanese imports of American automobiles and automotive
parts. The final wording of the agreement is ambiguous, and therefore it is
likely that this issue will continue to be a source of tension between the two
countries. Other current sources of tension between the two countries, are
disputes in connection with trade in semiconductors and photographic supplies,
deregulation of the Japanese insurance market and a dispute over aviation
rights. It is expected that the continuing friction between the United States
and Japan with respect to trade issues will continue for the foreseeable future.
In response to pressures caused by the slumping Japanese economy, the fragile
financial markets and the appreciating Yen, the Japanese government, in April
and June 1995, announced emergency economic packages that focus on higher and
accelerated public works spending and increased aid for post-earthquake
reconstruction in the Kobe area. These measures helped to increase public
investment and lead to faster GDP growth. Nevertheless, these packages did not
include measures which are likely to continue to assist the economy in the
future.
In addition to the government's emergency economic packages, the Bank of Japan
attempted to assist the financial markets by lowering its official discount rate
to a record low in 1995. However, large amounts of bad debt have prevented banks
from expanding their loan portfolios despite low discount rates. Japanese banks
have suffered six years of declining profits and three of the four largest
securities firms reported unconsolidated pre-tax losses for 1994-1995. In
addition, many banks have required public funds to avert insolvency. In June
1995, the Finance Ministry announced an expansion of deposit insurance and
restrictions on rescuing insolvent banks. In June 1996, six bills designed to
address the large amount of bad debt in the banking system were passed by the
Diet. Nevertheless, the financial system's fragility is expected to continue for
the foreseeable future.
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The Japanese Yen has generally appreciated against the U.S. Dollar for the past
decade. Between 1990 and 1994 the Yen's real effective exchange rate appreciated
by approximately 36%. On April 19. 1995, the Japanese Yen reached an all time
high of 79.75% against the U.S. Dollar. On December 17, 1996, the exchange rate
was 113.75 Yen per Dollar.
Currently, there are eight stock exchanges in Japan. The Tokyo Stock Exchange
(the "TSE"), the Osaka Securities Exchange and the Nagoya Stock Exchange are the
largest, together accounting for approximately 98.4% of the share trading volume
and for about 98.2% of the overall market value of all shares traded on Japanese
stock exchanges during the year ended December 31, 1995. The other stock
exchanges are located in Kyoto, Hiroshima, Fukuoka, Nigato and Sapporo.
The TSE is the largest of the Japanese stock exchanges and as such is widely
regarded as the principal securities exchange for all of Japan. In 1995, the TSE
accounted for 72.1% of the market value and 76.6% of the share trading volume on
all Japanese stock exchanges. A foreign stock section on the TSE, consisting of
shares of non-Japanese companies, listed 77 non-Japanese companies at the end of
1995. The market for stock of Japanese issuers on the TSE is divided into a
First Section and a Second Section. The First Section is generally for larger,
established companies (in existence for five years or more) that meet listing
criteria relating to the size and business condition of the issuing company, the
liquidity of its securities and other factors pertinent to investor protection.
The TSE's Second Section is for smaller companies and newly listed issuers.
The TSE's domestic stocks include a broad cross-section of companies involved in
many different areas of the Japanese economy. At the end of 1995, the three
largest industry sectors, based on market value, listed on the TSE were banking,
with 101 companies representing 22.3% of all domestic stocks listed on the TSE;
electric appliances, with 177 companies representing 11.5% of all domestic
stocks so listed; and transportation equipment with 86 companies representing
7.l% of all domestic stocks so listed. No other industry sector represented more
than 5% of TSE listed domestic stocks.
The First and Second Sections of the TSE grew in terms of both average daily
trading value end aggregate year-end market value from 1982, when they were
128,320 million yen and 98,090 billion yen, respectively, through the end of
1989, when they were 1,335,810 million yen and 611,152 billion yen,
respectively. Following the peak in 1989, both average daily trading value and
aggregate year-end market value declined through 1992 when they were 243,362
million yen and 289,483 billion yen, respectively. In 1993 and 1994, both
average daily trading value and aggregate year-end market value increased and
were 353,208 and 353,666 million yen, respectively, and 324,357 and 358,392
billion yen, respectively. In 1995, aggregate yearend market value increased to
365,716 billion yen and average daily trading value decreased to 335,598 million
yen.
As measured by the TOPIX, a capitalization-weighted composite index of all
common stocks listed in the First section, the performance of the First Section
reached a peak of 2,884.80 on December 18, 1989. Thereafter, the TOPIX declined
approximately 45% through December 29, 1995. As of December 17, 1996, the TOPIX
closed at a level close to that at the end of 1995. As of the end of the third
quarter, the TSE's average price/earnings ratio was substantially higher than
that of the stock markets of other developed economies.
Under Japan's Foreign Exchange and Foreign Trade Control Law and cabinet orders
and ministerial Ordinances thereunder (the "Foreign Exchange Controls"), prior
notification to the Minister of Finance of Japan (the "Minister of Finance") of
the acquisition of shares in a Japanese company from a resident of Japan
(including a corporation) by a non-resident of Japan (including a corporation)
is required unless the acquisition is made from or through a securities company
designated by the Minister of Finance or if the yen equivalent of the aggregate
purchase price of shares is not more than 100 million Yen. Even in these
situations, if a foreign investor intends to acquire shares of a Japanese
corporation listed on a Japanese stock exchange or traded on a Japanese over-
the-counter market (regardless of the person from or through whom the foreign
investor acquires such shares) and as a result of the acquisition the foreign
investor would directly or indirectly hold 10% or more of the total outstanding
shares of that corporation, the foreign investor must file a report within 15
days from the day of such acquisition with the Minister of Finance and any other
minister with proper jurisdiction. In instances where the acquisition concerns
national security or meets certain other conditions specified in the Foreign
Exchange Controls, the foreign investor must file
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a prior notification with respect to the proposed acquisition with the Minister
of Finance and any other minister with proper jurisdiction. The ministers may
make a recommendation to modify or prohibit the proposed acquisition if they
consider that the acquisition would impair the safety and maintenance of public
order in Japan or harmfully influence the smooth operation of the Japanese
economy. If the foreign investor does not accept the recommendation, the
ministers may issue an order modifying fir prohibiting the acquisition. In
certain limited and exceptional circumstances, the Foreign Exchange Controls
give the Minister of Finance the power to require prior approval for any
acquisition of shares in a Japanese company by a non-resident of Japan.
In general, the acquisition of shares by non-resident shareholders by way of
stock splits, as well as to the acquisition of shares of a Japanese company
listed on a Japanese stock exchange by non-resident upon exercise of warrants or
conversion of convertible bonds, are not subject to any of the foregoing
notification or reporting requirements. Under the Foreign Exchange Controls,
dividends paid on shares held by non-residents of Japan and the proceeds of any
sales of shares within Japan may, in general, be converted into any foreign
currency and remitted abroad.
The principal securities law in Japan is the Securities and Exchange Law ("SEL")
which provides overall regulation for the issuance of securities in public
offerings and private placements and for Secondary market trading. The SEL was
amended in 1988 in order to liberalize the securities market; to regulate the
securities futures, index, and option trade; to add disclosure regulations and
to reinforce the prevention of insider trading. Insider trading provisions are
applicable to debt and equity securities listed on a Japanese Stock exchange and
to unlisted debt and equity securities issued by a Japanese corporation that has
securities listed on a Japanese stock exchange or registered with the Securities
Dealers Association (the "SDA"). In addition, each of the eight stock exchanges
in Japan has it's own constitution, regulations governing the sale and purchase
of securities and standing rules for exchange contracts for the purchase and
sale of securities on the exchange, as well as detailed rules and regulations
covering a variety of matters, including rules and standards for listing and
depicting of securities.
The loss compensation incidents involving preferential treatment of certain
customers by certain Japanese securities companies, which came to light in 1991,
provided the impetus for amendments to the SEL, which took effect fin 1992, as
well as two reform bills passed by the Diet in 1992. The amended SEL now
prohibits securities companies from the operation of discretionary accounts,
loss compensation or provision of artificial gains in securities transactions,
directly or indirectly, to their customers and making offers or agreements with
respect thereto. To ensure that securities are traded at their fair value, the
SDA and the TSE have promulgated certain rules, effective in 1992, which, among
other things, explicitly prohibit any transaction undertaken with the intent to
provide loss compensation of illegal gains regardless of whether the transaction
otherwise technically complies with the rules. The reform bill passed by the
Diet, which took effect in 1992 and 1993, provides for the establishment of a
new Japanese securities regulator and for a variety of reforms designed to
revitalize the Japanese financial and capital markets by permitting banks and
securities companies to compete in each other's field of business, subject to
various regulations and restrictions.
2. INVESTMENT LIMITATIONS
The Funds have adopted the following fundamental investment limitations which
are in addition to those contained in the Funds' Prospectus and which may not be
changed without shareholder approval. Each Fund may not:
(1) Borrow money from banks or by entering into reverse repurchase
agreements, but the Fund will limit borrowings to amounts not in
excess of 33 1/3% of the value 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, provided that the Funds may invest, to the extent
permitted by the 1940 Act, all or a portion of its assets in
another diversified, open-end management investment company with
substantially the same investment objective, policies and
restrictions as the Fund.
15
<PAGE>
(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; however, each Fund may invest all or a portion of its
assets in another diversified, open-end management investment
company with substantially the same investment objective, policies
and restrictions as the Fund.
(4) Act as an underwriter of securities of other issuers, except to
the extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed to be an underwriter for
purposes of the Securities Act of 1933.
(5) Make loans to other persons except for loans of portfolio
securities and except through the use of repurchase agreements and
through the purchase of commercial paper or debt securities which
are otherwise permissible investments.
(6) Purchase or sell real estate or any interest therein, except
that the Fund may invest in securities issued or guaranteed by
corporate or governmental entities secured by real estate or
interests therein, such as mortgage pass-throughs and
collateralized mortgage obligations, or issued by companies that
invest in real estate or interests therein.
(7) Purchase or sell physical commodities or contracts relating to
physical commodities, provided that currencies, currency-related
contracts and contracts on indices will not be deemed to be
physical commodities.
(8) Issue senior securities except pursuant to Section 18 of the
Investment Company Act of 1940 ("1940 Act ) and except that the
Fund may borrow money subject to investment limitations specified
in the Fund's Prospectus.
(9) Invest in interests in oil or gas or interests in other
mineral exploration or development programs.
Each Fund has adopted the following nonfundamental investment limitations that
may be changed by the Board without shareholder approval. Each Fund may not:
(a) Borrow for purposes other than meeting redemptions in an amount
exceeding 5% of the value of the Fund's total assets or purchase
securities for investment while any borrowing equaling 5% or more
of the Fund's total assets is outstanding.
(b) Pledge, mortgage or hypothecate its assets, except to secure
permitted indebtedness. The deposit in escrow of securities in
connection with the writing of put and call options, collateralized
loans of securities and collateral arrangements with respect to
margin for futures contracts are not deemed to be pledges or
hypothecations for this purpose.
(c) Invest in securities of another registered investment company,
except in connection with a merger, consolidation, acquisition or
reorganization; and except 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, but
the Fund may make margin deposits in connection with permitted
transactions in options, futures contracts and options on futures
contracts.
(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 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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<PAGE>
(f) 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.
(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) 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.
In performance advertising the Funds may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDC/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). In addition, a Fund may compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Salomon Brothers Bond Index, the Shearson
Lehman Bond Index, the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. A Fund may refer in such materials
to mutual fund performance rankings and other data published by Fund Tracking
Companies. Performance advertising may also refer to discussions of a Fund and
comparative mutual fund data and ratings reported in independent periodicals,
such as newspapers and financial magazines.
YIELD CALCULATIONS
Yields for a Fund used in advertising are computed by dividing the Fund's
interest income for a given 30-day or one-month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced with
respect to bonds purchased at a premium over their par value by subtracting a
portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
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<PAGE>
Income calculated for the purpose of determining a Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that a Fund's yield for any given
period is not an indication or representation by the Fund of future yields or
rates of return on the Fund's shares. Also, Processing Organizations may charge
their customers direct fees in connection with an investment in a Fund, which
will have the effect of reducing the Fund's net yield to those shareholders. The
yields of each Fund are not fixed or guaranteed, and an investment in a Fund is
not insured or guaranteed. Accordingly, yield information may not necessarily be
used to compare shares of a Fund with investment alternatives which, like money
market instruments or bank accounts, may provide a fixed rate of interest. Also,
it may not be appropriate to compare a Fund's yield information directly to
similar information regarding investment alternatives which are insured or
guaranteed.
TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. While
average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the performance is not constant over
time but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over a given period
according to the following formula:
n
P(1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return; n = number of years;
and ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gain and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1)
18
<PAGE>
Where:
PT = period total return. The other definitions
are the same as in average annual total return
above.
For the period January 28, 1997 through March 31, 1997, the total return of the
Fund since inception was 0.63%.
4. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 53)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Financial Corp.(a registered transfer agent) and
Forum Advisors, Inc. (a registered investment adviser). Mr. Keffer is
a Trustee and/or officer of various registered investment companies for
which Forum Financial Services, Inc. serves as manager, administrator
and/or distributor. His address is Two Portland Square, Portland, Maine
04101.
Costas Azariadis, Trustee (age 52)
Professor of Economics, University of California, Los Angeles,
since July 1992. Prior thereto, Dr.Azariadis was Professor of
Economics at the University of Pennsylvania. His address is Department
of Economics, University of California, Los Angeles, 405 Hilgard Avenue,
Los Angeles, California 90024.
James C. Cheng, Trustee (age 53)
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President
and Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is 27 Temple Street, Belmont,
Massachusetts 02178.
J. Michael Parish, Trustee (age 52)
Partner at the law firm of Winthrop Stimson Putnam & Roberts since 1989.
Prior thereto, he was a partner at LeBoeuf, Lamb, Leiby & MacRae, a law
firm of which he was a member from 1974 to 1989. His address is 40 Wall
Street, New York, New York 10005.
Mark D. Kaplan, Vice President, Assistant Treasurer and Assistant Secretary
(age 40)
Managing Director at Forum Financial Services, Inc. since September
1995. Prior thereto, Mr. Kaplan was Managing Director and Director
of Research at H.M. Payson & Co. His address is Two Portland Square,
Portland, Maine 04101.
David I. Goldstein, Secretary (age 34)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1991. Prior thereto, Mr.Goldstein was associated with
the law firm of Kirkpatrick & Lockhart. Mr. Goldstein is also Secretary
or Assistant Secretary of various registered investment companies for
which Forum Financial Services, Inc. serves as manager, administrator
and/or distributor. His address is Two Portland Square, Portland, Maine
04101.
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<PAGE>
Richard C. Butt, Treasurer (age 40)
Managing Director, Forum Financial Corp.
with which he has been associated since 1995. Prior thereto, Mr. Butt
served as a consultant in the financial services division of KPMG Peat
Marwick LLP ("KPMG"). Prior to his employment at KPMG, Mr. Butt was
President of 440 Financial Distributors, Inc., the distribution subsidiary
of 440 Financial Group, and Senior Vice President of the parent company.
Before joining 440 Financial, he was a Vice President at Fidelity Services
Company. Mr. Butt is also treasurer of various registered investment
companies for which Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
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. His address is Two Portland Square,
Portland, Maine 04101.
Don L. Evans, Assistant Secretary (age 47)
Assistant Counsel, Forum Financial Services, Inc., with which he has
been associated since August 1995. Prior thereto, Mr. Evans was
associated with the law firm of Bisk & Lutz and prior thereto the law
firm of Weiner & Strother. Mr. Evans is also Assistant Secretary of
various registered investment companies for which Forum Financial
Services, Inc. serves as manager, administrator and/or distributor.
His address is Two Portland Square, Portland, Maine.
Cheryl O. Tumlin, Assistant Secretary (age 30)
Assistant Counsel, Forum Financial Services, Inc., with which she has
been associated since 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 associated
with the law firm of Robinson Silverman Pearce Aronsohn & Berman. Her
address is Two Portland Square, Portland, Maine.
M. Paige Turney, Assistant Secretary (age 27).
Fund Administrator, Forum Financial Services, Inc., with which she has
been associated since 1995. Ms. Turney was employed from 1992 as a Senior
Fund Accountant with First Data Corporation in Boston, Massachusetts.
Prior thereto she was a student at Montana State University Her address
is Two Portland Square, Portland, Maine 04101.
John Y. Keffer is an interested person of the Trust as that term is defined in
the 1940 Act.
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, 1996.
<TABLE>
<CAPTION>
ACCRUED ANNUAL
AGGREGATE PENSION BENEFITS UPON TOTAL
TRUSTEE COMPENSATION BENEFITS RETIREMENT COMPENSATION
<S> <C> <C> <C> <C>
Mr. Keffer $4,000 None None $4,000
Mr. Azariadis $4,000 None None $4,000
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
</TABLE>
20
<PAGE>
ADVISERS
QUADRA Capital Partners, L.P. ("Quadra"), 270 Congress Street, Boston,
Massachusetts 02210, serves as investment adviser to the Funds pursuant to an
investment advisory agreement with the Trust (the "Advisory Agreement"). The
general partner of Quadra is Quadra Capital Partners, Inc., ("General Partner")
a Delaware Corporation. The business address of the General Partner is 270
Congress Street, Boston, Massachusetts 02210. As a new entity, Quadra has no
previous experience managing an investment company. The managing partners of
Quadra have significant experience, however, in the formation and management of
trust and investment management entities including registered investment
companies, registered investment advisers, and a commingled fund of funds.
Ms. Eileen Delasandro is founder and Chief Executive Officer of Quadra. She has
over twenty years of experience in the institutional investment management
Industry. Prior to founding Quadra, she was Partner and Chief Operating Officer
at Nicholas-Applegate Capital Management, L.P. Ms. Delasandro has completed the
National Association of Securities Dealers' Series 2, 3, 7, 63 and 65
examinations. Mr. Donald Levi is founder and Chief Operating Officer of Quadra.
He has over thirty years of experience in the banking and trust industries.
Prior founding Quadra, he was founder and Chief Executive Officer of Western
Trust Services. Mr. Howard Stevenson is founder and Chairman of Quadra. He is
also the Sarafin-Rock Professor at Harvard Business School, were he has taught
for over twenty-five years, and is co-chairman of the Baupost Group, a private
registered investment adviser, which he co-founded. Mr. Philip Hamilton is
Director of Strategic Planning at Quadra. Prior to joining Quadra, he was Senior
Researcher in Finance at Harvard Business School. He serves as compliance
officer for the firm.
To assist it in carrying out its responsibility, the Adviser has retained the
Subadvisers to render advisory services and make daily investment decisions for
each Fund pursuant to an investment subadvisory agreements with Quadra (the
"Subadvisory Agreements"). Quadra has retained the following Subadvisers:
CARL DOMINO ASSOCIATES, L.P., ("CDA") founded in 1987 by Mr. Carl Domino, CFA,
who is presently Managing Partner and Senior Portfolio Manager of CDA.
MCDONALD INVESTMENT MANAGEMENT, INC. ("McDonald"), organized in 1990 by Mr.
John McDonald, CFA, who is Chief Investment Officer of McDonald.
ANHALT/O'CONNELL INC., organized in 1975 by Mr. Paul Anhalt and Mr. Michael
O'Connell.
LM CAPITAL MANAGEMENT, INC. organized in 1988 by Mr. Luis Maizel and Mr. John
Chalker.
The amount of the fees paid by Quadra to each Subadviser may vary from time to
time as a result of periodic negotiations with the Subadviser regarding such
matters as the nature and extent of the services (other than investment
selection and order placement activities) provided by the Subadviser to the
Fund, the increased cost and complexity of providing services to the Fund, the
investment record of the Subadviser in managing the Fund and the nature and
magnitude of the expenses incurred by the Subadviser in managing the Fund's
assets and by the Adviser in overseeing and administering management of the
Fund. However, the contractual fee payable to each Fund by Quadra for investment
advisory services that is set forth in the Prospectus will not vary as a result
of those negotiations.
The Advisers furnish at their own expense all services, facilities and personnel
necessary to perform their duties under the Advisory or Subadvisory Agreements.
The Advisory and Subadvisory Agreements provide, with respect to each Fund, for
an initial term of two years from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or, with respect to each
Fund, by vote of the shareholders of that Fund, and in either case by a majority
of the directors who are not parties to the Advisory Agreement or interested
persons of any such party.
The Advisory and Subadvisory Agreements are terminable without penalty by the
Trust and by the Adviser, respectively, with respect to a Fund on 30 days'
written notice when authorized either by vote of the Fund's
21
<PAGE>
shareholders or by a vote of a majority of the Board, or by the Adviser and the
Subadviser, respectively, on not less than 90 days' written notice, and will
automatically terminate in the event of its assignment. The Agreements also
provide that, with respect to each Fund, the Adviser shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
performance of its duties to the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of the Adviser's duties or by reason of
reckless disregard of its obligations and duties under the Agreements. In
addition, under the Advisory Agreement, if the Adviser ceases to act as a Fund's
investment advisor, or in the event the Adviser so requests in writing, the
Trust will change a Fund's name so as not to include the word "Quadra." The
Advisory and Subadvisory Agreements provide that the Advisers may render
services to others.
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 a 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 a Fund an amount equal to all or a portion of the fees received
by the Adviser or any affiliate of the Adviser from a Fund with respect to the
client's assets invested in that Fund.
MANAGER
Forum Administrative Services, LLC ("FAdS") acts as administrator to the Trust
pursuant to an Administration Agreement with the Trust. As administrator, FAdS
provides management and administrative services necessary to the operation of
the Trust (which include, among other responsibilities, negotiation of contracts
and fees with, and monitoring of performance and billing of, the transfer agent
and custodian and arranging for maintenance of books and records of the Trust),
and provides the Trust with general office facilities. The Administration
Agreement will remain in effect for a period of twelve months with respect to
the Fund and thereafter is automatically renewed each year for an additional
term of one year.
The Administration Agreement terminates automatically if it is assigned and may
be terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party on not more than 60 days' written notice. The
Administration Agreement also provides that FAdS shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Trust, except for willful misfeasance, bad
faith or gross negligence in the performance of Forum's duties or by reason of
reckless disregard of its obligations and duties under the Administration
Agreement.
At the request of the Board, FAdS provides persons satisfactory to the Board to
serve as officers of the Trust. Those officers, as well as certain other
employees and Trustees of the Trust, may be directors, officers or employees of
FAdS, the Adviser, the subadviser or their affiliates.
DISTRIBUTOR
Forum Financial Services, Inc. ("Forum"), an affiliate of FAdS, is the Trust's
distributor and acts as the agent of the Trust in connection with the offering
of shares of the Fund pursuant to a Distribution Agreement. The Distribution
Agreement will continue in effect for twelve months and will continue in effect
thereafter only if its continuance is specifically approved at least annually by
the Board or by vote of the shareholders entitled to vote thereon, and in either
case, by a majority of the Trustees who (i) are not parties to the Distribution
Agreement, (ii) are not interested persons of any such party or of the Trust and
(iii) with respect to any class for which the Trust has adopted a distribution
plan, have no direct or indirect financial interest in the operation of that
distribution plan or in the Distribution Agreement, at a meeting called for the
purpose of voting on the Distribution Agreement. All subscriptions for shares
obtained by Forum are directed to the Trust for acceptance and are not binding
on the Trust until accepted by it. Forum receives no compensation or
reimbursement of expenses for the distribution services provided pursuant to the
Distribution Agreement and is under no obligation to sell any specific amount of
Fund shares.
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<PAGE>
The Distribution Agreement provides that Forum shall not be liable for any error
of judgment or mistake of law or in any event whatsoever, except for willful
misfeasance, bad faith or gross negligence in the performance of Forum's duties
or by reason of reckless disregard of its obligations and duties under the
Distribution Agreement.
The Distribution Agreement is terminable with respect to the Fund without
penalty by the Trust on 60 days' written notice when authorized either by vote
of the Fund's shareholders or by a vote of a majority of the Board, or by Forum
on 60 days' written notice. The Distribution Agreement will automatically
terminate in the event of its assignment.
Forum may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of the Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Fund are sold without sales charges or
distribution fees. These financial institutions may otherwise act as processing
agents, and will be responsible for promptly transmitting purchase, redemption
and other requests to the Fund.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition to, or
different from, those listed herein. Information concerning any charges or
services will be provided to customers by the financial institution. Investors
purchasing shares of the Fund in this manner should acquaint themselves with
their institution's procedures and should read this Prospectus in conjunction
with any materials and information provided by their institution. The financial
institution and not its customers will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
TRANSFER AGENT
Forum Financial Corp. ("FFC") acts as transfer agent of the Trust pursuant to a
transfer agency agreement (the "Transfer Agency Agreement"). The Transfer Agency
Agreement provided, with respect to each Fund, for an initial term of one year
from its effective date and for its continuance in effect for successive
twelve-month periods thereafter, provided that the agreement is specifically
approved at least annually by the Board or, with respect to either Fund, by a
vote of the shareholders of that Fund, and in either case by a majority of the
directors who are not parties to the Transfer Agency Agreement or interested
persons of any such party at a meeting called for the purpose of voting on the
Transfer Agency Agreement.
Among the responsibilities of FFC 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.
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 shareholders of the Funds with respect to
assets invested in the Funds. 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 FFC with
respect to assets of those customers or clients invested in the Funds. FFC,
Forum or sub-transfer agents or processing agents retained by 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
Forum.
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<PAGE>
For its services under the Transfer Agency Agreement, Forum receives, with
respect to each Series: a fee of $24,000 per year; such amounts to be computed
and paid monthly in arrears by the Fund; and (iii) Annual Shareholder Account
Fees of $25.00 for a retail and $125.00 for an institutional shareholder
account; such fees to be computed as of the last business day of the prior
month.
Pursuant to a Fund Accounting Agreement, FFC prepares and maintains books and
records of each Fund on behalf of the Trust as required under the 1940 Act,
calculates the net asset value per share of each Fund and dividends and capital
gain distributions and prepares periodic reports to shareholders and the
Securities and Exchange Commission. For its services, FFC receives from the
Trust with respect to each Fund a fee of $36,000 per year plus surcharges of
$6,000 to $24,000 for specified asset levels. FFC is paid additional surcharges
of $12,000 per year for each of the following: a portfolio with more than a
specified number of securities positions and/or international positions;
investments in derivative instruments; percentages of assets invested in asset
backed securities; and, a monthly portfolio turnover rate of 10% or greater.
FFC 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.
EXPENSES
Under the Advisory Agreement, the Trust has confirmed its obligation to pay all
its expenses subject to the obligation of the Adviser to reimburse the Trust for
its excess expenses as described in the Prospectus. The Trust believes that
currently the most restrictive expense ratio limitation imposed by any state is
2-1/2% of the first $30 million of the Fund's average net assets, 2% of the next
$70 million of its average net assets and 1-1/2% of its average net assets in
excess of $100 million.
The Trust's expenses include: interest charges, taxes, brokerage fees and
commissions; certain insurance premiums; fees, interest charges and expenses of
the Trust's custodian and transfer agent; fees of pricing, interest, dividend,
credit and other reporting services; costs of membership in trade associations;
telecommunications expenses; funds transmission expenses; auditing, legal and
compliance expenses; costs of forming the Trust and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information and shareholder reports and delivering them to
existing shareholders; costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; compensation of the Trust's Trustees;
compensation of the Trust's officers and employees who are not employees of the
Adviser, Forum or their respective affiliates and costs of other personnel
performing services for the Trust; costs of corporate meetings; Securities and
Exchange Commission registration fees and related expenses; state securities
laws registration fees and related expenses; the fees payable under the Advisory
Agreement, and the Administration and Distribution Agreement.
5. DETERMINATION OF NET ASSET VALUE
The Trust does not determine net asset value on the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Veterans' Day, Thanksgiving and Christmas. 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. Purchases and redemptions are effected
at the time of the next determination of net asset value following the receipt
in proper form of any purchase or redemption order.
6. PORTFOLIO TRANSACTIONS
Purchases and sales of debt securities for the Fixed Income Funds usually are
principal transactions. Portfolio Securities for these Funds are normally
purchased directly from the issuer or from an underwriter or market maker
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for the securities. There usually are no brokerage commissions paid for such
purchases. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and
asked prices.
The Equity Funds will, and the Fixed Income Funds may, effect purchases and
sales through brokers who charge commissions. Allocations of transactions to
brokers and dealers and the frequency of transactions are determined by the
Adviser in its best judgment and in a manner deemed to be in the best interest
of shareholders of the Fund rather than by any formula. The primary
consideration is prompt execution of orders in an effective manner and at the
most favorable price available to the Fund.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with Fund transactions, the 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 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 Advisers may give consideration to research and investment
analysis services furnished by brokers or dealers to the Advisers 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 Advisers' own internal research and
investment strategy capabilities. The Adviser may use the research and analysis
in connection with services to clients other than the Fund, and the Advisers'
fee is not reduced by reason of the Advisers' 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 Advisers or their affiliates. If, however, a Fund and other investment
companies or accounts managed by one of the Advisers are contemporaneously
engaged in the purchase or sale of the same security, the transactions may be
averaged as to price and allocated equitably to each account. In some cases,
this policy might adversely affect the price paid or received by a Fund or the
size of the position obtainable for the Fund. In addition, when purchases or
sales of the same security for a Fund and for other investment companies and
accounts managed by one of the Advisers occur contemporaneously, the purchase or
sale orders may be aggregated in order to obtain any price advantages available
to large denomination purchases or sales.
In the future the Funds, consistent with the policy of obtaining best net
results, may conduct brokerage transactions through the Advisers' affiliates,
affiliates of those persons or Forum. If a Fund anticipates conducting brokerage
transactions through these persons, the Board will adopt procedures in
conformity with applicable rules under the 1940 Act to ensure that all brokerage
commissions paid to these persons are reasonable and fair.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse a Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to a Fund's shares as provided in the
Prospectus.
The Trust has filed a formal election with the Securities and Exchange
Commission pursuant to which a Fund will only effect a redemption in portfolio
securities if a shareholder is redeeming more than $250,000 or 1% of the Fund's
total net assets, whichever is less, during any 90-day period.
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<PAGE>
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of any other Quadra fund of the Trust or shares of Daily
Assets Cash Fund, a money market fund of Forum Funds ("Participating Fund"). For
Federal income tax purposes, exchange transactions are treated as sales on which
a purchaser will realize a capital gain or loss depending on whether the value
of the shares redeemed is more or less than his basis in such shares at the time
of the transaction.
By use of the exchange privilege, the shareholder authorizes FFC 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 FFC to be genuine.
The records of FFC of such instructions are binding. Proceeds of an exchange
transaction may be invested in another Participating Fund in the name of the
shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction. Shares of any Participating Fund
may be redeemed and the proceeds used to purchase, without a sales charge,
shares of any other Participating Fund. The terms of the exchange privilege are
subject to change, and the privilege may be terminated by the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
The Funds offer an individual retirement plan (the "IRA") for individuals who
wish to use shares of the Funds as a medium for funding individual retirement
savings. Under the IRA, distributions of net investment income and capital gain
will be automatically reinvested in the IRA established for the investor. The
Funds' custodian furnishes custodial services to the IRAs for a service fee.
Shareholders wishing to use a Fund's IRA should contact FFC for further details
and information.
8. TAXATION
Each Fund intends, for each taxable year, to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code").
Qualification as a regulated investment company under the Internal Revenue Code
of 1986 does not involve governmental supervision of management or investment
practices or policies. Investors should consult their own counsel for a complete
understanding of the requirements the Funds must meet to qualify for such
treatment. The information set forth in the Prospectus and the following
discussion relate solely to Federal income taxes on dividends and distributions
by a Fund and assume that each Fund qualifies as a regulated investment company.
Investors should consult their own counsel for further details and for the
application of state and local tax laws to the investor's particular situation.
The Equity Funds expect to derive a substantial amount of their gross income
(exclusive of capital gain) from dividends. Accordingly, that portion of the
Equity Funds' dividends so derived will qualify for the dividends-received
deduction for corporations to the extent attributable to certain qualifying
dividends received by the Fund from domestic corporations. The Fixed Income
Funds expect to derive substantially all of their gross income (exclusive of
capital gain) from sources other than dividends. Accordingly, it is expected
that only a small portion, if any, of the Fixed Income Funds' dividends or
distributions will qualify for the dividends-received deduction for
corporations. Capital gain distributions are not eligible for the dividends
received deduction for corporations.
Under the Code, gains or losses from the disposition of (i) foreign currencies,
(ii) debt securities denominated in a foreign currency, (iii) certain options on
foreign currencies or (iv) certain forward contracts denominated in a foreign
currency, that are attributed to fluctuations in the value of the foreign
currency between the date of acquisition of the asset and the date of its
disposition are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, increase or
decrease the amount of a Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than affecting the
amount of the Fund's net capital gain. Because section 988 losses reduce the
amount of ordinary dividends a Fund
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will be allowed to distribute for a taxable year, such losses may result in all
or a portion of prior dividend distributions for such year being recharacterized
as non-taxable return of capital to shareholders, rather than as an ordinary
dividend, reducing each shareholder's basis in his or her shares. To the extent
that such distributions exceed such shareholders' basis, each distribution will
be treated as a gain from the sale of shares. Under certain conditions, a Fund
may elect to except from Section 988 any foreign currency gain or loss realized
by a Fund on any regulated forward contract, option or futures contract which
would be "marked to market" under Section 1256 of the Code if held on the last
day of taxable year, as described immediately below.
Certain listed options, regulated futures contracts and foreign exchange
contracts are considered "section 1256 contracts" for Federal income tax
purposes. Section 1256 contracts held by a Fund at the end of each taxable year
will be "marked to market" and treated for Federal income tax purposes as though
sold for fair market value on the last business day of such taxable year. Gain
or loss realized by a Fund on section 1256 contracts generally will be
considered 60% long-term and 40% short-term capital gain or loss. A Fund can
elect to exempt its section 1256 contracts which are part of a "mixed straddle"
from the application of section 1256.
With respect to equity or over-the-counter put and call options, gain or loss
realized by a Fund upon the lapse or sale of such options held by the Fund will
be either long-term or short-term capital gain or loss depending upon the
respective Fund's holding period with respect to such option. However, gain or
loss realized upon the lapse or closing out of such options that are written by
a Fund will be treated as short-term capital gain or loss. In general, if a Fund
exercises an option, or if an option that a Fund has written is exercised, gain
or loss on the option will not be separately recognized but the premium received
or paid will be included in the calculation of gain or loss upon disposition of
the property underlying the option.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by such Fund may constitute a
"straddle" for Federal income tax purposes. A straddle of which at least one,
but not all, the positions are section 1256 contracts may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that (i) loss realized on
disposition of one position of a straddle not be recognized to the extent that a
Fund has unrealized gains with respect to the other position in such straddle;
(ii) a Fund's holding period in straddle positions be suspended while the
straddle exists (possibly resulting in gain being treated as short-term capital
gain rather than long-term capital gain); (iii) losses recognized with respect
to certain straddle positions which are part of a mixed straddle and which are
non-section 1256 positions be treated as 60% long-term and 40% short-term
capital loss; (iv) losses recognized with respect to certain straddle positions
which would otherwise constitute short-term capital losses be treated as long-
term capital losses; and (v) the deduction of interest and carrying charges
attributable to certain straddle positions may be deferred. Various elections
are available to a Fund which may mitigate the effects of the straddle rules,
particularly with respect to mixed straddles. In general, the straddle rules
described above do not apply to any straddles held by a Fund all of the
offsetting positions of which consist of section 1256 contracts.
A Fund's investment in zero coupon securities will be subject to special
provisions of the Code which may cause the Fund to recognize income without
receiving cash necessary to pay dividends or make distributions in amounts
necessary to satisfy the distribution requirements for avoiding federal income
and excise taxes. In order to satisfy those distribution requirements the Fund
may be forced to sell other portfolio securities.
Each International Equity Fund shareholder should include in the shareholder's
report of gross income in his Federal income tax return both cash dividends
received by the shareholder from the Fund and also the amount which the Fund
advises the shareholder is the shareholder's pro rata portion, if any, of
foreign income taxes paid with respect to, or withheld from, dividends and
interest paid to the Fund from its foreign investments. Each shareholder then
would be entitled, subject to certain limitations, to take a foreign tax credit
against the shareholders' Federal income tax liability for the amount of such
foreign taxes or else to deduct such foreign taxes as an itemized deduction from
gross income.
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9. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement, The First National Bank of Boston, 100
Federal Street, Boston, MA 02106, acts as the custodian of the Funds' assets.
The custodian's responsibilities include safeguarding and controlling the Funds'
cash and securities, determining income and collecting interest on Fund
investments.
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, One Battery
Park Plaza, New York, New York 10004
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109,
act as independent accountants for the Quadra Funds.
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, 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.
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 a Fund. Accordingly, those shareholders may be able to greatly affect (if not
determine) the outcome of a shareholder vote. As noted, certain of these
shareholders are known to the Trust to hold their shares of record only and have
no beneficial interest, including the right to vote, in the shares.
SHAREHOLDINGS
As of May 27, 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
shareholder listed below owned more than 5% of Quadra Limited Maturity Treasury
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
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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.
SHAREHOLDER INTEREST
Lansdowne Parking 99.8%
c/o Meredith Management
29 Crafts Street, # 300
Newton, MA 02158
10. FINANCIAL STATEMENTS
The audited Schedule of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, Notes to Financial
Statements and Financial Highlights of Quadra Limited Maturity Treasury Fund for
the fiscal year ended March 31, 1997 and the Report of Independent Accountants
thereon are included in the Annual Report to Shareholders, which is delivered
along with this SAI and is incorporated herein by reference.
As Quadra Value Equity Fund, Quadra International Equity Fund and Quadra
Opportunistic Bond Fund had not commenced operations until April 1, 1997,
financial statements for these funds are not yet available.
<PAGE>
THE QUADRA FUNDS
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE BONDS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
<PAGE>
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated CC typically are debt subordinated to senior debt which is assigned
an actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated D are in payment default or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
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AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
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.
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An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
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.
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.
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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.
