POLARIS GLOBAL VALUE FUND
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Two Portland Square
Portland, Maine 04101
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING:
Forum Shareholder Services, LLC
Two Portland Square
Portland, Maine 04101
888-263-5594
http:www.polariscapital.com
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PROSPECTUS May 5, 1998
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This Prospectus offers shares of Polaris Global Value Fund (the "Fund"), which
is a diversified portfolio of Forum Funds (the "Trust"), an open-end, management
investment company. The investment objective of the Fund is to seek capital
appreciation. The Fund seeks its objective by investing primarily in a portfolio
of equity securities of issuers worldwide. Fund shares are offered to investors
without any sales charge.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor should know before investing. The Trust has
filed a Statement of Additional Information dated May 5, 1998, as may be amended
from time to time, that contains more detailed information about the Fund and
the Trust with the Securities and Exchange Commission (the "SAI"). The SAI is
hereby incorporated by reference into this Prospectus. An investor may obtain a
copy of the SAI without charge by contacting Shareholder Servicing at the
address or phone number listed above. The Securities and Exchange Commission
also maintains a Web site (http://www.sec.gov) that contains the Fund's
Prospectus, SAI and certain other information regarding the Fund.
Table of Contents
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Prospectus Summary.......................... 2 Purchases and Redemptions of Shares.......... 11
Expenses of Investing in the Fund........... 2 Dividends and Tax Matters.................... 16
Performance Information..................... 3 Other Information............................ 17
Investment Objective, Policies and Risk..... 4 Appendix..................................... A-1
Management.................................. 9
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Investors should read this Prospectus and retain it for future reference.
FUND SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK OR ANY AFFILIATE OF A BANK AND ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE SYSTEM OR ANY
OTHER FEDERAL AGENCY.
AN INVESTMENT IN SHARES OF ANY MUTUAL FUND IS SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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1. PROSPECTUS SUMMARY
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek capital appreciation. The
Fund seeks its objective by investing primarily in a portfolio of equity
securities of issuers worldwide. See "Investment Objective and Policies."
MANAGEMENT
Polaris Capital Management, Inc. (the "Adviser') is the Fund's
investment adviser and makes investment decisions for the Fund. Forum Financial
Services, Inc. ("FFSI") distributes the Fund's shares, and Forum Administrative
Services, LLC ("FAdS") administers the Fund. See "Management."
PURCHASES AND REDEMPTIONS
Fund shares are offered at the next-determined net asset value without
a sales charge to investors who plan to invest a minimum of $2,500 in the Fund.
Fund shares may be redeemed from the Fund without charge at their
next-determined net asset value. See "Purchases and Redemptions of Shares."
DIVIDENDS
Dividends representing the net investment income of the Fund are
declared and paid at least annually. Any net capital gain realized by the Fund
also is distributed annually. Dividends and distributions are reinvested in
additional Fund shares unless a shareholder elects to have them paid in cash.
See "Dividends and Tax Matters."
CERTAIN RISK FACTORS
There can be no assurance that the Fund will achieve its investment
objective, and the Fund's net asset value will fluctuate based upon changes in
the value of its portfolio securities. The Fund invests in the securities of
foreign issuers, including issuers located in countries with emerging capital
markets. Investments in such securities entail certain risks not associated with
investment in domestic securities. See "Investment Policies -- Foreign
Securities." The Fund also may use leverage, which involves special risks and
may involve speculative investment techniques. See "Additional Investment
Policies - Techniques Involving Leverage." In addition, the futures and options
strategies in which the Fund may engage involve additional risks. See
"Additional Investment Policies -- Futures and Options." The Fund is not
intended to provide a complete or balanced investment program for all investors.
The Adviser has no prior experience in advising mutual funds.
2. EXPENSES OF INVESTING IN THE FUND
The purpose of the following table is to assist investors in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. There are no transaction or sales charges
associated with the purchase or redemption of Fund shares.
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets after
applicable fee waivers and expense reimbursements)
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Advisory Fees 1.00%
12b-1 Fees None
Other Expenses (after expense reimbursements) 0.75%
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Total Fund Operating Expenses (after expense reimbursements) 1.75%
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The amounts of expenses are based on anticipated amounts projected for
the Fund's first fiscal year ending May 31, 1999. The Adviser has voluntarily
agreed to cap advisory fees so that Total Fund Operating Expenses through May
31, 1999 will not exceed 1.75%. Absent expense reimbursements during the year,
the Investment Advisory Fees and Total Fund Operating Expenses are expected to
be 1.0000% and 1.7515%, respectively. Fee waivers are voluntary and may be
reduced or eliminated at any time. For a further description of the various
costs and expenses incurred in the Fund's operation, see "Management."
EXAMPLE
The following is a hypothetical example that indicates the dollar
amount of expenses an investor would pay assuming a $1,000 investment, a 5%
annual return, reinvestment of all dividends and distributions and full
redemption at the end of each period:
1 Year 3 Years 5 Years 10 Years
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$18 $55 $95 $206
The example is based on the estimated expenses listed in Annual Fund Operating
Expenses above. The 5% annual return is not a prediction of and does not
represent the Fund's projected returns; rather, it is required by government
regulation. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RETURN. ACTUAL EXPENSES AND RETURN MAY BE GREATER OR LESS
THAN INDICATED.
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3. PERFORMANCE INFORMATION
The Fund's performance may be quoted in advertising in terms of yield
or total return. Performance calculations are based on the Fund's historical
results and are not intended to indicate future performance.
Yield is a way of showing the rate of income earned on the Fund's
investments as a percentage of the Fund's share price. To calculate yield, the
interest and dividend income the Fund has earned from its portfolio of
investments for a 30-day period (net of expenses) is divided by the average
number of shares entitled to receive dividends and expresses the result as an
annualized percentage rate based on the Fund's share price at the beginning of
the period.
Total return shows the Fund's overall change in value, including
changes in share price and assuming all the Fund's distributions are reinvested.
Cumulative total return reflects the Fund's performance over a stated period of
time. Average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if the Fund's
performance had been constant over the entire period. Because average annual
returns tend to smooth out variations in the Fund's returns, shareholders should
recognize that these returns are not the same as actual year-by-year returns. To
illustrate the components of overall performance, the Fund may separate its
cumulative and average annual returns into income results and capital gain or
loss.
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_____________________________________________________________________________________________________________________
Performance As of March 31, 1998
[] Polaris Global Value Fund
[] MSCI World Index
[Insert bar graph here that compares Fund performance to MSCI World Index.]
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1 Year 3 Year 5 Year Since Inception
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Fund 40.41% 31.12% 22.67% 14.59%
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MSCI World Index 31.96% 20.07% 16.53% 10.49%
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PRIOR TO JUNE 1, 1998, POLARIS CAPITAL MANAGEMENT, INC. MANAGED A LIMITED
PARTNERSHIP WITH AN INVESTMENT OBJECTIVE AND INVESTMENT POLICIES THAT WERE, IN
ALL MATERIAL RESPECTS, EQUIVALENT TO THE FUND. THE PERFORMANCE FOR THE FUND
INCLUDES THE PERFORMANCE OF THE PREDECESSOR LIMITED PARTNERSHIP FOR THE PERIOD
BEFORE IT BECAME A MUTUAL FUND ON JUNE 1, 1998. FOR PERIODS PRIOR TO JUNE 1,
1998, THE PERFORMANCE FIGURES INCLUDE THE EXPENSES FOR THE LIMITED PARTNERSHIP.
FOR ALL PERIODS EXCEPT "SINCE INCEPTION," HAD THE FUND'S FIRST YEAR ESTIMATED
EXPENSES BEEN USED, THE PERFORMANCE WOULD HAVE BEEN LOWER. THE LIMITED
PARTNERSHIP WAS NOT REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS
AMENDED ("1940 ACT") NOR SUBJECT TO CERTAIN INVESTMENT LIMITATIONS,
DIVERSIFICATION REQUIREMENTS, AND OTHER RESTRICTIONS IMPOSED BY THE 1940 ACT AND
THE INTERNAL REVENUE CODE, WHICH, IF APPLICABLE, MAY HAVE ADVERSELY AFFECTED ITS
PERFORMANCE.
INCLUDING THE LIMITED PARTNERSHIP PERFORMANCE, THE FUND'S AVERAGE ANNUAL TOTAL
RETURN FOR THE 1-YEAR, 3-YEAR, 5-YEAR AND SINCE INCEPTION (JULY 31, 1989)
PERIODS AS OF MARCH 31, 1998 WAS 40.41%, 31.12%, 22.67% AND 14.59%,
RESPECTIVELY. TOTAL RETURN INCLUDES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS.
RESULTS REPRESENT PAST PERFORMANCE AND DO NOT GUARANTEE FUTURE RESULTS.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
THE MSCI WORLD INDEX ("MSCI") MEASURES THE PERFORMANCE OF A DIVERSE RANGE OF
GLOBAL STOCK MARKETS IN THE UNITED STATES, CANADA, EUROPE, AUSTRALIA, NEW
ZEALAND AND THE FAR EAST. THE MSCI IS UNMANAGED AND DOES INCLUDE THE
REINVESTMENT OF DIVIDENDS, NET OF WITHHOLDING TAXES. IT IS NOT POSSIBLE TO
INVEST IN ANY INDEX.
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The Fund's advertisements may refer to ratings and rankings among similar funds
by independent evaluators such as Morningstar, Lipper Analytical Services, Inc.
or CDA/Weisenberger. In addition, the Fund's performance may be compared to
recognized indices or market performance. Comparative material found in the
Fund's advertisements, sales literature or reports to shareholders may contain
performance ratings. These are not to be considered representative or indicative
of future performance.
4. INVESTMENT OBJECTIVE, POLICIES AND RISKS
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek capital appreciation. The
Fund seeks its objective by investing primarily in a portfolio of equity
securities of issuers worldwide. There is, of course, no assurance that the Fund
will achieve its investment objective.
INVESTMENT POLICIES
The belief that companies exist to generate cash flow for their owners
drives the Adviser's investment philosophy. Using a unique three-step process,
the Adviser's main objective is to identify companies with the most undervalued
streams of sustainable cash flow.
o The Adviser believes that country and industry factors are
important influences on security prices. In order to identify
companies priced low relative to comparable companies, the
Adviser, as a first step, produces a ranking of country and
industry value sectors. This ranking is achieved by evaluating
the interaction of cash flow, inflation and interest rates,
utilizing a proprietary investment model developed by the
Adviser.
o The Adviser also believes that normal security price
fluctuations can undervalue a company's cash flow and assets.
As the second step, using traditional valuation criteria, the
Adviser regularly screens its database of more than 16,000
global companies to produce a list of approximately 500
companies that appear to have the greatest potential for
undervalued streams of sustainable cash flow.
o With the ranking of country and industry value sectors
identified, the Adviser, as its third and final step,
conducts rigorous fundamental research on the companies
identified throughout the investment process. The Fund
invests in a portfolio of 50-100 companies that pass the
Fund's fundamental research criteria. Initial investments,
in the companies purchased, typically are evenly weighted
but will not necessarily remain so because the value of
stocks will change. Most investments are generally held for
three to five years. If, however, a company becomes valued
less attractively than other companies on the Adviser's
"watch-list," it may be sold and replaced by another company
on the Adviser's watch-list. The Fund rebalances its
portfolio securities infrequently, typically when these
normal portfolio changes are made. The Adviser's watch-list
consists of approximately 250 companies.
COMMON STOCK. Common stock represents a share of ownership in a
company, and usually carries voting rights and may earn dividends. Common
stockholders 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 and, if applicable, preferred stockholders, are paid. Dividends on
common stock are declared at the discretion of the issuer. Historically, common
stocks have provided greater long-term returns and entailed greater short-term
risks than other investment choices. The market value of all securities,
including common stock, is based on the market's perception of value and not
necessarily the book value of an issuer or other objective measure of the
issuer's worth.
FOREIGN SECURITIES. The Fund invests in the securities of foreign
issuers,including issuers located in countries with emerging capital markets.
These investments involve certain risks, such as exchange-rate fluctuations,
political or economic instability of the issuer or the country of issue and the
possible imposition of exchange controls, withholding taxes on dividends or
interest payments, confiscatory taxes
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or expropriation. Foreign securities may also be subject to greater fluctuations
in price than securities of domestic corporations denominated in U.S. dollars.
Foreign securities and their markets may not be as liquid as domestic securities
and their markets, and foreign brokerage commissions and custody fees are
generally higher than those in the United States.
While the Adviser currently intends to invest the Fund's assets in
issuers located in at least 5 countries, there is no limit on the amount of the
Fund's assets that may be invested in issuers located in any one country or
region. To the extent that the Fund has concentrated its investments in issuers
located in a single country or region, the Fund is more susceptible to factors
adversely affecting the economy of that country or region than if the Fund were
invested in a more geographically diverse portfolio.
In addition, issuers of securities in foreign jurisdictions generally
are not subject to the same degree of regulation as are U.S. issuers with
respect to such matters as insider trading rules, restrictions on market
manipulation, shareholder proxy requirements and timely disclosure of
information. Less information may be publicly available about a foreign company
than about a domestic company and foreign companies may not be subject to
uniform accounting, auditing, and financial reporting standards comparable to
those applicable to domestic companies. Securities registration, custody and
settlements may in some instances be subject to delays and to legal and
administrative uncertainties. To the extent that the Fund invests a portion of
its assets in a particular region of the world, an investment in the Fund will
be subject to certain risks to the extent that the economies and markets in a
region are interrelated and are adversely affected in a similar manner by
political, economic, and other events.
Issuers of securities located in emerging markets may be especially
susceptible to the risks set forth above with respect to foreign investments
because the risks of political and economic instability are generally greater in
emerging market countries, government supervision and regulation of exchanges
and brokers in emerging market countries is frequently less extensive than in
countries with developed markets and the securities markets in emerging market
countries tend to be relatively small, with the majority of
market-capitalization and trading volume concentrated in a limited number of
companies representing a limited number of industries.
The Fund may invest in sponsored and unsponsored American Depositary
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. Unsponsored ADRs may be created without the participation of the foreign
issuer. Holders of these ADRs generally bear all the costs of the ADR facility,
whereas foreign issuers typically bear certain costs in a sponsored ADR. The
bank or trust company depository of an unsponsored ADR may be under no
obligation to distribute shareholder communications received from the foreign
issuer or to pass through voting rights.
The Fund's investments that are denominated in foreign currencies will
be adversely affected by any decrease in the value of those currencies relative
to the U.S. dollar. These changes will affect the Fund's net assets,
distributions and income. Currently, it is not the Adviser's policy to hedge the
foreign currency exposure associated with foreign investments. In the future,
however, the Fund may use foreign currency forward contracts, foreign currency
options, foreign currency futures contracts and options on those futures
contracts to hedge against uncertainty in the level of foreign exchange rates.
See the SAI for descriptions of these hedging practices.
ADDITIONAL INVESTMENT POLICIES
The Fund's investment objective and fundamental investment limitations,
as described in the SAI, may not be changed without approval of the holders of a
majority of the Fund's outstanding voting securities. A majority of the Fund's
outstanding voting securities means the lesser of 67% of the shares of the Fund
present or represented at a meeting at which the holders of more than 50% of the
outstanding shares of the Fund are present or represented or more than 50% of
the outstanding shares of the Fund. Except as otherwise indicated, investment
policies of the Fund are not fundamental and may be changed by the Board of
Trustees of the Trust
5
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the "Board") without shareholder approval. A further description of the Fund's
investment policies is contained in the SAI.
BORROWING. As a fundamental policy, the Fund may not borrow money if,
as a result, outstanding borrowings would exceed an amount equal to 33 1/3% of
the Fund's total assets. For purposes of this limitation, there is no limit on
the following to the extent they are fully collateralized: (1) the delayed
delivery of purchase securities (such as the purchase of when-issued
securities); (2) reverse repurchase agreements; and (3) dollar-roll
transactions.
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 rather than sold to meet the needs for which funds were
borrowed). Under adverse market conditions, the Fund might have to sell
portfolio securities to meet interest or principal payments at a time when
investment considerations would not favor such sales. The Fund's use of borrowed
proceeds to make investments would subject the Fund to the risks of leveraging.
The use of these techniques in connection with a segregated account may result
in the Fund's assets being 100 percent leveraged. See "Additional Investment
Policies - Techniques Involving Leverage."
ILLIQUID SECURITIES. The Fund may not invest more than 15% of its net
assets in illiquid securities, including repurchase agreements and other
securities not entitling the Fund to the payment of principal within seven days.
Illiquid securities are securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which the Fund
has valued the securities.
REPURCHASE AGREEMENTS AND LENDING OF PORTFOLIO SECURITIES. The Fund may
seek additional income by entering into repurchase agreements or by lending
securities from its portfolio to brokers, dealers and other financial
institutions. These investments may entail certain risks not associated with
direct investments in securities. For instance, in the event that bankruptcy or
similar proceedings were commenced against a counterparty in these transactions
or a counterparty defaulted on its obligations, the Fund might suffer a loss.
Failure by the other party to deliver a security purchased by the Fund may
result in a missed opportunity to make an alternative investment. The Adviser
monitors the creditworthiness of counterparties to these transactions and
intends to enter into these transactions only when it believes the
counterparties present minimal credit risks and the income to be earned from the
transaction justifies the attendant risks. Repurchase agreements are
transactions in which the Fund purchases a security and simultaneously commits
to resell that security to the seller at an agreed-upon price on an agreed upon
future date, normally one to seven days later. The resale price reflects a
market rate of interest that is not related to the coupon rate or maturity of
the purchased security. Securities loans must be continuously secured by cash or
securities issued or guaranteed as to principal and interest by the United
States Government or by any of its agencies, instrumentalities or
government-sponsored enterprises ("U.S. Government Securities") with a market
value, determined daily, at least equal to the value of the Fund's securities
loaned. When the Fund lends a security, it receives income from the borrower or
from investing cash collateral. The Trust's custodian maintains possession of
the purchased securities and any underlying collateral in these transactions,
the total market value of which on a continuous basis is at least equal to the
repurchase price or value of securities loaned, plus accrued interest and which
consists of the types of securities in which the Fund may invest directly. The
Fund may pay fees to arrange securities loans. The Fund will not lend portfolio
securities in excess of 50% of the value of the Fund's total assets.
DIVERSIFICATION AND CONCENTRATION. The Fund is diversified, as that
term is defined in the 1940 Act. The Fund may not, with respect to 75% of its
assets, purchase a security (other than a U.S. Government Security or a security
of an investment company) if, as a result: (1) more than 5% of the Fund's total
assets would be invested in the securities of a single issuer; or (2) the Fund
would own more than l0% of the outstanding voting securities of any single
issuer.
As a fundamental policy, the Fund may not purchase securities if,
immediately after the purchase, more than 25% of the value of the Fund's total
assets would be invested in the securities of issuers conducting their principal
business activities in the same
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industry. For purposes of determining industry concentration: (1) there is no
limit on investments in U.S. Government Securities, repurchase agreements
covering U.S. Government Securities, tax-exempt securities issued by the states,
territories or possessions of the United States ("municipal securities") or
foreign government securities; and (2) the Fund treats the assets of investment
companies in which it invests as its own except to the extent that the Fund
invests in other investment companies pursuant to Section 12(d)(l)(A) of the
l940 Act.
WARRANTS. The Fund may invest in warrants, which provide the holder the
right to purchase an equity security at a specified price (usually representing
a premium over the applicable market value of the underlying equity security at
the time of the warrant's issuance) and usually during a specified period of
time. Warrants are usually issued by the issuer of the security to which they
relate. While warrants may be traded, there is often no secondary market for
them and the prices of warrants do not necessarily correlate with the prices of
the underlying securities. Holders of warrants have no voting rights, receive no
dividends and have no rights with respect to the assets of the issuer. The Fund
will limit its purchases of warrants to not more than 5% of the value of its
total assets.
SHORT SALES. The Fund may make short sales of securities that it does
not own or have the right to acquire in anticipation of a decline in the market
price for the security. When the Fund makes a short sale, the proceeds that it
receives are retained by the broker until the Fund replaces the borrowed
security. In order to deliver the security to the buyer, the Fund must arrange
through a broker to borrow the security and, in so doing, the Fund becomes
obligated to replace the security borrowed at its market price at the time of
replacement, whatever that price may be. Short sales create opportunities to
increase the Fund's return but, at the same time, involve special risk
considerations and may be considered a speculative technique. Since the Fund in
effect profits from a decline in the price of the securities sold short without
the need to invest the full purchase price of the securities on the date of the
short sale, the Fund's net asset value per share will tend to increase more when
the securities it has sold short decrease in value, and to decrease more when
the securities it has sold short increase in value, than would otherwise be the
case if it had not engaged in such short sales. Short sales theoretically
involve unlimited loss potential, as the market price of securities sold short
may continuously increase, although the Fund may mitigate such losses by
replacing the securities sold short before the market price has increased
significantly. Under adverse market conditions, the Fund might have difficulty
purchasing securities to meet its short sale delivery obligations and might have
to sell portfolio securities to raise the capital necessary to meet its short
sale obligations at a time when fundamental investment considerations would not
favor those sales.
TECHNIQUES INVOLVING LEVERAGE. Use of leveraging involves special risks
and may involve speculative investment techniques. The Fund may borrow for other
than temporary or emergency purposes (including to purchase investment
securities), sell securities short, lend its securities, enter into reverse
repurchase agreements and purchase securities on a when-issued or forward
commitment basis. 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. The Fund uses these investment techniques only
when the Adviser 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 the 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. 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
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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. 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. 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 sell securities at a time when fundamental investment considerations
would not favor those sales.
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 and securities in accordance with Securities and Exchange
Commission guidelines. The account's value, which is marked to market daily,
will be at least equal to the Fund's commitments under these transactions.
FUTURES AND OPTIONS. The Fund may seek to enhance returns by writing
exchange-traded or over-the-counter covered call options or to hedge against a
decline in the value of securities owned by it or an increase in the price of
securities which it plans to purchase through the writing and purchase of
exchange-traded and over-the-counter options and the purchase and sale of
futures contracts and options on those futures contracts. The Fund may write
(sell) covered put and call options and may buy put and call options on equity
securities and stock indices, such as the Standard & Poor's 500 Stock Index. In
addition, the Fund may buy or sell stock index futures contracts and may write
covered options and buy options on those contracts. Definitions of these
instruments may be found in Appendix A. 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 liquid assets in a
segregated account with a value at all times sufficient to cover the Fund's
obligation under the option.
The Fund will not hedge more than 25% of its total assets by selling
futures contracts, buying put options and writing call options. In addition, the
Fund will not buy futures contracts or write put options whose underlying value
exceeds 25% of the Fund's total assets and will not purchase call options if the
value of purchased call options would exceed 5% of the Fund's total assets.
The Fund's use of options and futures contracts would subject the Fund
to certain investment risks and transaction costs to which it might not
otherwise be subject. These risks include: (1) dependence on the Adviser's
ability to predict movements in the prices of individual securities or
currencies and fluctuations in the general securities markets; (2) imperfect
correlation between movements in the prices of options, futures contracts or
related options and movements in the price of the securities hedged or used for
cover; (3) the fact that skills and techniques needed to trade these instruments
are different from those needed to select the other securities in which the Fund
invests; (4) lack of assurance that a liquid secondary market will exist for any
particular instrument at any particular time; (5) the possible need to defer
closing out of certain options, futures contracts and related options to avoid
adverse tax consequences; and (6) the potential for unlimited loss when
investing in futures contracts. Other risks include the inability of the Fund,
as the writer of covered call options, to benefit from the appreciation of the
underlying securities above the exercise price and the possible loss of the
entire premium paid for options purchased by the Fund.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities,
which 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.
The value of a convertible security generally increases when interest rates
decline and generally decreases when interest rates rise, but is also influenced
by the value of the underlying common stock. The Fund may only invest in
convertible securities that are investment grade, that is, rated "Baa" or higher
by Moody's Investor Service ("Moody's") or "BBB" or higher by Standard & Poor's.
The Fund may purchase unrated securities if the Adviser determines the security
to be of comparable quality to a
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rated investment grade security. Moody's indicates that securities rated "Baa"
have speculative characteristics.
TEMPORARY INVESTMENTS. It is the general policy of the Fund to be fully
invested in accordance with its investment objective and policies. However,
pending investment of cash balances or if the Adviser believes that business or
financial conditions warrant, the Fund may invest without limit in cash or in
investment-grade cash equivalents, including: (1) short-term U.S. Government
Securities; (2) certificates of deposit, bankers' acceptances, and
interest-bearing savings deposits of commercial banks; (3) prime quality
commercial paper; and (4) repurchase agreements covering any of the securities
in which the Fund may invest directly, and, subject to the limits of the
Investment Company Act, other investment companies (including affiliates of the
Fund) that invest in securities in which the Fund may invest. During periods
when and to the extent that the Fund is invested in cash equivalents, it will
not be pursuing its investment objective.
PORTFOLIO TRANSACTIONS. From time to time, the Fund may engage in
active short-term trading to take advantage of price movements affecting
individual issues, groups of issues or markets. This will increase the Fund's
rate of turnover and will result in higher total brokerage costs for the Fund.
The Adviser anticipates that the annual turnover in the Fund will not be in
excess of 50%. An annual turnover rate of 50% would occur, for example, if one
half of the securities in the Fund were replaced once in a period of one year.
The Adviser has no obligation to deal with any specific broker or
dealer in the execution of portfolio transactions. Consistent with its policy of
obtaining the best net results, the Fund's brokerage transactions may be
conducted through certain affiliates of the Adviser. The Board has adopted
policies to ensure that these transactions are reasonable and fair and that the
commissions charged are comparable to those charged by non-affiliated qualified
broker-dealers. The Adviser may effect transactions for the Fund through brokers
who sell Fund shares.
YEAR 2000
Like other mutual funds, financial and other business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Adviser and other service providers to the Fund do
not properly process and calculate date-related information and data from and
after January 1, 2000. The Adviser and the Trust's manager are taking steps to
address the Year 2000 issue with respect to the computer systems that they use
and to obtain reasonable assurances that comparable steps are being taken by the
Fund's other major service providers. There can be no assurance, however, that
these steps will be sufficient to avoid any adverse impact on the Fund from this
problem.
CORE AND GATEWAY(R)
The Fund, upon future action by the Board of Trustees and notice to
shareholders, may convert to a Core and Gateway structure, in which the fund
would hold as its only investment securities the shares of another investment
company having substantially the same investment objective and policies as the
Fund. The Board of Trustees will not authorize conversion to a Core and Gateway
structure if it would materially increase costs to a Fund's shareholders.
5. MANAGEMENT
The business of the Trust is managed under the direction of the Board.
The Board formulates the general policies of the Fund and generally meets
quarterly to review the results of the Fund, monitor investment activities and
practices and discuss other matters affecting the Fund and the Trust.
INVESTMENT ADVISER
Under an investment advisory agreement with the Trust, Polaris Capital
Management, Inc. serves as the Fund's investment adviser. Subject to the general
control of the Board, the Adviser makes investment decisions for the Fund. For
its services, the Adviser receives an advisory fee that is accrued daily and
paid monthly at an annual rate of 1.00% of the average daily net assets of the
Fund.
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The Adviser, which is located at 125 Summer Street, Boston,
Massachusetts 02110, is registered as an investment adviser with the Securities
and Exchange Commission and provides investment management services to pension
plans, endowment funds and institutional and individual accounts. The Adviser
has had no prior experience in advising mutual funds. As of the date of this
Prospectus, the Adviser had approximately $50 million of assets under management
and was controlled by Bernard R. Horn, Jr., president and chief portfolio
manager of the Adviser since its organization in 1995.
Mr. Horn has been portfolio manager of the Fund since the Fund's inception
and,as such, is responsible for the day-to-day management of the Fund's
portfolio. The ability of the Adviser to manage the Fund depends entirely on the
services of Mr. Horn. Prior to his establishment of the Adviser, Mr. Horn was a
portfolio manager and Investment Officer at MDT Advisers, Inc. Prior thereto,
Mr. Horn was vice-president of Freedom Capital Management Corp. from 1990 to
1992 and the principal and founder of Horn & Company from 1980 to 1990.
ADMINISTRATION
On behalf of the Fund, the Trust has entered into an Administration
Agreement with FAdS. Under this agreement, FAdS is responsible for the
supervision of the overall management of the Trust (including the Trust's
receipt of services for which the Trust is obligated to pay), providing the
Trust with general office facilities, and providing persons satisfactory to the
Board to serve as officers of the Trust. For these services, FAdS is entitled to
receive a monthly fee at annual rates of 0.10% of the first $150 million of the
Fund's average daily net assets and 0.05% of the Fund's average daily net assets
in excess of $150 million, with a $40,000 minimum fee per year. FAdS, in its
sole discretion, may waive all or any portion of its fees.
FAdS, which is located at Two Portland Square, Portland, Maine 04101,
was organized under Delaware law on December 29, 1995 and, as of March 31, 1998,
FAdS and FFSI provided management, administrative and distribution services to
registered investment companies and collective investment funds with assets of
approximately $36 billion.
DISTRIBUTOR
Under a Distribution Agreement, FFSI acts as the distributor of the
Fund's shares. FFSI acts as the agent of the Trust in connection with the
offering of Fund shares. FFSI receives no compensation for its services under
the Distribution Agreement. FFSI may enter into arrangements with banks,
broker-dealers or other financial institutions through which investors may
purchase or redeem shares. FFSI 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 Fund shares. 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. FFSI is a registered
broker-dealer and investment adviser and is a member of the National Association
of Securities Dealers, Inc.
SHAREHOLDER SERVICES PLAN
The Trust has adopted a shareholder services plan (the "Plan") which
provides that the Trust may obtain the services of the Adviser and other
qualified financial institutions to act as shareholder servicing agents for
their customers. Under this Plan, the Trust has authorized FAdS to enter into
agreements pursuant to which the shareholder servicing agent performs certain
shareholder services not otherwise provided by FSS. For these services, the
Trust pays the shareholder servicing agent a fee of up to 0.25% of the average
daily net assets of the shares owned by investors for which the shareholder
servicing agent maintains a servicing relationship.
Among the services provided by the shareholder servicing agents are:
(1) aggregating and processing purchase and redemption orders and transmitting
and receiving funds for shareholder orders; (2) answering customer inquiries
regarding account matters; (3) assisting shareholders in designating and
changing various account options;
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4) transmitting, on behalf of the Trust, proxy statements, prospectuses and
shareholder reports; (5) tabulating proxies; (6) processing dividend payments
and providing subaccounting services for Fund shares held beneficially; and (7)
providing such other services as the Trust or a shareholder may request.
TRANSFER AGENT AND FUND ACCOUNTANT
The Trust has entered into a Transfer Agency Agreement with Forum
Shareholder Services, LLC ("FSS") under which FSS acts as the Fund's transfer
agent and dividend disbursing agent. FSS maintains for each shareholder of
record, an account (unless such accounts are maintained by sub-transfer agents)
to which all shares purchased are credited, together with any dividends or
distributions that are reinvested in additional shares. FSS also performs other
transfer agency functions and acts as dividend disbursing agent for the Trust.
Forum Accounting Services, LLC ("FAcS") performs fund accounting services for
the Fund, including determination of the Fund's net asset value. As of May 5,
1998, each of FAdS, FFSI, FSS and FAcS was controlled by John Y.
Keffer, President and Chairman of the Trust.
EXPENSES OF THE TRUST
The Fund's expenses comprise Trust expenses attributable to the Fund,
which are charged to the Fund, and those not attributable to a particular fund
of the Trust, which are allocated among the Fund and all other funds of the
Trust in proportion to their average net assets. The Adviser, FAdS and FSS may
each elect to waive (or continue to waive) all or a portion of their fees. Fee
waivers are voluntary and may be reduced or eliminated at any time. The Trust is
responsible for all of its expenses, including: interest charges and taxes;
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, FAdS 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; expenses incurred
pursuant to state securities laws; the fees payable under the Advisory Agreement
and the Administration Agreement; and any fees and expenses payable pursuant to
the Plan. The Adviser has agreed to reimburse the Trust for certain of the
Fund's operating expenses which in any year exceed the limits prescribed by any
state in which the Fund's shares are qualified for sale.
6. PURCHASES AND REDEMPTIONS OF SHARES
GENERAL
PURCHASES. Investments in the Fund may be made by an investor either
directly or through certain brokers and financial institutions of which the
investor is a customer. All transactions in Fund shares are effected through
FSS, which accepts orders for purchases and redemptions from shareholders of
record and new investors. Shareholders of record will receive from the Trust
periodic statements listing all account activity during the statement period.
The Trust reserves the right in the future to modify, limit or terminate any
shareholder privilege upon appropriate notice to shareholders.
Fund shares may be purchased without a sales charge at their net asset
value on any weekday except days when the New York Stock Exchange (the
"Exchange") is closed, normally, New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas (a "Fund Business Day"). See "Other Information
- -- Determination of Net Asset Value."
Fund shares are issued at a price equal to their net asset value per
share next determined immediately after an order in proper form is received by
FSS. The Fund's net asset value is calculated as of
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the close of the Exchange (normally, 4:00 p.m., Eastern time) on each Fund
Business Day. Fund shares become entitled to receive dividends on the next Fund
Business Day after the order is accepted. The Trust and the Adviser reserve the
right to reject any subscription for the purchase of Fund shares, including
subscriptions by those deemed to be "market timers." "Market timers" generally
include: market timing or allocation services, accounts administered so as to
buy, sell or exchange shares based on predetermined market indicators, or any
person or group whose transactions seem to follow a timing pattern.
REDEMPTIONS. Fund shares may be redeemed without charge on any Fund
Business Day. There is no minimum period of investment and no restriction on
frequency of redemptions. Redemptions are effected at a price equal to the net
asset value per share next determined following receipt by FSS of the redemption
order in proper form (and any supporting documentation that the transfer agent
may require). Shares redeemed are not entitled to participate in dividends
declared after the day on which a redemption becomes effective.
Normally, redemption proceeds are paid immediately, but in any event
within seven days, following receipt of a redemption order by FSS. Redemption
proceeds, however, are not paid unless any check used for investment has been
cleared by the shareholder's bank, which may take up to 15 calendar days. This
delay may be avoided by investing in the Fund through wire transfers. Unless
otherwise indicated, redemption proceeds normally are paid by check mailed to
the shareholder of record at his or her record address. Redemption rights may
not be suspended nor may payment dates be postponed except when the Exchange is
closed (or when trading thereon is restricted) for any reason other than its
customary weekend or holiday closings or under any emergency or other
circumstance as determined by the Securities and Exchange Commission.
Redemption proceeds are normally paid in cash. Payments may be made
wholly or partially in portfolio securities, however, if the Board determines
that payment in cash would be detrimental to the best interests of the Fund. The
Trust may 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 and FSS employ reasonable procedures to insure that telephone
orders are genuine (which include recording certain transactions and the use of
shareholder security codes). If the Trust and FSS did not employ such
procedures, either 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, the telephone redemption
privilege may be difficult to implement. In the event that a shareholder is
unable to reach FSS by telephone, these requests may be mailed or hand-delivered
to FSS.
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 $2,500
($2,000 for IRAs). Shareholders who wish to redeem shares by telephone or by
bank wire must elect these options by properly completing the appropriate
sections of their account application.
PURCHASE AND REDEMPTION PROCEDURES
The following purchase and redemption procedures and shareholder
services apply to investors who invest in the Fund directly. These investors may
open an account by completing the application at the back of this Prospectus or
by contacting FSS at the address on the first page of this Prospectus. For
shareholder services described in this Prospectus but not referenced on the
account application or to change information regarding a shareholder's account
(such as addresses), investors should request an Optional Services Form from
FSS.
There is a $2,500 minimum for initial investments in the Fund and a
$250 minimum for subsequent purchases, except for individual retirement
accounts. See "Purchases and Redemptions of Shares -- Individual Retirement
Accounts." Shareholders of record will receive from the Trust periodic
statements listing account activity during a statement period.
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INITIAL PURCHASE OF SHARES
MAIL. Investors may send a check made payable to the Trust along with
a completed account application to FSS at:
Polaris Global Value Fund
Two Portland Square
Portland, Maine 04101
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, FSS or FFSI.
BANK WIRE. To make an initial investment in the Fund using the fed wire
system for transmittal of money among banks, an investor should first telephone
FSS at 888-263-5594 or 207-879-0001 to obtain an account number for an initial
investment. The investor should then instruct a member bank to wire the money
immediately to:
BankBoston
Boston, Massachusetts
ABA # 011000390
For Credit to: Forum Shareholder Services, LLC
Account # 541-54171
Polaris Global Value Fund
(Investor's Name)
(Investor's Account Number)
The investor should then promptly complete and mail the account
application.
Any investor planning to wire funds should instruct the bank early in
the day so the wire transfer can be accomplished the same day. There may be a
charge by the investor's bank for transmitting the money by bank wire, and there
also may be a charge for use of federal funds. The Trust does not charge
investors for the receipt of wire transfers.
THROUGH BROKERS AND OTHER FINANCIAL INSTITUTIONS. Shares may be
purchased and redeemed through brokers and other financial institutions that
have entered into sales agreements with FFSI. These institutions may charge
their customers a fee for their services and are responsible for promptly
transmitting purchase, redemption and other requests to the Trust. The Trust is
not responsible for the failure of any institution to promptly forward these
requests or otherwise carry out its obligations to its customers.
Investors who purchase shares through a financial institution may be
charged a fee if they effect transactions in Fund shares through the institution
and are subject to the procedures of their financial institution, which may
include charges, limitations, investment minimums, cutoff times and restrictions
in addition to, or different from, those applicable to shareholders who invest
in the Fund directly. These investors should acquaint themselves with their
financial institution's procedures and should read the Prospectus in conjunction
with any materials and information provided by their institution. Customers who
purchase Fund shares in this manner may or may not be the shareholder of record
and, subject to their institution's and the Fund's procedures, may have Fund
shares transferred into their name. Under their arrangements with the Trust,
broker-dealers are not generally required to deliver payment for purchase orders
until several business days after a purchase order has been received by the
Fund. Certain other institutions may also enter purchase orders with payment to
follow.
Certain shareholder services may not be available to shareholders who
have purchased shares through an institution. These shareholders should contact
their institution for further information. The Trust may confirm purchases and
redemptions of an institution's customers directly to the institution, which in
turn will provide its customers with such confirmations and periodic statements
as may be required by law or agreed to between the institution and its
customers. The Trust is not responsible for the failure of any institution to
carry out its obligations to its customers. Certain states permit Fund shares to
be purchased and redeemed only through registered broker-dealers, including the
Fund's distributor.
SUBSEQUENT PURCHASES OF SHARES
Subsequent purchases may be made by sending a bank wire or by mailing a
check as indicated above. Shareholders using the wire system for subsequent
purchases should first telephone the Fund at 888-263-5594 or FSS at 207-879-0001
to notify it of
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the wire transfer. All payments should clearly indicate the shareholder's name
and account number.
AUTOMATIC INVESTMENT. Shareholders may purchase Fund shares at regular,
preselected intervals by authorizing the automatic transfer of funds from a
designated bank account maintained with a United States banking institution that
is an Automated Clearing House member. Under the program, existing shareholders
may authorize amounts of $250 or more to be debited from their bank account and
invested in a Fund monthly or quarterly. Shareholders wishing to participate in
this program may obtain the applicable forms from FSS. Shareholders may
terminate their automatic investments or change the amount to be invested at any
time by written notification to FSS.
REDEMPTION OF SHARES
Shareholders who wish to redeem shares by telephone or receive
redemption proceeds by bank wire must elect these options by properly completing
the appropriate sections of their account application. These privileges may not
be available until several weeks after a shareholder's application is received.
REDEMPTION BY MAIL. Shareholders may make a redemption in any amount by
sending a written request to FSS accompanied by any share certificate that was
issued to the shareholder. All share certificates submitted for redemption, and
all written requests for redemption, must be endorsed by the shareholder with
signature guaranteed.
TELEPHONE REDEMPTION. A shareholder that has elected telephone
redemption privileges may make a telephone redemption request by calling the
Fund at 888-263-5594 or FSS at 207-879-0001. Shareholders must provide FSS with
the shareholder's account number, the exact name in which the 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.
BANK WIRE REDEMPTION. For redemptions of more than $10,000, a
shareholder who has elected wire redemption privileges may request the Fund to
transmit the redemption proceeds by federal funds wire to a bank account
designated on the shareholder's account application. To request bank wire
redemptions by telephone, the shareholder also must have elected the telephone
redemption privilege. Redemption proceeds are transmitted by wire on the day the
redemption request in proper form is received by FSS.
AUTOMATIC REDEMPTIONS. Shareholders may redeem Fund shares at regular,
preselected intervals by authorizing the automatic redemption of shares from
their Fund account. Redemption proceeds are sent either by check or by automatic
transfer to a designated bank account maintained with a United States banking
institution that is an Automated Clearing House member. Under this program,
shareholders may authorize the redemption of shares in amounts of $250 or more
from their account monthly or quarterly. Shareholders may terminate their
automatic redemptions or change the amount to be redeemed at any time by written
notification to FSS.
OTHER REDEMPTION MATTERS. To protect shareholders and the Fund against
fraud, signatures on certain requests must have a signature guarantee. Requests
must be made in writing and include a signature guarantee for any of the
following transactions: (1) any endorsement on a share certificate; (2) written
instruction to redeem shares whose value exceeds $50,000; (3) instructions to
change a shareholder's record name; (4) redemption in an account in which the
account address or account registration has changed within the last 30 days; (5)
redemption proceeds to be sent to other than the address of record,
preauthorized bank account, or preauthorized brokerage firm account; (6)
redemption proceeds to be paid to someone other than the record owners or to an
account with a different registration; or (7) change of automatic investment or
redemption, dividend election, telephone redemption option election or any other
option election in connection with the shareholder's account.
Signature guarantees may be provided by any eligible institution
acceptable to FSS, including a bank, a broker, a dealer, a national securities
exchange, a credit union, or a savings association that is authorized to
guarantee signatures. Whenever a signature guarantee is required, the signature
of each
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person required to sign for the account must be guaranteed. A notarized
signature is not sufficient.
FSS may deem a shareholder's account "lost" if correspondence to the
shareholder's address of record is returned for six months, unless FSS
determines the shareholder's new address. When an account is deemed lost, all
distributions on the account are 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 FSS will be reinvested, and the
checks will be canceled.
INDIVIDUAL RETIREMENT ACCOUNTS
A single Fund should not be considered as a complete investment vehicle
for the assets held in individual retirement accounts. The Fund may be a
suitable investment for assets held in a traditional or Roth individual
retirement account (collectively, "IRAs"). An IRA account application form may
be obtained by contacting the Trust at 888-263-5594 or FSS at 207-879-0001. For
a traditional IRA, generally, all contributions are tax-deductible, and
investment earnings will be tax-deferred until withdrawn. The deduction on
contributions to a traditional IRA is reduced, however, if the individual or, in
the case of a married individual, either the individual or the individual's
spouse is an active participant in an employer-sponsored retirement plan and has
adjusted gross income above certain levels. Contributions to a Roth IRA are not
tax deductible, but generally investment earnings grow tax-free. Individuals may
make IRA contributions of up to a maximum of $2,000 annually. The Fund's minimum
initial investment for investors opening an IRA or investing through their own
IRA is $2,000, and its minimum subsequent investment is $250.
An employer may also contribute to an individual's IRA as part of a
Savings Incentive Match Plan for Employees, or "SIMPLE plan," established after
December 31, 1996. Under a SIMPLE plan, an employee may contribute up to $6,000
annually to the employee's IRA, and the employer must generally match such
contributions up to 3% of the employee's annual salary. Alternatively, the
employer may elect to contribute to the employee's IRA 2% of the lesser of the
employee's earned income or $160,000.
The foregoing discussion regarding IRAs is based on regulations in
effect as of January 1, 1998 and summarizes only some of the important federal
tax considerations generally affecting IRA contributions made by individuals or
their employers. It is not intended as a substitute for tax planning. Investors
should consult their tax advisors with respect to their specific tax situations
as well as with respect to state and local taxes.
EXCHANGES
Fund shareholders may exchange their shares for Investor shares of
Daily Assets Government Fund, another series of the Trust that is a money market
fund. A prospectus for Daily Assets Government Fund may be obtained by
contacting FSS.
The Trust does not charge for exchanges, and there is currently no
limit on the number of exchanges you may make. The Trust reserves the right,
however, to limit excessive exchanges by any shareholder and may impose a fee
for excessive exchanges. Exchanges are subject to the fees charged by, and the
limitations (including minimum investment restrictions) of Daily Assets
Government Fund.
Exchanges may only be made between identically registered accounts or
by opening a new account. A new account application is required to open a new
account through an exchange if the new account will not have an identical
registration and the same shareholder privileges as the account from which the
exchange is being made.
Under federal tax law, an exchange is treated as a redemption and a
purchase. Accordingly, an investor may realize a capital gain or loss depending
on whether the value of the shares redeemed is more or less than the investor's
basis in the shares at the time of the exchange transaction. Exchange procedures
may be amended materially or terminated by the Trust at any time upon 60 days'
notice to shareholders. See "Additional Purchase and Redemption Information" in
the SAI.
EXCHANGES BY MAIL. You may make an exchange by sending a written
request to FSS accompanied by any share certificates for the shares to be
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<PAGE>
exchanged. You must sign all written requests for exchanges and endorse all
certificates submitted for exchange with your signature guaranteed. (See
"Redemption of Shares - Other Redemption Matters.")
EXCHANGE BY TELEPHONE. If you have elected telephone exchange
privileges, you may make a telephone exchange request by calling FSS at
888-263-5594 or 207-879-0001 and providing the account number, the exact name in
which the shareholder's shares are registered and your social security or
taxpayer identification number.
(See "Redemption of Shares - Other Redemption Matters.")
7. DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends of the Fund's net investment income are declared and paid at
least annually. Any net capital gain realized by the Fund is distributed
annually.
Shareholders may choose either to have all dividends reinvested in
additional Fund shares or received in cash or to have distributions of net
capital gain reinvested in additional shares of the Fund and dividends of net
investment income paid in cash. All dividends are treated in the same manner for
federal income tax purposes whether received in cash or reinvested in shares of
the Fund.
Income dividends will be reinvested at the Fund's net asset value as of
the last day of the period with respect to which the dividends are paid. Capital
gain distributions will be reinvested at the net asset value of the Fund on the
payment date for the distribution. All dividends and distributions are
reinvested unless another option is selected. All dividends not reinvested will
be paid to the shareholder in cash and may be made more than seven days
following the date on which dividends would otherwise be reinvested.
TAXES
TAXATION OF THE FUND. The Fund intends to qualify each fiscal year to
be taxed as a "regulated investment company" under the Internal Revenue Code of
1986, as amended (the "Code"). As such, the Fund will not be liable for federal
income and excise taxes on the net investment income and capital gain
distributed to its shareholders in accordance with the applicable provisions of
the Code. The Fund intends to distribute all of its net income and net capital
gains each year. Accordingly, the Fund should thereby avoid all federal income
and excise taxes.
SHAREHOLDER TAX MATTERS. Dividends paid by the Fund out of its net
investment income (including realized net short term capital gain) are taxable
to Fund shareholders as ordinary income. Two different tax rates apply to net
capital gain - that is, the excess of net gain from capital assets held for more
than one year over net losses from capital assets held for not more than one
year. One rate (generally 28%) applies to net gain on capital assets held for
more than one year but not more than 18 months ("mid-term gain"), and a second
rate (generally 20%) applies to the balance of such net capital gain ("adjusted
net capital gain"). Distributions of net capital gain will be treated in the
hands of shareholders as mid-term gain to the extent designated by the Fund as
deriving from net gain from assets held for more than one year but not more than
18 months, and the balance will be treated as adjusted net capital gain,
regardless of how long a shareholder has held shares in the Fund. A portion of
the Fund's dividends may qualify for the dividends received deduction available
to corporations.
If a shareholder holds shares for six months or less and during that
period receives a distribution of net capital gain, any loss realized on the
sale of the shareholder's shares during that six-month period would be deemed a
long-term capital loss to the extent of the distribution.
Any dividend or distribution received by a shareholder on Fund shares
will have the effect of reducing the net asset value of the shareholder's shares
by the amount of the dividend or distribution. Furthermore, a dividend or
distribution made shortly after the purchase of shares by a shareholder,
although in effect a return of capital to that particular shareholder, would be
taxable to the shareholder as described above.
Investment income received by the Fund from sources within foreign
countries may be subject to foreign income or other taxes. Under certain
circumstances, shareholders will be notified of their share of
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these taxes and will be required to include that amount as income. In that
event, the shareholder may be entitled to claim a credit or deduction for those
taxes.
GENERAL. The Fund is required by federal law to withhold 31% of
reportable payments (which may include dividends, capital gain distributions and
redemptions) paid to a non-corporate shareholder unless the shareholder has
certified in writing that the social security or tax identification number
provided is correct and that the shareholder is not subject to backup
withholding for prior underreporting to the Internal Revenue Service.
Reports containing appropriate information with respect to the federal
income tax status of the Fund's dividends and distributions paid during the year
will be mailed to shareholders shortly after the close of each year.
8. OTHER INFORMATION
BANKING LAW MATTERS
Federal banking rules generally permit a bank or bank affiliate to act
as investment adviser, transfer agent, or custodian to an investment company and
to purchase shares of the investment company as agent for and upon the order of
a customer and, in connection therewith, to retain a sales charge or similar
payment. FFSI believes that a bank or bank affiliate also may perform Processing
Organization or similar services for the Trust and its shareholders without
violating applicable federal banking rules. If a bank or bank affiliate were
prohibited in the future from so acting, changes in the operation of the Trust
could occur and a shareholder serviced by the bank or bank affiliate may no
longer be able to avail itself of those services. It is not expected that
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences.
DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of
the close of the Exchange on each Fund Business Day by dividing the value of the
Fund's net assets (i.e., the value of its securities and other assets less its
liabilities, including expenses payable or accrued but excluding capital stock
and surplus) by the number of shares outstanding at the time the determination
is made. Securities owned by the Fund for which market quotations are readily
available are valued at current market value, or, in their absence, at fair
value as determined by the Board. Purchases and redemptions are effected at the
net asset value next determined following the receipt of any purchase or
redemption order as described under "Purchases and Redemptions of Shares."
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and
assumed the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996,
Forum Funds, Inc. was reorganized as a Delaware business trust. The Trust has an
unlimited number of authorized shares of beneficial interest. The Board may,
without shareholder approval, divide the authorized shares into an unlimited
number of separate portfolios or series (such as the Fund) and may in the future
divide portfolios or series into two or more classes of shares. Currently the
authorized shares of the Trust are divided into 23 separate series. The Fund
reserves the right to reorganize as a separate registered investment company, as
opposed to a series of the Trust, without shareholder approval. The Fund also
reserves the right to invest in a master-feeder or fund-of-funds structure under
the Investment Company Act or any rule or exemptive order thereunder without
shareholder approval.
On June 1, 1998, the Fund acquired substantially all of the assets of
the Predecessor Partnership, a Massachusetts limited partnership, for which the
Adviser served as the general partner and investment adviser. The Predecessor
Partnership, which had an investment objective and policies substantially
similar to those of the Fund, was organized in 1989.
Each share of each fund of the Trust and each class of shares, as
applicable, 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 fund or class (and certain
other expenses such as transfer agency and administration expenses) are borne
solely by those shares. Each
17
<PAGE>
fund or class votes separately with respect to the provisions of any Rule 12b-1
plan that pertains to the fund or class and other matters for which separate
fund or class voting is required or appropriate under applicable law. Generally,
shares are voted in the aggregate without reference to a particular fund or
class, except if the matter affects only one fund or class or voting by fund or
class is required by law, in which case shares will be voted separately by fund
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by federal or state law. Shareholders
(and Trustees) have available certain procedures for the removal of Trustees.
There are no conversion or preemptive rights in connection with shares of the
Trust. All shares when issued in accordance with the terms of the offering will
be fully paid and nonassessable. Shares are redeemable at net asset value, at
the option of the shareholders, subject to any contingent deferred sales charge
that may apply. A shareholder in a fund is entitled to a 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 the Fund. Accordingly, those shareholders may be able to greatly
affect (if not determine) the outcome of a shareholder vote. Prior to the public
offering of the Fund's shares, FAdS, the holder of the initial shares of the
Fund, may be deemed to control the Fund.
18
<PAGE>
APPENDIX
OPTIONS ON EQUITY SECURITIES (sometimes referred to as stock options) -
A call option is a short-term contract under 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 (seller) 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 (seller) of the put, who receives the premium, has the obligation to buy
the underlying security, upon exercise at the exercise price during the option
period.
OPTIONS ON STOCK INDICES - A stock index assigns relative values to the
stocks included in the index, and the index fluctuates with changes in the
market values of the stocks included in the index. Stock index options operate
in the same way as the more traditional stock options except that exercises of
stock index options are effected with cash payments and do not involve delivery
of securities. Thus, upon exercise of a stock index option, the purchaser will
receive and the writer will pay an amount based on the difference between the
exercise price and the closing price of the stock index.
FOREIGN CURRENCY OPTIONS - A foreign currency option operates in the
same manner as an option on securities. Options on foreign currencies are
primarily traded in the over-the-counter markets.
STOCK INDEX FUTURES CONTRACTS - A stock index futures contract is a
bilateral agreement under which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the stock index value at the close of trading of the contract and the price at
which the futures contract is originally struck. No physical delivery of the
stocks comprising the index is made.
Generally contracts are closed out prior to the expiration date of the contract.
FOREIGN CURRENCY FUTURES CONTRACTS - A foreign currency futures
contract is a bilateral agreement under which two parties agree to take or make
delivery of a quantity of a foreign currency called for in a contract at a
specified future time and at a specific price. Although these contracts call for
delivery of or acceptance of the foreign currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery.
OPTIONS ON FUTURES CONTRACTS - Options on futures contracts are similar
to stock options except that an option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell stock, at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by transfer to the holder of an accumulated balance representing the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option in 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
FUND'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFERING OF THE FUND'S
SHARES, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER
MAY NOT LAWFULLY BE MADE.
- --------------------------------------------------------------------------------
A-1
<PAGE>
POLARIS GLOBAL
VALUE FUND
PROSPECTUS
MAY 5, 1998
[Logo]
POLARIS
CAPITAL MANAGEMENT, INC.
<PAGE>
POLARIS GLOBAL VALUE FUND
- --------------------------------------------------------------------------------
Investment Adviser: Account Information and
Polaris Capital Management, Inc. Shareholder Servicing
125 Summer Street Forum Shareholder Services, LLC
Boston, Massachusetts 02110 Two Portland Square
Portland, Maine 04101
207-879-0001
888-263-5594
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 5, 1998
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information ("SAI") supplements the Prospectus dated May
5, 1998 offering shares of Polaris Global Value Fund (the "Fund") and should be
read only in conjunction with the Prospectus, a copy of which may be obtained
without charge by contacting shareholder servicing at the addresses listed
above.
<TABLE>
<S> <C> <C>
TABLE OF CONTENTS
Page
----
1. Investment Policies
and Limitations............................................ 2
2. Performance Data............................................. 17
3. Management................................................... 18
4. Determination of Net Asset Value............................. 24
5. Portfolio Transactions....................................... 25
6. Custodian.................................................... 26
7. Additional Purchase and
Redemption Information..................................... 26
8. Tax Matters.................................................. 27
9. Other Matters................................................ 28
Appendix A - Description of Securities Ratings A-1
</TABLE>
Defined terms used in this SAI have the same meaning as defined in the Fund's
Prospectus. THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
<PAGE>
1. INVESTMENT POLICIES AND LIMITATIONS
The Fund's investment adviser, Polaris Capital Management,
Inc. (the "Adviser") intends to invest the Fund's assets primarily in a
portfolio of equity securities of issuers located worldwide.
INVESTMENT IN FOREIGN SECURITIES
While the Adviser currently intends to invest the Fund's
assets in issuers located in at least 5 countries, there is no limit on the
amount of the Fund's assets that may be invested in issuers located in any one
country or region. To the extent that the Fund has concentrated its investments
in issuers located in a country or region, the Fund is more susceptible to
factors adversely affecting the economy of that country or region than if the
Fund were invested in a more geographically diverse portfolio.
Foreign securities are generally purchased in over-the-counter
markets or on stock exchanges located in the countries in which the respective
principal offices of the issuers of the various securities are located, if that
is the best available market. Foreign securities markets are generally not as
developed or efficient as those in the United States, and securities of foreign
companies may be less liquid and more volatile than securities of comparable
United States companies. Fixed commissions on foreign stock exchanges can be
higher than negotiated commissions on United States exchanges. The Fund will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
stock exchanges, brokers and listed companies than in the United States. Foreign
countries may place limitations on the removal of funds or other assets of the
Fund, and diplomatic developments could affect United States investments in
those countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States' economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, self-sufficiency of
natural resources and balance of payments position.
The dividends and interest payable on certain of the Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders. A shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a credit or
deduction for U.S. federal income tax purposes for the shareholder's
proportionate share of foreign taxes paid by the Fund. See "Tax Matters."
Although the Fund values its assets daily in terms of U.S.
dollars, it will not normally convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (commonly known as the "spread") between the price at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Investors should understand that the expense ratio of the Fund
can be expected to be higher than that of other investment companies investing
solely in domestic securities due to, among other things, the greater cost of
maintaining the custody of foreign securities and higher transaction charges,
such as stamp duties and turnover taxes that may be associated with the purchase
and sale of portfolio securities.
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Corporation ("S&P") are private services that provide ratings of the
credit quality of debt obligations, including convertible securities. A
description of the range of ratings assigned to corporate bonds, including
convertible securities by Moody's and S&P is included in Appendix A to this SAI.
The Fund may use these ratings in determining whether to purchase, sell or hold
a security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, securities with the same
maturity, interest rate and rating may have different market prices. Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced.
2
<PAGE>
The Adviser will consider such an event in determining whether the Fund should
continue to hold the obligation. Credit ratings attempt to evaluate the safety
of principal and interest payments and do not evaluate the risks of fluctuations
in market value. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock of the
same or a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to
nonconvertible debt securities in that they ordinarily provide a stable stream
of income with generally higher yields than those of common stocks of the same
or similar issuers. Although no securities investment is without some risk,
investment in convertible securities generally entails less risk than in the
issuer's common stock. However, the extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells above
its value as a fixed income security. Convertible securities have unique
investment characteristics in that they generally (1) have higher yields than
common stocks, but lower yields than comparable non-convertible securities, (2)
are less subject to fluctuation in value than the underlying stocks since they
have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
The investment value of a convertible security is influenced
by changes in interest rates, with investment value declining as interest rates
increase and increasing as interest rates decline. The credit standing of the
issuer and other factors also may have an effect on the convertible security's
investment value. The conversion value of a convertible security is determined
by the market price of the underlying common stock. If the conversion value is
low relative to the investment value, the price of the convertible security is
governed principally by its investment value and generally the conversion value
decreases as the convertible security approaches maturity. To the extent the
market price of the underlying common stock approaches or exceeds the conversion
price, the price of the convertible security will be increasingly influenced by
its conversion value. In addition, a convertible security generally will sell at
a premium over its conversion value determined by the extent to which investors
place value on the right to acquire the underlying common stock while holding a
fixed income security.
A convertible security may be subject to redemption at the
option of the issuer at a price established in the convertible security's
governing instrument. If a convertible security held by the Fund is called for
redemption, the Fund will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party.
WARRANTS
The Fund may invest in warrants, which provide the holder the
right to purchase an equity security at a specified price (usually representing
a premium over the applicable market value of the underlying equity security at
the time of the warrant's issuance) and usually during a specified period of
time. To the extent that the market value of the security that may be purchased
upon exercise of the warrant rises above the exercise price, the value of the
warrant will tend to rise. To the extent that the exercise price equals or
exceeds the market value of such security, the warrants will have little or no
market value. If a warrant is not exercised within the specified time period, it
will become worthless and the Fund will lose the purchase price paid for the
warrant and the right to purchase the underlying security.
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve
currencies of foreign countries. In addition, the Fund may temporarily hold
funds in bank deposits in foreign currencies during the completion of investment
programs. Accordingly, the value of the assets of the Fund as measured in United
States dollars may be
3
<PAGE>
affected by changes in foreign currency exchange rates and exchange control
regulations, and the Fund may incur costs in connection with conversions between
various currencies. The Fund normally will conduct foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market. While it is not currently the policy of the
Adviser to engage in foreign currency hedging strategies, the Fund in the future
may enter into foreign currency forward contracts ("forward contracts") to
purchase or sell foreign currencies or engage in certain other foreign currency
hedging strategies set forth in "Investment Policies and Limitations -- Hedging
and Option Income Strategies." 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. The Fund will
not enter into these contracts for speculative purposes. These contracts involve
an obligation to purchase or sell a specific currency at a specified future
date, usually less than one year from the date of the contract, at a specified
price. The Fund may enter into foreign currency forward contracts to manage
currency risks and to facilitate transactions in foreign securities. These
contracts involve a risk of loss if the Adviser fails to predict currency values
correctly. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers
and involve the risk that the other party to the contract may fail to deliver
currency when due, which could result in losses to the Fund. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. Foreign exchange dealers realize a profit based on the
difference between the price at which they buy and sell various currencies.
The Fund may enter into forward contracts under two
circumstances. First, with respect to specific transactions, when the Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency involved in the
underlying security transactions, the Fund may be able to protect itself against
a possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment is made or
received.
Second, the Fund may enter into forward currency contracts in
connection with existing portfolio positions. For example, when the Adviser
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar, the Fund may enter into a forward
contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency.
The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible since the future
value of such securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. Forward contracts involve the
risk of inaccurate predictions of currency price movements, which may cause the
Fund to incur losses on these contracts and transaction costs. The Adviser does
not intend to enter into forward contracts on a regular or continuous basis, and
will not do so if, as a result, the Fund will have more than 25% of the value of
its total assets committed to such contracts or the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency.
At or before the settlement of a forward currency contract,
the Fund may either make delivery of the foreign currency or terminate its
contractual obligation to deliver the foreign currency by purchasing an
offsetting contract. If the Fund chooses to make delivery of the foreign
currency, it may be required to obtain the currency through the conversion of
assets of the Fund into the currency. The Fund may close out a forward contract
obligating it to purchase a foreign currency by selling an offsetting contract.
If the Fund engages in an offsetting transaction, the Fund will incur a gain or
a loss to the extent that there has been a change in forward contract prices.
Additionally, although forward contracts may tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain which might result should the value of such currency
increase.
4
<PAGE>
There is no systematic reporting of last sale information for
foreign currencies and there is no regulatory requirement that quotations
available through dealers or other market sources be firm or revised on a timely
basis. Quotation information available is generally representative of very large
transactions in the interbank market. The interbank market in foreign currencies
is a global, around-the-clock market.
When required by applicable regulatory guidelines, the Fund
will set aside cash, U.S. Government Securities or other liquid assets in a
segregated account with its custodian in the prescribed amount.
HEDGING AND OPTION INCOME STRATEGIES
As discussed in Part I, the Adviser may engage in certain
options and futures strategies to attempt to enhance performance or hedge the
Fund's portfolio. The instruments in which the Fund may invest include: (1)
options on securities, stock indices and foreign currencies; (2) stock index and
foreign currency futures contracts ("futures contracts"); and (3) options on
futures contracts. Use of these instruments is subject to regulation by the
Securities and Exchange Commission (the "SEC"), the several options and futures
exchanges upon which options and futures are traded, and the Commodities Futures
Trading Commission (the "CFTC").
The various strategies referred to herein and in Part I are
intended to illustrate the types of strategies that are available to, and may be
used by, the Adviser in managing the Fund's portfolio. No assurance can be
given, however, that any strategies will succeed.
The Fund will not use leverage in its hedging strategies. In
the case of transactions entered into as a hedge, the Fund will hold securities,
currencies or other options or futures positions whose values are expected to
offset ("cover") its obligations thereunder. The Fund will not enter into a
hedging strategy that exposes the Fund to an obligation to another party unless
it owns either: (1) an offsetting ("covered") position, or (2) cash, obligations
issued or guaranteed as to principal and interest by the U.S. Government, its
agencies and instrumentalities ("U.S. Government Securities") or other liquid
assets with a value sufficient at all times to cover its potential obligations.
When required by applicable regulatory guidelines, the Fund will set aside cash,
U.S. Government Securities or other liquid assets in a segregated account with
its custodian in the prescribed amount. Any assets used for cover or held in a
segregated account cannot be sold or closed out while the hedging strategy is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that the use of cover or segregation involving a large percentage
of a Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
OPTIONS STRATEGIES
The Fund may purchase put and call options written by others
and write (sell) put and call options covering specified securities, stock
index-related amounts or currencies. A put option (sometimes called a "standby
commitment") gives the buyer of the option, upon payment of a premium, the right
to deliver a specified amount of a security or currency to the writer of the
option on or before a fixed date at a predetermined price. A call option
(sometimes called a "reverse standby commitment") gives the purchaser of the
option, upon payment of a premium, the right to call upon the writer to deliver
a specified amount of a security or currency on or before a fixed date, at a
predetermined price. The predetermined prices may be higher or lower than the
market value of the underlying currency or security. The Fund may buy or sell
both exchange-traded and over-the-counter ("OTC") options. The Fund will
purchase or write an option only if that option is traded on a recognized U.S.
options exchange or if the Adviser believes that a liquid secondary market for
the option exists. When the Fund purchases an OTC option, it relies on the
dealer from which it has purchased the OTC option to make or take delivery of
the securities or currency underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. OTC options and the securities
underlying these options currently are treated as illiquid securities.
The Fund may purchase call options on equity securities that
the Adviser intends to include in the Fund's portfolio in order to fix the cost
of a future purchase. Call options may also be purchased as a means of
participating in an anticipated price increase of a security on a more limited
risk basis than would be possible if the
5
<PAGE>
security itself were purchased. In the event of a decline in the price of the
underlying security, use of this strategy would serve to limit the potential
loss to the Fund to the option premium paid; conversely, if the market price of
the underlying security increases above the exercise price and the Fund either
sells or exercises the option, any profit eventually realized will be reduced by
the premium paid. The Fund may similarly purchase put options in order to hedge
against a decline in market value of securities held in its portfolio. The put
enables the Fund to sell the underlying security at the predetermined exercise
price; thus the potential for loss to the Fund is limited to the option premium
paid. If the market price of the underlying security is lower than the exercise
price of the put, any profit the Fund realizes on the sale of the security would
be reduced by the premium paid for the put option less any amount for which the
put may be sold.
The Fund may write covered call options. The Fund may write
call options when the Adviser believes that the market value of the underlying
security will not rise to a value greater than the exercise price plus the
premium received. Call options may also be written to provide limited protection
against a decrease in the market price of a security, in an amount equal to the
call premium received less any transaction costs. The Fund may write covered put
options only to effect closing transactions.
The Fund may purchase and write put and call options on stock
indices in much the same manner as the equity security options discussed above,
except that stock index options may serve as a hedge against overall
fluctuations in the securities markets (or market sectors) or as a means of
participating in an anticipated price increase in those markets. The
effectiveness of hedging techniques using stock index options will depend on the
extent to which price movements in the stock index selected correlate with price
movements of the securities which are being hedged. Stock index options are
settled exclusively in cash.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS
The Fund may take positions in options on foreign currencies
in order to hedge against the risk of foreign exchange fluctuation on foreign
securities the Fund holds in its portfolio or which it intends to purchase.
Options on foreign currencies are affected by the factors discussed in "Options
Strategies" above and "Foreign Currency Forward Transactions" which influence
foreign exchange sales and investments generally.
The value of foreign currency options is dependent upon the
value of the foreign currency relative to the U.S. dollar and has no
relationship to the investment merits of a foreign security. Because foreign
currency transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign currency
options, the Fund may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
To the extent that the U.S. options markets are closed while
the market for the underlying currencies remains open, significant price and
rate movements may take place in the underlying markets that cannot be reflected
in the options markets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
The Fund may effectively terminate its right or obligation
under an option contract by entering into a closing transaction. For instance,
if the Fund wished to terminate its potential obligation to sell securities or
currencies under a call option it had written, a call option of the same type
would be purchased by the Fund. Closing transactions essentially permit the Fund
to realize profits or limit losses on its options positions prior to the
exercise or expiration of the option. In addition:
(1) The successful use of options depends upon the Adviser's
ability to forecast the direction of price fluctuations in the underlying
securities or currency markets, or in the case of a stock index option,
fluctuations in the market sector represented by the index.
6
<PAGE>
(2) Options normally have expiration dates of up to nine
months. Options that expire unexercised have no value. Unless an option
purchased by the Fund is exercised or unless a closing transaction is effected
with respect to that position, a loss will be realized in the amount of the
premium paid.
(3) A position in an exchange-listed option may be closed out
only on an exchange which provides a market for identical options. Most
exchange-listed options relate to equity securities. Exchange markets for
options on foreign currencies are relatively new and the ability to establish
and close out positions on the exchanges is subject to the maintenance of a
liquid secondary market. Closing transactions may be effected with respect to
options traded in the over-the-counter markets (currently the primary markets
for options on foreign currencies) only by negotiating directly with the other
party to the option contract or in a secondary market for the option if such
market exists. There is no assurance that a liquid secondary market will exist
for any particular option at any specific time. If it is not possible to effect
a closing transaction, the Fund would have to exercise the option which it
purchased in order to realize any profit. The inability to effect a closing
transaction on an option written by the Fund may result in material losses to
the Fund.
(4) The Fund's activities in the options markets may result in
a higher portfolio turnover rate and additional brokerage costs.
FUTURES STRATEGIES
A futures contract is a bilateral agreement wherein one party
agrees to accept, and the other party agrees to make, delivery of cash,
securities or currencies as called for in the contract at a specified future
date and at a specified price. For stock index futures contracts, delivery is of
an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the time of the contract and the close of
trading of the contract.
The Fund may sell stock index futures contracts in
anticipation of a general market or market sector decline that may adversely
affect the market values of the Fund's securities. To the extent that the Fund's
portfolio correlates with a given stock index, the sale of futures contracts on
that index could reduce the risks associated with a market decline and thus
provide an alternative to the liquidation of securities positions. The Fund may
purchase a stock index futures contract if a significant market or market sector
advance is anticipated. These purchases would serve as a temporary substitute
for the purchase of individual stocks, which stocks may then be purchased in the
future.
The Fund may purchase call options on a stock index future as
a means of obtaining temporary exposure to market appreciation at limited risk.
This strategy is analogous to the purchase of a call option on an individual
stock, in that it can be used as a temporary substitute for a position in the
stock itself. The Fund may purchase a call option on a stock index future to
hedge against a market advance in stocks which the Fund planned to acquire at a
future date. The Fund may also purchase put options on stock index futures
contracts. These purchases are analogous to the purchase of protective puts on
individual stocks, where a level of protection is sought below which no
additional economic loss would be incurred by the Fund. The Fund may write
covered call options on stock index futures contracts as a partial hedge against
a decline in the prices of stocks held in the Fund's portfolio. This is
analogous to writing covered call options on securities.
The Fund may sell foreign currency futures contracts to hedge
against possible variations in the exchange rate of the foreign currency in
relation to the U.S. dollar. In addition, the Fund may sell foreign currency
futures contracts when the Adviser anticipates a general weakening of foreign
currency exchange rates that could adversely affect the market values of the
Fund's foreign securities holdings. The Fund may purchase a foreign currency
futures contract to hedge against an anticipated foreign exchange rate increase
pending completion of anticipated transactions. Such a purchase would serve as a
temporary measure to protect the Fund against such increase. The Fund may also
purchase call or put options on foreign currency futures contracts to obtain a
fixed foreign exchange rate at limited risk. The Fund may write call options on
foreign currency futures contracts as a partial hedge against the effects of
declining foreign exchange rates on the value of foreign securities.
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SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING
No price is paid upon entering into futures contracts; rather,
the Fund is required to deposit with its custodian in a segregated account in
the name of the futures broker an amount of cash or U.S. Government Securities
generally equal to 5% or less of the contract value. This amount is known as
initial margin. Subsequent payments, called variation margin, to and from the
broker, would be made on a daily basis as the value of the futures position
varies. When writing a call on a futures contract, variation margin must be
deposited in accordance with applicable exchange rules. The initial margin in
futures transactions is in the nature of a performance bond or good-faith
deposit on the contract that is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied.
Holders and writers of futures and options on futures
contracts can enter into offsetting closing transactions, similar to closing
transactions on options, by selling or purchasing, respectively, a futures
contract or related option with the same terms as the position held or written.
Positions in futures contracts may be closed only on an exchange or board of
trade providing a secondary market for such futures contracts. For example,
futures contracts on broad-based stock indices can currently be entered into
with respect to the Standard & Poor's 500 Stock Index on the Chicago Mercantile
Exchange, the New York Stock Exchange Composite Stock Index on the New York
Futures Exchange, the Value Line Composite Stock Index on the Kansas City Board
of Trade and the Major Market Index of the Chicago Board of Trade.
Under certain circumstances, futures exchanges may establish
daily limits in the amount that the price of a futures contract or related
option may vary either up or down from the previous day's settlement price. Once
the daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit. Prices could move to the daily limit for
several consecutive trading days with little or no trading and thereby prevent
prompt liquidation of positions. In such event, it may not be possible for the
Fund to close a position, and in the event of adverse price movements, the Fund
would have to make daily cash payments of variation margin. In addition:
(1) Successful use by the Fund of futures contracts and
related options will depend upon the Adviser's ability to predict movements in
the direction of the overall securities and currency markets, which requires
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the current
level of the underlying instrument but to the anticipated levels at some point
in the future; thus, for example, trading of stock index futures may not reflect
the trading of the securities which are used to formulate an index or even
actual fluctuations in the relevant index itself.
(2) The price of futures contracts may not correlate perfectly
with movement in the price of the hedged securities or currencies due to price
distortions in the futures market or otherwise. There may be several reasons
unrelated to the value of the underlying securities or currencies which causes
this situation to occur. As a result, a correct forecast of general market
trends still may not result in successful hedging through the use of futures
contracts over the short term.
(3) There is no assurance that a liquid secondary market will
exist for any particular contract at any particular time. In such event, it may
not be possible to close a position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin.
(4) Like other options, options on futures contracts have a
limited life. The Fund will not trade options on futures contracts on any
exchange or board of trade unless and until, in the Adviser's opinion, the
market for such options has developed sufficiently that the risks in connection
with options on futures transactions are not greater than the risks in
connection with futures transactions.
(5) Purchasers of options on futures contracts pay a premium
in cash at the time of purchase. This amount and the transaction costs is all
that is at risk. Sellers of options on futures contracts, however, must post an
initial margin and are subject to additional margin calls which could be
substantial in the event of adverse price movements.
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(6) The Fund's activities in the futures markets may result in
a higher portfolio turnover rate and additional transaction costs in the form of
added brokerage commissions.
(7) Buyers and sellers of foreign currency futures contracts
are subject to the same risks that apply to the buying and selling of futures
generally. In addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those associated with
options on foreign currencies described above. In addition, settlement of
foreign currency futures contracts must occur within the country issuing that
currency. Thus, the Fund must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulations
regarding the maintenance of foreign banking arrangements by U.S. residents, and
the Fund may be required to pay any fees, taxes or charges associated with such
delivery which are assessed in the issuing country.
COMMODITY FUTURES CONTRACTS AND COMMODITY OPTIONS
The Fund may invest in certain financial futures contracts and
options contracts in accordance with the policies described in the Part I and
above. The Fund will only invest in futures contracts, options on futures
contracts and other options contracts that are subject to the jurisdiction of
the CFTC after filing a notice of eligibility and otherwise complying with the
requirements of Section 4.5 of the rules of the CFTC. Under that section the
Fund would be permitted to purchase such futures or options contracts only for
bona fide hedging purposes within the meaning of the rules of the CFTC;
provided, however, that in addition, with respect to positions in commodity
futures and option contracts not for bona fide hedging purposes, the Fund
represents that the aggregate initial margin and premiums required to establish
these positions (subject to certain exclusions) will not exceed 5% of the
liquidation value of the Fund's assets after taking into account unrealized
profits and losses on any such contract the Fund has entered into.
BORROWING AND TRANSACTIONS INVOLVING LEVERAGE
The Fund may borrow money in amounts up to 33 1/3 percent of
the Fund's total 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 rather than sold to meet the needs for
which funds were borrowed). Under adverse market conditions, the Fund might have
to sell portfolio securities to meet interest or principal payments at a time
when investment considerations would not favor such sales. The 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 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.
OTHER TECHNIQUES INVOLVING LEVERAGE
Utilization of leveraging involves special risks and may
involve speculative investment techniques. The Fund may borrow for other than
temporary or emergency purposes, sell securities short, lend its securities,
enter reverse repurchase agreements and purchase securities on a when issued or
forward commitment basis. 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. The Fund uses these investment
techniques only when the Adviser believes that the leveraging and the returns
available to the Fund from investing the cash will provide shareholders a
potentially higher return.
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. Leverage may involve
the creation of a liability that requires the Fund to pay interest (for
instance, reverse repurchase agreements) or the creation of a liability that
does not entail any interest costs (for instance, forward commitment
transactions).
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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 the 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 borrowing 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 it investments at an inappropriate time The
use of leverage may be considered speculative.
SEGREGATED ACCOUNT
In order to limit the risks involved in various transactions
involving leverage, the Trust's custodian will maintain in a segregated account
cash, U.S. Government Securities or other assets as may be permitted by the
Securities and Exchange Commission in accordance with Securities and Exchange
Commission guidelines. The account's value, which is marked to market daily,
will be at least equal to the Fund's commitments under these transactions. The
Fund's commitments include the Fund's obligations to repurchase securities under
a reverse repurchase agreement and settle when-issued and forward commitment
transactions.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund
sells a security and simultaneously commits to repurchase that security from the
buyer at an agreed upon price on an agreed upon future date. The resale price in
a reverse repurchase agreement reflects a market rate of interest that is not
related to the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate. A
counterparty to a reverse repurchase agreement must be a primary dealer that
reports to the Federal Reserve Bank of New York ("primary dealers") or one of
the largest 100 commercial banks in the United States.
Generally, a reverse repurchase agreement enables the Fund to
recover for the term of the reverse repurchase agreement all or most of the cash
invested in the portfolio securities sold and to keep the interest income
associated with those portfolio securities. Such transactions are only
advantageous if the interest cost to the Fund of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise. In addition,
interest costs on the money received in a reverse repurchase agreement may
exceed the return received on the investments made by a Fund with those monies.
The use of reverse repurchase agreement proceeds to make investments may be
considered to be a speculative technique.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase or sell portfolio securities on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased by a Fund with payment and
delivery to take place in the future in order to secure what is considered to be
an advantageous price and yield to the Fund at the time it enters into the
transaction. In those cases, the purchase price and the interest rate payable on
the securities are fixed on the transaction date and delivery and payment may
take place a month or more after the date of the transaction. When the Fund
enters into a delayed delivery transaction, it becomes obligated to purchase
securities and it has all of the rights and risks attendant to ownership of the
security, although delivery and payment
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<PAGE>
occur at a later date. To facilitate such acquisitions, the Fund will maintain
with its custodian a separate account with portfolio securities in an amount at
least equal to such commitments.
At the time a Fund makes the commitment to purchase securities
on a when-issued or delayed delivery basis, the Fund will record the transaction
as a purchase and thereafter reflect the value each day of such securities in
determining its net asset value. The value of the fixed income securities to be
delivered in the future will fluctuate as interest rates and the credit of the
underlying issuer vary. On delivery dates for such transactions, the Fund will
meet its obligations from maturities, sales of the securities held in the
separate account or from other available sources of cash. The Fund generally has
the ability to close out a purchase obligation on or before the settlement date,
rather than purchase the security. If the Fund chooses to dispose of the right
to acquire a when-issued security prior to its acquisition, it could, as with
the disposition of any other portfolio obligation, realize a gain or loss due to
market fluctuation.
To the extent the Fund engages in when-issued or delayed
delivery transactions, it will do so for the purpose of acquiring securities
consistent with the Fund's investment objectives and policies and not for the
purpose of investment leverage or to speculate in interest rate changes. The
Fund will only make commitments to purchase securities on a when-issued or
delayed delivery basis with the intention of actually acquiring the securities,
but the Fund reserves the right to dispose of the right to acquire these
securities before the settlement date if deemed advisable.
The use of when-issued transactions and forward commitments
enables the Fund to hedge against anticipated changes in interest rates and
prices. For instance, in periods of rising interest rates and falling bond
prices, the Fund might sell securities which it owned on a forward commitment
basis to limit its exposure to falling prices. In periods of falling interest
rates and rising bond prices, the Fund might sell a security and purchase the
same or a similar security on a when-issued or forward commitment basis, thereby
obtaining the benefit of currently higher cash yields. However, if the Adviser
were to forecast incorrectly the direction of interest rate movements, the Fund
might be required to complete such when-issued or forward transactions at prices
inferior to the current market values.
When-issued securities and forward commitments may be sold
prior to the settlement date, but the Fund enters into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. If the Fund, however, chooses to dispose of the
right to acquire a when-issued security prior to its acquisition or to dispose
of its right to deliver or receive against a forward commitment, it can incur a
gain or loss. The Fund will establish and maintain with its custodian a separate
account with cash, U.S. Government Securities or other liquid assets in an
amount at least equal to such commitments. No when-issued or forward commitments
will be made by the Fund if, as a result, more than 10% of the value of the
Fund's total assets would be committed to such transactions.
INVESTMENT COMPANY SECURITIES
In connection with managing its cash position, the Fund may
invest in the securities of other investment companies that are money market
funds, including the Fund's affiliates, within the limits proscribed by the
Investment Company 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).
TEMPORARY INVESTMENTS
The cash or cash equivalents in which the Fund may invest
include: (1) short-term U.S. Government Securities; (2) certificates of deposit,
bankers' acceptances and interest-bearing savings deposits of commercial banks
doing business in the United States that are members of the Federal Deposit
Insurance Corporation and whose short term ratings are rated in one of the two
highest rating categories by S&P or Moody's or, if not rated by those agencies,
determined by the Adviser to be of comparable quality; (3) commercial paper of
prime quality rated "A-2" or higher by S&P or "Prime-2" or higher by Moody's or,
if not rated by those agencies,
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<PAGE>
determined by the Adviser to be of comparable quality; and (3) repurchase
agreements covering any of the securities in which the Fund may invest directly.
FUNDAMENTAL POLICIES
Fundamental investment policies of the Fund may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. A majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act, means the lesser of: (1) 67% of the
shares of the Fund present or represented at a shareholders meeting at which the
holders of more than 50% of the shares are present or represented; or (2) more
than 50% of the outstanding shares of the Fund. Investment policies are not
fundamental unless they are designated as fundamental.
INVESTMENT LIMITATIONS
The Fund has adopted the following fundamental investment
limitations that are in addition to those contained in Part I and that may not
be changed without shareholder approval.
(1) The Fund may not borrow money if, as a result, outstanding
borrowings would exceed an amount equal to 33 1/3% of the Fund's total assets.
The following are not subject to this limitation to the extent they are fully
collateralized: (a) the delayed delivery of purchased securities; (such as the
purchase of when-issued securities); (b) reverse repurchase agreements; and (c)
dollar-roll transactions.
(2) The Fund may not purchase securities, other than U.S.
Government Securities, repurchase agreements covering U.S. Government
Securities, or securities of other regulated investment companies, if,
immediately after each purchase, more than 25% of the Fund's total assets taken
at market value would be invested in securities of issuers conducting their
principal business activity in the same industry.
(3) The Fund may not, with respect to 75% of its assets,
purchase a security (other than a U.S. Government Security or a security of an
investment company) if, as a result: (i) more than 5% of the Fund's total assets
would be invested in the securities of a single issuer, or (ii) the Fund would
own more than l0% of the outstanding voting securities of any single issuer.
(4) The Fund may not underwrite (as that term is defined in
the 1933 Act) securities issued by other persons except, to the extent that in
connection with the disposition of the Fund's assets, the Fund may be deemed to
be an underwriter.
(5) The Fund may not make loans to other parties. For purposes
of this limitation, entering into repurchase agreements, lending securities and
acquiring any debt security are not deemed to be the making of loans.
(6) The Fund may not purchase or sell real estate unless
acquired as a result of ownership of securities or other instruments (but this
shall not prevent the Fund from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real estate
business).
(7) The Fund may not purchase or sell physical commodities
unless acquired as a result of ownership of securities or other instruments (but
this shall not prevent the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities).
(8) The Fund may not issue senior securities except to
the extent permitted by the 1940 Act.
The Fund has adopted the following nonfundamental investment
limitations that may be changed by the Trust's Board of Trustees without
shareholder approval.
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<PAGE>
(a) The Fund may not pledge, mortgage or hypothecate its
assets, except to secure permitted indebtedness. The deposit in escrow of
securities in connection with the writing of put and call options,
collateralized loans of securities and collateral arrangements with respect to
margin for futures contracts are not deemed to be pledges or hypothecations for
this purpose.
(b) The Fund may not invest in securities of another
registered investment company, except to the extent permitted by the Investment
Company Act.
(c) The Fund may not enter into short sales if, as a result,
more than 25% of the Fund's total assets would be so invested or the Fund's
short positions (other than those positions "against the box") would represent
more than 2% of the outstanding voting securities of any single issuer or of any
class of securities of any single issuer.
(d) The Fund may not invest more than 15% of its net assets in
illiquid assets such as: (i) securities that cannot be disposed of within seven
days at their then-current value, (ii) repurchase agreements not entitling the
holder to payment of principal within seven days and (iii) securities subject to
restrictions on the sale of the securities to the public without registration
under the 1933 Act ("restricted securities") that are not readily marketable.
The Fund may treat certain restricted securities as liquid pursuant to
guidelines adopted by the Board of Trustees.
Except as required by the Investment Company Act, whenever an
amended or restated investment policy or limitation states a maximum percentage
of the Fund's assets that may be invested, such percentage limitation will be
determined immediately after and as a result of the acquisition of such security
or other asset. Any subsequent change in values, assets or other circumstances
will not be considered when determining whether the investment complies with the
Fund's investment policies or limitations.
2. PERFORMANCE DATA
The Fund may quote performance in various ways. All performance
information supplied by the Fund in advertising is historical and is not
intended to indicate future returns. The Fund's net asset value, yield and total
return will fluctuate in response to market conditions and other factors, and
the value of Fund shares when redeemed may be more or less than their original
cost.
LIMITED PARTNERSHIP PERFORMANCE
Prior to June 1, 1998, Polaris Capital Management, Inc. managed a
limited partnership with an investment objective and investment policies that
were, in all material respects, equivalent to the Fund. The performance for the
Fund includes the performance of the predecessor limited partnership for the
period before it became a mutual fund on June 1, 1998. For periods prior to June
1, 1998, the performance figures include the expenses for the limited
partnership. For all periods except "since inception," had the Fund's first year
estimated expenses been used, the performance would have been lower. The limited
partnership was not registered under the 1940 Act nor subject to certain
investment limitations, diversification requirements, and other restrictions
imposed by the Act and the Internal Revenue Code, which, if applicable, may have
adversely affected its performance.
Including the limited partnership performance, the Fund's average
annual total return for the 1-year, 3-year, 5-year and since inception (July 31,
1989) periods as of March 31, 1998 was 40.41%, 31.12%, 22.67% and 14.59%,
respectively. Total return includes reinvestment of dividends and capital gains.
Results represent past performance and do not guarantee future results.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than original cost.
13
<PAGE>
ADDITIONAL ADVERTISING INFORMATION
In performance advertising the Fund may compare any of its
performance information with data published by independent evaluators such as
Morningstar, Lipper Analytical Services, Inc., IBC/Donoghue, Inc.,
CDA/Wiesenberger or other companies which track the investment performance of
investment companies ("Fund Tracking Companies"). The Fund may also compare any
of its performance information with the performance of recognized stock, bond
and other indices, including but not limited to the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, the MSCI World
Index, and changes in the Consumer Price Index as published by the U.S.
Department of Commerce. The Fund may refer to general market performances over
past time periods such as those published by Ibbotson Associates. In addition,
the Fund may refer in such materials to mutual fund performance rankings and
other data published by Fund Tracking Companies. Performance advertising may
also refer to discussions of the Fund and comparative mutual fund data and
ratings reported in independent periodicals, such as newspapers and financial
magazines.
TOTAL RETURN CALCULATIONS
The Fund may advertise total return. Total returns quoted in
advertising reflect all aspects of the Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in the Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. For
example, a cumulative return of 100% over ten years would produce an average
annual return of 7.18%, which is the steady annual rate that would equal 100%
growth on a compounded basis in ten years. While average annual returns are a
convenient means of comparing investment alternatives, investors should realize
that the performance is not constant over time but changes from year to year,
and that average annual returns represent averaged figures as opposed to the
actual year-to-year performance of the Fund.
Average annual total return is calculated by finding the
average annual compounded rates of return of a hypothetical investment, over
such periods according to the following formula:
P(1+T)n = ERV; where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value (ERV is the value, at
the end of the applicable period, of a hypothetical $1,000 payment made at the
beginning of the applicable period).
In addition to average annual total returns, the Fund may
quote cumulative total returns reflecting the simple change in value of an
investment over a stated period. Total returns may be broken down into their
components of income and capital (including capital gain and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1); where:
PT = period total return;
The other definitions are the same as in average
annual total return above.
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3. MANAGEMENT
The trustees and officers of the Trust and their principal
occupations during the past five years are set forth below. Each Trustee who is
an "interested person" (as defined by the Investment Company Act) of the Trust
is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 55)
President and Director, Forum Financial Services, Inc. (a
registered broker-dealer), Forum Administrative Services, LLC (a
mutual fund administrator), Forum Shareholder Services, LLC. (a
registered transfer agent) and Forum Investment Advisors, LLC (a
registered investment adviser). Mr. Keffer is a Trustee and/or
officer of various registered investment companies for which
Forum Administrative Services, LLC serves as manager or
administrator and for which Forum Financial Services, Inc. serves
as distributor. His address is Two Portland Square, Portland,
Maine 04101.
Costas Azariadis, Trustee (age 53)
Professor of Economics, University of California, Los Angeles,
since July 1992. Prior thereto, Dr. Azariadis was Professor of
Economics at the University of Pennsylvania. His address is
Department of Economics, University of California, Los Angeles,
405 Hilgard Avenue, Los Angeles, California 90024.
James C. Cheng, Trustee (age 54)
President of Technology Marketing Associates (a marketing
consulting company) since September 1991. Prior thereto, Mr.
Cheng was President and Chief Executive Officer of Network
Dynamics, Incorporated (a software development company). His
address is 27 Temple Street, Belmont, Massachusetts 02178.
J. Michael Parish, Trustee (age 53)
Partner at the law firm of Reid & Priest LLP. Prior thereto, he
was a partner at the law firm of Winthrop Stimson Putnam &
Roberts and prior thereto, a partner at the law firm of LeBoeuf,
Lamb, Leiby & MacRae. His address is 40 West 57th Street, New
York, New York 10019-4097.
Mark D. Kaplan, Vice President, Acting Treasurer and Assistant Secretary(age 41)
Managing Director at Forum Financial Services, Inc. since
September 1995. Prior thereto, Mr. Kaplan was Managing Director
and Director of Research at H.M. Payson & Co. His address is Two
Portland Square, Portland, Maine 04101.
David I. Goldstein, Secretary (age 36)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1991. Prior thereto, Mr. Goldstein was
associated with the law firm of Kirkpatrick & Lockhart. Mr.
Goldstein is also Secretary or Assistant Secretary of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as
manager, administrator and/or distributor. His address is Two
Portland Square, Portland, Maine 04101.
Max Berueffy, Assistant Secretary (age 46)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto, Mr. Berueffy was on the
staff of the U.S. Securities and Exchange Commission for seven
years, first in the appellate branch of the Office of the General
Counsel, then as a counsel to Commissioner Grundfest and finally
as a senior special counsel in the Division of Investment
Management. Mr. Berueffy is also Secretary or Assistant Secretary
of various registered investment companies for which Forum
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<PAGE>
Administrative Services, LLC or Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. His address
is Two Portland Square, Portland, Maine 04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she
has been associated since July 1996. Prior thereto, Ms. Tumlin
was on the staff of the U.S. Securities and Exchange Commission
as an attorney in the Division of Market Regulation and prior
thereto Ms. Tumlin was an associate with the law firm of Robinson
Silverman Pearce Aronsohn & Berman in New York, New York. Ms.
Tumlin is also Assistant Secretary of various registered
investment companies for which Forum Administrative Services, LLC
or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland
Square, Portland, Maine 04101.
TRUSTEE COMPENSATION. Each trustee of the Trust (other than John
Y. Keffer, who is an interested person of the Trust) is paid $1,000 for each
Board meeting attended (whether in person or by electronic communication), plus
$100 per active portfolio of the Trust, and is paid $1,000 for each committee
meeting attended on a date when a Board meeting is not held. To the extent a
meeting relates to only certain portfolios of the Trust, trustees are paid the
$100 fee only with respect to those portfolios. Trustees are also reimbursed for
travel and related expenses incurred in attending meetings of the Board. No
officer of the Trust is compensated by the Trust.
The following table provides the aggregate compensation paid to
each trustee. The Trust has not adopted any form of retirement plan covering
trustees or officers. Information is presented for the fiscal year ended March
31, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
- ------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $4,000 None None $4,000
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
</TABLE>
THE INVESTMENT ADVISER
Under an investment advisory agreement with the Trust (the
"Advisory Agreement"), the Fund's investment adviser, Polaris Capital
Management, Inc. (the "Adviser") furnishes at its own expense all services,
facilities and personnel necessary in connection with managing the Fund's
investments and effecting portfolio transactions for the Fund. The Advisory
Agreement will remain in effect for a period of twelve months from the date of
its effectiveness and will continue in effect thereafter only if its continuance
is specifically approved at least annually by the Board of Trustees or by vote
of the shareholders, and in either case by a majority of the Trustees who are
not parties to the Advisory Agreement or interested persons of any such party,
at a meeting called for the purpose of voting on the Advisory Agreement.
The Advisory Agreement is terminable without penalty by the
Trust with respect to the Fund on 60 days' written notice when authorized either
by vote of the Fund's shareholders or by a vote of a majority of the Board of
Trustees, or by the Adviser on 60 days' written notice to the Trust, and will
automatically terminate in the event of its assignment. The Advisory Agreement
also provides that, with respect to the Fund, the Adviser shall not be liable
for any error of judgment or mistake of law or for any act or omission in the
performance of its duties to the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties or by reason of reckless
disregard of its obligations and duties under the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render
services to others. In addition to receiving its advisory fee from the Fund of
1.0% of the Fund's average daily net assets, the Adviser may also act and be
compensated as investment manager for its clients with respect to assets which
are invested in the Fund. In some instances the Adviser may elect to credit
against any investment management fee received from a client who is also a
shareholder in the Fund an
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amount equal to all or a portion of the fees received by the Adviser or any
affiliate of the Adviser from the Fund with respect to the client's assets
invested in the Fund.
The Adviser has agreed to reimburse the Trust for certain of
the Fund's operating expenses which in any year exceed the limits prescribed by
any state in which the Fund's shares are qualified for sale. The Trust may elect
not to qualify its shares for sale in every state. For the purpose of this
obligation to reimburse expenses, the Fund's annual expenses are estimated and
accrued daily, and any appropriate estimated payments will be made by the
Adviser monthly. Subject to the obligations of the Adviser to reimburse the
Trust for its excess expenses, the Trust has, under the Advisory Agreement,
confirmed its obligation to pay all its other expenses. The 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 asset, 2% of the next
$70 million of its average net assets and 1-1/2% of its average net assets in
excess of $100 million.
ADMINISTRATION
Under an Administration Agreement, Forum Administrative
Services, LLC ("FAdS") supervises the overall management of the Trust (which
includes, among other responsibilities, negotiation of contracts and fees with,
and monitoring of performance and billing of, the transfer agent, fund
accountant and custodian and arranging for maintenance of books and records of
the Trust). In addition, under the Agreement, FAdS is directly responsible for
managing the Trust's regulatory and legal compliance and overseeing the
preparation of its registration statement. Under the Administration Agreement,
FAdS is entitled to an annual fee, payable monthly, at the rates of 0.10% of the
first $150 million of the Fund's average daily net assets and 0.05% on the
Fund's average daily net assets in excess of that amount. The Administration
Agreement remains in effect until terminated, provided that continuance is
specifically approved at least annually: (1) by the Board of Trustees or by a
vote of a majority of the outstanding voting securities of the Fund; and (2) by
a vote of a majority of trustees of the Trust who are not parties to the
Administration Agreement or interested persons of a party to the Administration
Agreement.
The Administration Agreement may be terminated by either party
without penalty on 60 days' written notice and may not be assigned except upon
written consent of both parties. 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 FAdS's
duties or by reason of reckless disregard of its obligations and duties under
the Administration Agreement.
FAdS also provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Those officers, as well as certain
other employees and trustees of the Trust, may be directors, officers or
employees of (and persons providing services to the Trust may include) FAdS, the
Adviser or their respective affiliates.
DISTRIBUTOR
Forum Financial Services, Inc. ("FFSI") acts as distributor of
the Fund's shares on a best efforts basis pursuant to a Distribution Agreement
with the Trust (the "Distribution Agreement"). The Distribution Agreement will
remain in effect for a period of twelve months from the date of its
effectiveness and will continue in effect thereafter only if its continuance is
specifically approved at least annually by the Board of Trustees or by the
shareholders and, in either case, by a majority of the Trustees who are not
parties to the agreement or interested persons of any such party and do not have
any direct or indirect financial interest in the Distribution Agreement.
The Distribution Agreement terminates automatically if it is
assigned and may be terminated without penalty with respect to the Fund by vote
of the Fund's shareholders or by either party to the agreement on 60 days'
written notice to the Trust. The Distribution Agreement also provides that FFSI
shall not be liable for any error of judgment or mistake of law or for any act
or omission in the administration or management of the Trust, except for willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its obligations and duties under the
Distribution Agreement.
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<PAGE>
TRANSFER AGENT
Forum Shareholder Services, LLC. ("FSS, LLC") acts as transfer
agent of the Trust under a transfer agency agreement (the "Transfer Agency
Agreement"). The Transfer Agency Agreement provides, with respect to the 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 the Fund, by a vote of the shareholders of the Fund, and in either
case by a majority of the trustees who are not parties to the Transfer Agency
Agreement or interested persons of any such party at a meeting called for the
purpose of voting on the Transfer Agency Agreement.
Among the responsibilities of FFC as agent for the Trust are:
(1) answering customer inquiries regarding account status and history, the
manner in which purchases and redemptions of shares of the Fund may be effected
and certain other matters pertaining to the Fund; (2) assisting shareholders in
initiating and changing account designations and addresses; (3) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, assisting in processing purchase and redemption
transactions and receiving wired funds; (4) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (5) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (6) furnishing periodic statements and confirmations of
purchases and redemptions; (7) arranging for the transmission of proxy
statements, annual reports, prospectuses and other communications from the Trust
to it 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 Fund with
respect to assets invested in the Fund. FFC or any sub-transfer agent or other
processing agent may elect to credit against the fees payable to it by its
clients or customers all or a portion of any fee received from the Trust or from
FFC with respect to assets of those customers or clients invested in the Fund.
FFC, FAdS or sub-transfer agents or processing agents retained by FFC may be
financial institutions which sell Fund Shares to customers and in the case of
sub-transfer agents or processing agents, may also be affiliated persons of FFC
or FAdS.
For its services under the Transfer Agency Agreement, FFC
receives a fee at an annual rate $24,000 per year plus annual shareholder
account fees of $25.00 per shareholder account; such fees to be computed as of
the last business day of the prior month.
FUND ACCOUNTING
Forum Accounting Services, LLC ("FAcS") performs portfolio
accounting services for the Fund under a Fund Accounting Agreement with the
Trust. The Fund Accounting Agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board of Trustees
or by a vote of the shareholders of the Trust and in either case by a majority
of the trustees who are not parties to the Fund Accounting Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Fund Accounting Agreement. Under its agreement, FAcS prepares and
maintains books and records of the Fund on behalf of the Trust as required under
the Investment Company Act, calculates the net asset value per share of the Fund
and dividends and capital-gain distributions and prepares periodic reports to
shareholders and the Securities and Exchange Commission. For the services
provided under the Fund Accounting Agreement, FAcS is entitled to receive from
the Trust with respect to the Fund a fee of $36,000 per year plus an additional
$12,000 per year in fiscal years after the Fund's first two years of operations.
4. DETERMINATION OF NET ASSET VALUE
The Trust determines the Fund's net asset value per share as
of the close of the New York Stock Exchange (normally, 4:00 p.m., Eastern time),
on Business Days (as defined in Part I), by dividing the value of the Fund's net
assets (i.e., the value of its securities and other assets less its liabilities,
including expenses payable or accrued) by the number of shares outstanding at
the time the determination is made. The Trust does not determine net asset value
on the following
18
<PAGE>
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
Securities listed or traded on United States or foreign
securities exchanges are valued at the last quoted sales prices on such
exchanges prior to the time when assets are valued. Securities listed or traded
on certain foreign exchanges whose operations are similar to the United States
over-the-counter market are valued at the price within the limits of the latest
available current bid and asked prices deemed best to reflect market value.
Listed securities that are not traded on a particular day, and securities
regularly traded in the over-the-counter market, are valued at the price within
the limits of the latest available current bid and asked prices deemed best to
reflect market value. In instances where market quotations are not readily
available, the security is valued in a manner intended to reflect its fair
value. All other securities and assets are valued in a manner determined to
reflect their fair value. For purposes of determining the Fund's net asset value
per share, all assets and liabilities initially expressed in foreign currencies
will be converted into United States dollars at the mean of the bid and asked
prices of such currencies against the United States dollar last quoted by any
major bank.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well before the
close of business of each Fund Business Day in New York. In addition, European
or Far Eastern securities trading generally or in a particular country or
countries may not take place on all Business Days in New York. Furthermore,
trading takes place in Japanese markets on certain Saturdays and in various
foreign markets on days which are not Fund Business Days in New York and on
which the Fund's net asset value is not calculated. Calculation of the net asset
value per share of the Fund does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used in
such calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of the New York Stock
Exchange, Inc. will not be reflected in the Fund's calculation of net asset
value unless it is deemed that the particular event would materially affect net
asset value, in which case an adjustment will be made.
5. PORTFOLIO TRANSACTIONS
The Fund generally effects purchases and sales through brokers
who charge commissions. Allocations of transactions to brokers and dealers and
the frequency of transactions are determined by the Adviser in its best judgment
and in a manner deemed to be in the best interest of shareholders of the Fund
rather than by any formula. The primary consideration is prompt execution of
orders in an effective manner and at the most favorable price available to the
Fund.
Transactions on stock exchanges involve the payment of
brokerage commissions. In transactions on stock exchanges in the United States,
these commissions are negotiated, whereas on foreign stock exchanges these
commissions are generally fixed. In the case of securities traded in the foreign
and domestic over-the-counter markets, there is generally no stated commission,
but the price usually includes an undisclosed commission or markup. In
underwritten offerings, the price includes a disclosed fixed commission or
discount. Where transactions are executed in the over-the-counter market, the
Fund will seek to deal with the primary market makers; but when necessary in
order to obtain best execution, it will utilize the services of others. In all
cases the Fund will attempt to negotiate best execution.
The Fund may not always pay the lowest commission or spread
available. Rather, in determining the amount of commission, including certain
dealer spreads, paid in connection with Fund transactions, the Adviser takes
into account such factors as size of the order, difficulty of execution,
efficiency of the executing broker's facilities (including the services
described below) and any risk assumed by the executing broker. The Adviser may
also take into account payments made by brokers effecting transactions for the
Fund: (1) to the Fund, or (2) to other persons on behalf of the Fund for
services provided to it for which it would be obligated to pay.
In addition, the Adviser may give consideration to research
services furnished by brokers to the Adviser for its use and may cause the Fund
to pay these brokers a higher amount of commission than may be charged by other
brokers. Such research and analysis may be used by the Adviser in connection
with services to clients other than the Fund, and the Adviser's fee is not
reduced by reason of the Adviser's receipt of the research services.
Investment decisions for the Fund are made independently from
those for any other account or investment company that is or may in the future
become managed by the Adviser or its affiliates. If, however, the Fund and other
19
<PAGE>
investment companies or accounts managed by the Adviser are contemporaneously
engaged in the purchase or sale of the same security, the transactions may be
averaged as to price and allocated equitably to each account. In some cases,
this policy might adversely affect the price paid or received by the Fund or the
size of the position obtainable for the Fund. In addition, when purchases or
sales of the same security for the Fund and for other investment companies and
accounts managed by the Adviser occur contemporaneously, the purchase or sale
orders may be aggregated in order to obtain any price advantages available to
large denomination purchases or sales.
The Fund contemplates that, consistent with the policy of
obtaining best net results, brokerage transactions may be conducted through the
Adviser's affiliates, affiliates of those persons or FFSI. The Advisory
Agreement authorizes the Adviser to so execute trades. The Board of Trustees has
adopted procedures in conformity with applicable rules under the Investment
Company Act to ensure that all brokerage commissions paid to these persons are
reasonable and fair.
6. CUSTODIAN
Under a Custodian Agreement (the "Custodian Agreement"), BankBoston acts as
the custodian of the Fund's assets. The custodian's responsibilities include
safeguarding and controlling the Fund's cash and securities, determining income
and collecting interest on Fund investments. The Fund's custodian employs
foreign subcustodians to provide custody of the Fund's foreign assets in
accordance with applicable regulations.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by FFSI at
net asset value without any sales charge. Redemption proceeds normally are paid
in cash. However, payments may be made wholly or partly in portfolio securities
if the Board of Trustees determines economic conditions exist which would make
payment in cash detrimental to the best interests of the Fund. If payment for
shares redeemed is made wholly or partly in portfolio securities, brokerage
costs may be incurred by the shareholder in converting the securities to cash.
The Trust has filed an election with the SEC to which the Fund may only effect a
redemption in portfolio securities if the particular shareholder is redeeming
more than $250,000 or 1% of the Fund's total net assets, whichever is less,
during any 90-day period.
In addition to the situations described in the Part I under
"Purchases and Redemptions of Shares," the Trust may redeem shares involuntarily
to reimburse the Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to the Fund's shares as provided in the Fund's
Prospectus from time to time.
Shareholders' rights of redemption may not be suspended,
except: (1) for any period during which the New York Stock Exchange, Inc. is
closed (other than customary weekend and holiday closings) or during which the
SEC determines that trading thereon is restricted; (2) for any period during
which an emergency (as determined by the SEC) exists as a result of which
disposal by the Fund of its securities is not reasonably practicable or as a
result of which it is not reasonably practicable for the Fund fairly to
determine the value of its net assets; or (3) for such other period as the SEC
may by order permit for the protection of the shareholders of the Fund.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Fund to
exchange their shares for Investor Shares of Daily Assets Government Fund
(formerly Daily Assets Treasury Fund), a money market fund of the Trust
("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 the other Participating Fund in the
name of the shareholder.
20
<PAGE>
Exchange transactions are made on the basis of relative net
asset values per share at the time of the exchange transaction. Shares of either
Participating Fund may be redeemed and the proceeds used to purchase, without a
sales charge, shares of the 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.
8. TAX MATTERS
FOREIGN INCOME TAXES
Investment income received by the Fund from sources within
foreign countries may be subject to foreign income taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which entitle the Fund to a reduced rate of such taxes or exemption from taxes
on such income. It is impossible to know the effective rate of foreign tax in
advance since the amount of the Fund's assets to be invested within various
countries cannot be determined.
U.S. FEDERAL INCOME TAXES
The Fund intends for each taxable year to qualify for tax
treatment as a "regulated investment company" under the Code. Such qualification
does not, of course, involve governmental supervision of management or
investment practices or policies. Investors should consult their own counsel for
a complete understanding of the requirements the Fund must meet to qualify for
such treatment.
Income received by the Fund from sources within various
foreign countries may be subject to foreign income tax. If more than 50% of the
value of the Fund's total assets at the close of its taxable year consists of
the stock or securities of foreign corporations, the Fund may elect to "pass
through" to the Fund's shareholders the amount of foreign income taxes paid by
the Fund. Pursuant to that election, shareholders would be required: (1) to
include in gross income, even though not actually received, their respective
pro-rata share of foreign taxes paid by the Fund; and (2) either to deduct their
pro-rata share of foreign taxes in computing their taxable income, or, subject
to certain limitations, to use it as a foreign tax credit against federal income
taxes (but not both). No deduction for foreign taxes could be claimed by a
shareholder who does not itemize deductions.
The Fund may or may not meet the requirements of the Code to
"pass through" to its shareholders foreign income taxes paid. Each shareholder
will be notified after the close of each taxable year of the Fund whether the
foreign taxes paid by the Fund will "pass through" for that year, and, if so,
the amount of each shareholder's pro-rata share (by country) of (1) the foreign
taxes paid, and (2) the Fund's gross income from foreign sources. Shareholders
who are not liable for federal income taxes, such as retirement plans qualified
under Section 401 of the Code, will not be affected by any "pass through" of
foreign taxes.
For federal income tax purposes, gains or losses attributable
to fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or ordinary
loss. Similarly, gains or losses from the disposition of: (1) foreign
currencies; (2) debt securities denominated in a foreign currency; or (3) a
forward contract denominated in a foreign currency, which are attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the assets and the date of disposition also are treated as
ordinary gain or loss.
The use of certain hedging strategies such as writing and
purchasing options, futures contracts and options on futures contracts and
entering into foreign currency forward contracts and other foreign instruments,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of income received by the Fund in connection
therewith.
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Dividends out of net ordinary income and distributions of net
short-term capital gain are eligible, in the case of corporate shareholders, for
the dividends-received deduction, subject to proportionate reduction of the
amount eligible for deduction if the aggregate qualifying dividends received by
the Fund from domestic corporations in any year are less than 100% of its gross
income (excluding long-term capital gain from securities transactions). A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in the Fund more than 45 days during the 90 day period
beginning 45 days prior to the ex-dividend date. Furthermore, provisions of the
tax law disallow the dividends-received deduction to the extent a corporation's
investment in shares of the Fund is financed with indebtedness.
9. OTHER MATTERS
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of
beneficial interest of the Trust are passed upon by Seward & Kissel, 1200 G
Street, N.W., Washington, D.C. 20005.
Coopers & Lybrand, L.L.P., One Post Office Square, Boston, MA
02109, independent auditors, have been selected as auditors of the Trust.
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24,
1980 and assumed the name of Forum Funds, Inc. on March 16, 1987. On January 5,
1996, Forum Funds, Inc. was reorganized as a Delaware business trust. The Trust
has an unlimited number of authorized shares of beneficial interest. The Board
may, without shareholder approval, divide the authorized shares into an
unlimited number of separate portfolios or series (such as the Fund) and may in
the future divide portfolios or series into two or more classes of shares (such
as Investor and Institutional Shares). Currently the authorized shares of the
Trust are divided into 23 separate series. The Fund reserves the right to
reorganize as a separate registered investment company, as opposed to a series
of the Trust, without a shareholder vote. The Fund also reserves the right to
invest in a master-feeder or funds-of-funds structure without a shareholder
vote.
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 fund or class and other matters for which separate
class voting is appropriate under applicable law. Generally, shares will be
voted in the aggregate without reference to a particular portfolio or class,
except if the matter affects only one portfolio or class or voting by portfolio
or class is required by law, in which case shares will be voted separately by
portfolio or class, as appropriate. Delaware law does not require the Trust to
hold annual meetings of shareholders, and it is anticipated that shareholder
meetings will be held only when specifically required by federal or state law.
Shareholders (and Trustees) have available certain procedures for the removal of
Trustees. There are no conversion or preemptive rights in connection with shares
of the Trust. All shares when issued in accordance with the terms of the
offering will be fully paid and nonassessable. Shares are redeemable at net
asset value, at the option of the shareholders. A shareholder in 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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of May 5, l998, Forum Administrative Services, LLC owned
all the initial shares of the Fund. A shareholder owning 25% or more of the
shares of Fund may be deemed to be a controlling person of the Fund. By reason
of substantial holdings of shares, such a person may be able to require the
Trust to hold a shareholder meeting to vote on certain issues and may be able to
determine the outcome of any shareholder vote.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
- ---------------------------------
CORPORATE BONDS (INCLUDING CONVERTIBLE DEBT)
(A) MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible
debt issues, as follows:
Bonds that 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 that 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 that are rated "A" possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds that 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 that 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 that are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or maintenance of
other terms of the contract over any long period of time may be small.
Bonds that 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 that are rated "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds that 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 that Moody's
believes possess the strongest investment attributes are designated by the
symbols "Aa1", "A1", "Baa1", "Ba1", and "B1".
(B) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt
issues, as follows:
Bonds rated "AAA" have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
A-1
<PAGE>
Bonds rated "AA" have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated "A" have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated "BBB" are regarded as having an adequate capacity to pay interest
and repay principal. Whereas, they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Bonds rated "BB" have less near-term
vulnerability to default than other speculative issues. However, they face major
ongoing uncertainties or exposure to adverse business, financial, or economic
conditions that could lead to inadequate capacity to meet timely interest and
principal payments.
Bonds rated "B" have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated "CCC" have currently identifiable vulnerability to default and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
The "C" rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating "C" is reserved
for income bonds on which no interest is being paid.
Bonds are rated "D" when the issue is in payment default, or the obligor has
filed for bankruptcy. Bonds rated "D" are in payment default. The "D" rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will made during such grace period. The "D" rating
also is used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
Note: The ratings from "AA" to "CCC" may be modified by the addition of a plus
(+) or minus (-) sign to show the relative standing within the rating category.
PREFERRED STOCK (INCLUDING CONVERTIBLE PREFERRED STOCK)
(A) MOODY'S
Moody's rates preferred stock issues as follows:
An issue rated "aaa" is a top-quality preferred stock. This rating indicates
good asset protection and the least risk of dividend impairment among preferred
stock issues.
An issue rated "aa" is a high-grade preferred stock. This rating indicates that
there is a reasonable assurance that earnings and asset protection will remain
relatively well maintained in the foreseeable future.
An issue rated "a" is an upper-medium grade preferred stock. While risks are
judged to be somewhat greater than in the "aaa" and "aa" classification,
earnings and asset protection are, nevertheless, expected to be maintained at
adequate levels.
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An issue rated "baa" is a medium-grade preferred stock, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
An issue rated "ba" has speculative elements and its future cannot be considered
well assured. Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
An issue 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 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 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 rated "c" can be regarded as having extremely poor prospects of ever
attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
(B) STANDARD & POOR'S
Standard & Poor's rates preferred stock issues as follows:
"AAA" is the highest rating that is assigned by S&P to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock
obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas 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 stocks 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 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 currently making such payments.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from "AA" to "B" may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
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