PROXY STATEMENT/PROSPECTUS
May 8, 1998
FORUM FUNDS
Two Portland Square
Portland, Maine 04101
(207) 879-1900
This Proxy Statement/Prospectus is furnished to the limited
partners (the "Limited Partners") of Global Value Limited Partnership (the
"Partnership") in connection with the solicitation by Polaris Capital
Management, Inc. (the "General Partner") of the Limited Partners' written
consent to two proposals in connection with the proposed conversion of the
Partnership into a series of a registered open-end management investment
company.
The Partnership has entered into an Agreement and Plan of
Reorganization (the "Plan") with Forum Funds (the "Trust"), a registered
open-end management investment company. In accordance with the Plan, the Trust
has established Polaris Global Value Fund (the "Fund") as a newly-created
separate series of the Trust. The investment objective of the Fund is to seek
capital appreciation. The Fund seeks its investment objective by investing
primarily in a diversified portfolio of equity securities of issuers worldwide.
The investment objectives and policies of the Fund are substantially similar to
those of the Partnership.
Pursuant to the Plan, substantially all of the Partnership's
assets will be transferred to the Fund in exchange for shares of beneficial
interest of the Fund (the "Exchange"). Immediately after the Exchange, those
shares of beneficial interest will be distributed to the General Partner and the
Limited Partners of record as of the business day immediately preceding the
consummation of the Exchange that have not made a complete withdrawal on that
day. Those shares of beneficial interest will be distributed to those partners
("Participating Partners") in proportion to their positive capital accounts (the
"Share Distribution"), followed as soon as practicable by the dissolution,
liquidation and termination of the Partnership (the "Liquidation"). Together,
the Exchange, the Share Distribution and the Liquidation are referred to herein
as the "Conversion."
You are being asked to give your consent to two matters with
respect to the Conversion. Proposal 1 is to make certain amendments (the
"Amendments") to the Partnership's current Partnership Agreement (the
"Partnership Agreement") expressly authorizing the General Partner, subject to
Limited Partner approval, to effectuate the transactions comprising the
Conversion and, to the extent required by applicable law, to permit certain
dissenting Limited Partners to withdraw their Partnership interests. Proposal 2
is to approve the Conversion pursuant to the Partnership Agreement as amended by
Proposal 1 (the "New Partnership Agreement"). The General Partner intends to
give its written consent to the Conversion. Unless both proposals are approved,
the Conversion may not occur. In that event, the Fund's Board of Trustees and
the General Partner will determine what course of action should be taken.
The General Partner believes the Conversion is in the best
interests of the Limited Partners. As shareholders of an open-end management
investment company, former Limited Partners will have increased flexibility and
liquidity due to their ability to redeem shares of beneficial interest each
business day and to purchase additional shares daily and in smaller amounts.
They will also receive simplified tax reports (Form 1099s for dividends rather
than Schedule K-1s).
A consent form that requests your vote on each of the two
proposals is enclosed with this mailing. After carefully reviewing the Proxy
Statement/Prospectus and considering the effects of the proposed Conversion,
please complete and return the consent form in the enclosed postage-paid return
envelope. If your consent form or a suitable alternative written instrument is
not received by the Partnership prior to May 29, 1998, you will be treated as
not having consented to both the Amendments and the Conversion. If the
Amendments and the Conversion are approved, you will, at the discretion of the
General Partner, either be treated as a Participating Partner or be permitted to
make a complete withdrawal from the Partnership on the business day immediately
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preceding the Exchange. It is anticipated that the General Partner will permit
such complete withdrawals only when required by applicable law. If you will be
permitted to make such a withdrawal, you will be notified within a reasonable
time after submitting your consent form. Please see "ERISA Considerations" for
additional discussion of this choice.
The Partnership and the Fund (the "Parties" and each, a
"Party") will pay their own costs in connection with the Conversion.
This Proxy Statement/Prospectus sets forth concisely
information about the Fund and the Conversion that Limited Partners should
consider carefully in deciding whether to approve the Conversion and the
Amendments. This Proxy Statement/Prospectus should be retained for future
reference. Additional information about the Fund and the Conversion has been
filed with the Securities and Exchange Commission as a separate statement of
additional information dated May 8, 1998 (the "Statement") and is incorporated
by reference in this Proxy Statement/Prospectus. The Statement can be obtained
without charge by calling or writing to: Forum Financial Corporation, Two
Portland Square, Portland, ME 04101, (888) 263-5594.
In addition, the Partnership can be reached by calling or
writing to: Global Value Limited Partnership, Polaris Capital Management, Inc.,
General Partner, 125 Summer Street, 14th Floor, Boston, MA 02110, (617)
951-1365.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Page
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SYNOPSIS
RISK FACTORS
GENERAL INFORMATION ABOUT THE PARTNERSHIP AND THE FUND
THE CONVERSION
THE PROPOSALS
SECURITIES TO BE ISSUED
ADVANTAGES TO FUND SHAREHOLDERS
FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION
ERISA CONSIDERATIONS
COMPARISON OF THE PARTNERSHIP TO THE FUND
CAPITALIZATION
FINANCIAL INFORMATION
ADVISORY FEES AND OTHER EXPENSES
EXPENSES OF THE CONVERSION
VOTING INFORMATION
INTEREST OF MR. KEFFER
LEGAL MATTERS RELATING TO THE CONVERSION
FINANCIAL STATEMENTS
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SYNOPSIS
The following Synopsis is qualified by reference to the more
detailed information contained elsewhere in this Proxy Statement/Prospectus or
attached as an appendix.
THE CONVERSION. Polaris Capital Management, Inc. (the
"General Partner"), as the general partner of Global Value Limited Partnership
(the "Partnership"), proposes to convert the Partnership into mutual fund form.
Assuming the approval of the limited partners of the Partnership (the "Limited
Partners"), the conversion of the Partnership will be accomplished by a transfer
of substantially all of the Partnership assets to a newly-created series of a
registered open-end management investment company, Polaris Global Value Fund
(the "Fund"), in exchange for shares of the Fund (the "Exchange"). Immediately
following the Exchange, the Partnership will distribute those shares to the
General Partner and those Limited Partners that are partners of record on the
Valuation Date (defined below) and have not withdrawn their Partnership interest
in lieu of participating in the Conversion (together, the "Participating
Partners") in proportion to their positive capital accounts. That distribution
(the "Share Distribution") will be followed as soon as practicable by the
dissolution, termination and liquidation of the Partnership (the "Liquidation").
Throughout this Proxy Statement/Prospectus, the transactions consisting of the
Exchange, the Share Distribution and the Liquidation are referred to as the
"Conversion." See "The Conversion."
THE PROPOSALS. In order to effectuate the Conversion, the
General Partner is soliciting the Limited Partners' written consent to two
proposals: Proposal 1 is to make certain amendments to the Partnership's current
Partnership Agreement (defined below) expressly authorizing the General Partner,
subject to Limited Partner approval, to effectuate the transactions comprising
the Conversion and, to the extent required by applicable law, to permit
dissenting Limited Partners to withdraw their Partnership interests. Proposal 2
is to approve the Conversion pursuant to the Partnership Agreement as amended by
Proposal 1 (the "New Partnership Agreement"). Unless both proposals are
approved, the Conversion may not occur. In that event, the Fund's Board of
Trustees and the General Partner will determine what course of action should be
taken.
THE FUND AND THE TRUST. The Fund is a series of Forum Funds
(the "Trust"), an open-end management investment company organized as a Delaware
business trust. Currently, there are 23 separate series of the Trust. The shares
of beneficial interest of the Fund are referred to herein as the "Shares."
TAX MATTERS. The Fund intends to elect and qualify annually
as a "regulated investment company" for federal income tax purposes. As such,
the Fund generally can avoid federal income taxation at the Fund level to the
extent that it distributes its earnings to its shareholders ("Shareholders" and
each, a "Shareholder") as a dividend. Moreover, the Exchange should be tax-free
to the Partnership and the Fund (the "Parties" and each, a "Party"). See
"Federal Income Tax Consequences of the Conversion," and "Comparison of the
Partnership to the Fund - Federal Income Tax Status."
ADVISORY FEES. Although the Fund's advisory fees will not
exceed those of the Partnership, other fees and expenses paid by the Fund
initially will be higher than those currently paid by the Partnership.
See "Advisory Fees and Other Expenses."
ADVANTAGES. The General Partner believes the Conversion is
in the best interests of the Limited Partners. The primary advantages of
converting the Partnership into a series of a registered investment company
include: increased flexibility and liquidity due to the ability to redeem daily
rather than quarterly, the lack of redemption fees, the ability to purchase
Shares daily, the reduced minimum purchase amounts, and the ability to exchange
Shares for shares in a money market fund that is also a series of the Trust;
simplified tax reporting and investor accounting associated with mutual funds;
and, if the Fund attracts a substantial amount of assets from new investors, the
possible realization by the Fund of economies of scale due to a larger asset
base. See "Advantages to Fund Shareholders."
DIFFERENCES. The Limited Partners should read carefully the
parts of this Proxy Statement/Prospectus that compare the Fund and the
Partnership and should carefully consider differences between
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the Fund and the Partnership in deciding whether or not to approve the
Conversion and the Amendments. In particular, Limited Partners should consider
differences between the Partnership and the Fund as to minimum investments, how
often redemptions are permitted, the fees or anticipated fees, the rights of
holders of interests in the entity and investment policies regarding
diversification, concentration of investments in an industry, borrowing and
leverage. For descriptions of the differences between the Fund and the
Partnership, see "Synopsis - Comparison of Investment Objectives and Policies,"
"- Comparison of Distribution and Purchase Procedures" and "- Comparison of
Redemption and Exchange Procedures" and "Comparison of the Partnership to the
Fund."
TIMING. The Partnership and the Trust intend to consummate the Exchange on
or about June 1, 1998. The Exchange could, however, be delayed for regulatory or
other reasons.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES. The
Partnership seeks capital appreciation and seeks to achieve its investment
objective through highly speculative investments in a portfolio of equity
securities of issuers worldwide, including without limitation active trading in
such securities on the basis of both long and short positions, covering short
sales, purchasing and writing options, and trading on margin by borrowing and
placing securities as collateral. In the past, the Partnership's portfolio
turnover has averaged between 20 and 40 percent each year and the General
Partner believes this practice would continue for the Partnership. The Fund also
will seek capital appreciation and will seek to achieve this investment
objective by investing primarily in a diversified portfolio of equity securities
of issuers worldwide. The General Partner, as investment adviser to both the
Partnership and the Fund, intends to apply substantially the same basic
investment strategy to the Fund as is applied on behalf of the Partnership.
There are, however, certain differences between an investment in the Partnership
and an investment in the Fund. See "Risk Factors."
COMPARISON OF DISTRIBUTION AND PURCHASE PROCEDURES.
Interests in the Partnership ("Partnership Interests") are offered only to
certain qualified investors and generally in minimum subscription amounts of
$100,000. Partnership Interests are purchased directly from the Partnership and
only upon the General Partner's approval. Shares, in contrast, will be offered
to the general public with a minimum initial investment of $2,500. Shares will
be available for purchase by an investor either directly or through certain
brokers and financial institutions (of which the investor is a customer) on any
day when the New York Stock Exchange is open (a "Business Day"). See "Comparison
of the Partnership to the Fund -- Purchases and Redemptions."
COMPARISON OF REDEMPTION AND EXCHANGE PROCEDURES. A Limited
Partner may withdraw all or part of its Partnership capital account, as of the
last day of any fiscal quarter, upon proper notice to the Partnership and
subject to a withdrawal charge, which may be waived at the discretion of the
General Partner, of 1/2 of 1% of the amount withdrawn. The Fund, in contrast,
will redeem Shares at their net asset value next-determined after receipt of a
redemption order in proper form on any Business Day. There will be no redemption
charge, no minimum period of investment, and no limit on the frequency of
redemptions. Normally, redemption proceeds will be paid immediately and, in any
event, within seven days, following receipt of a redemption order by the Fund's
transfer agent. Limited Partners do not have exchange privileges associated with
their Partnership Interests. In contrast, Shareholders will be able to exchange
their Shares for shares of Daily Assets Treasury Fund (to be renamed Daily
Assets Government Fund effective May 25, 1998), a series of the Trust that is a
money market fund. See "Comparison of the Partnership to the Fund - Purchases
and Redemptions" and "Advisory Fees and Other Expenses."
RISK FACTORS
There is no guarantee that the Partnership will achieve its
investment objective, and the value of the Partnership Interests will fluctuate
based upon changes in the value of the Partnership's portfolio securities.
Similarly, 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. Accordingly, investing in the Partnership
or the Fund presents investment risks.
Because the basic investment strategy of the Fund is
substantially the same as that of the Partnership, an investment in the Fund
involves investment risks that are similar to those associated with an
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investment in the Partnership. The risks are not, however, identical. This
section briefly describes those risks for the Fund and the Partnership.
The Fund will invest in a diversified portfolio of the
securities of foreign issuers, including issuers located in countries with
emerging capital markets. Investing in those securities entails certain risks
not associated with investing in domestic securities, such as exchange-rate
fluctuations, political or economic instability of the foreign country, exchange
controls, price volatility, arbitrage due to the intervals between the times at
which certain foreign portfolio securities are priced and the net asset value of
a Share is calculated ("Arbitrage Risk"), and lack of liquidity. See "Part I -
Investment Objective, Policies and Risks - Foreign Securities" in Appendix A,
which contains additional information about the Fund. The Fund also may use
leverage, which involves special risks and may involve speculative investment
techniques. See "Part I-Additional Investment Policies - Techniques Involving
Leverage" in Appendix A. In addition, the futures and options strategies in
which the Fund may engage involve certain risks. See "Part I - Additional
Investment Policies - Futures and Options" in Appendix A. Additional risks of an
investment in the Fund are described under "Part I - Investment Objective,
Policies and Risks" and under "Part II - Investment Policies and Limitations" in
Appendix A. The Fund is not intended to provide a complete or balanced
investment program for all investors.
The Partnership may invest in any of the securities in which
the Fund may invest and may employ any of the investment techniques that may be
employed by the Fund: the Partnership invests in the securities of foreign
issuers, it may use leverage and it may engage in futures and options
transactions. Although the Partnership invests principally in equity securities,
it, like the Fund, may also invest in other securities, including equity
equivalents, warrants, convertible and debt securities, options, and foreign
currency forward contracts. Limitations with respect to each of those
investments and investment techniques (and accordingly the associated risks) may
differ between the Partnership and the Fund. The General Partner currently does
not use foreign currency hedging strategies with respect to the Partnership. The
General Partner does not anticipate using foreign currency hedging strategies
with respect to the Fund, although the Fund reserves the right to engage in
these strategies in the future if warranted by market conditions. Specific
investment limitations are discussed below. See "Comparison of the Partnership
to the Fund - Investment Restrictions."
Because the Partnership does not redeem Shares daily, it
does not face the same Arbitrage Risk as that faced by the Fund.
The Fund, which is registered under the Investment Company
Act of 1940, as amended, (the "1940 Act") is subject to certain investment
restrictions and other protections that are required by applicable laws and
regulations and intended to reduce risks for investors. The Partnership, unlike
the Fund, is not registered under the 1940 Act in reliance on an exception
provided by Section 3(c)(1) of the Act. Moreover, the Partnership Interests are
not registered under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) and Regulation D thereunder. Consequently,
the Partnership as a whole is subject to less federal and state regulation and
supervision than the Fund. Although the investment restrictions and other
protections applicable to the Fund may protect investors, they may also prevent
the Fund from pursuing investment opportunities that would be available to the
Partnership.
The General Partner will serve as investment adviser to the
Fund. Although the General Partner has experience in managing pooled
investments, the General Partner does not have prior experience in managing
mutual funds.
The Partnership Interests are less liquid than the Shares.
The Fund's shares will be redeemable on any Business Day at their
next-determined net asset value after receipt of a redemption order in proper
form. The Partnership Interests are not registered under the Securities Act and
are not transferable. Accordingly, no secondary market exists for them. In
addition, a Limited Partner generally may make a partial or full withdrawal from
its capital account only as of the last Business Day of any fiscal quarter and
upon proper notice. Moreover, the General Partner may, in its discretion, make
such a distribution in cash or in portfolio securities of the Partnership. See
"Comparison of the Partnership to the Fund."
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In general, due to the additional regulations that apply to
a registered open-end management investment company, its administrative costs
and related expenses will be higher than those of a private limited partnership
of comparable size. Accordingly, the Fund's administrative costs and related
expenses upon completion of the Conversion will be higher than those currently
incurred by the Partnership. See "Advisory Fees and Other Expenses."
The Conversion could cause taxable Partners that are not calendar year
taxpayers to pay taxes on Partnership income before those taxes otherwise would
have become due. See "Federal Income Tax Consequences of the Conversion."
GENERAL INFORMATION ABOUT THE PARTNERSHIP AND THE FUND
The Partnership is a Massachusetts limited partnership that
commenced operations on July 31, 1989. Partnership Interests generally are
offered in initial subscription amounts of $100,000 and only to certain
qualified investors. Additional capital contributions generally may be made in
minimum amounts of $25,000.
The Trust is an open-end management investment company registered under the
1940 Act. The Trust commenced operations on March 24, 1980 as a Maryland
corporation and was reorganized as a Delaware business trust on January 5, 1996.
The Trust has an unlimited number of authorized Shares. Currently, those Shares
are divided into 23 separate series. See "Securities To Be Issued."
Additional information about the Fund and the Conversion has
been filed with the Securities and Exchange Commission as a separate statement
of additional information dated May 8, 1998 (the "Statement") and is
incorporated by reference in this Proxy Statement/Prospectus. The Statement can
be obtained without charge by calling or writing to: Forum Financial
Corporation, Two Portland Square, Portland, ME 04101, (888) 263-5594.
The Trust is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and the
1940 Act, and in accordance therewith files reports and other information with
the Securities and Exchange Commission. Proxy material, reports, proxy and
information statements and other information filed by the Trust can be inspected
and copied at the public reference facilities maintained by the Commission in
Washington, D.C., and at certain of its Regional Offices. Those Regional Offices
include: (i) Northeast Region Office, 7 World Trade Center, suite 1300, New
York, NY 10048; (ii) Southeast Region Office, 1401 Brickell Avenue, suite 200,
Miami, FL 33131; (iii) Midwest Region Office, 500 West Madison Street, suite
1400, Chicago, IL 60661; (iv) Central Region Office, 1801 California Street,
suite 4800, Denver, CO 80202; and (v) Pacific Region Office, 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, CA 90036. In addition, for a prescribed fee,
copies of such materials can be obtained from the Public Reference Branch,
Office of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C.
20549.
THE CONVERSION
The Conversion will take place pursuant to an Agreement and
Plan of Reorganization (the "Plan"). The following summary of the important
terms of the Plan is qualified by reference to the Plan, a copy of which is
attached to this Proxy Statement/Prospectus as Appendix B.
The Plan provides that the Partnership will transfer
substantially all of its assets to the Fund in exchange solely for over 80% of
the Shares (no par value per Share) of the Fund. Immediately thereafter, the
Shares will be tranferred to the Participating Partners, in the Share
Distribution, in proportion to their positive capital accounts as described
below. The Partnership will then be dissolved, liquidated and terminated as soon
as practicable after the Share Distribution.
The Partnership's assets will be valued at the close of
regular trading on the New York Stock Exchange on the Business Day immediately
preceding the consummation of the Exchange and after payment of any
distributions or other amounts (such time and date, the "Valuation Date"). The
Shares distributed to the Participating Partners will have an aggregate net
asset value equal to the aggregate net asset value of the assets
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transferred to the Fund in the Exchange. The number (or fraction thereof) of
Shares each Participating Partner will receive will be based upon that Partner's
proportionate interest in the Partnership's net assets on the Valuation Date. In
other words, for each Participating Partner, the number of Shares received will
be calculated, as of the Valuation Date, by dividing the amount of the Partner's
positive capital account by the sum of all of the other Participating Partners'
capital accounts, and multiplying that quotient by the total number of Shares
received by the Partnership in the Exchange.
In addition to approval by the Partners, as described below
in "The Proposals," certain other conditions must be satisfied before the
Exchange will be consummated, including the rendering by counsel to the
Partnership of an opinion with respect to the tax consequences of the Exchange
to the Partnership and to the Fund. Such opinion will be based upon certain
facts, assumptions and representations from the Parties.
The General Partner and the Trust propose to consummate the
Exchange on or about June 1, 1998. The Exchange could, however, be delayed for
regulatory or other reasons.
Before the Exchange, the Fund will have issued a nominal
number of Shares to Forum Administrative Services, LLC ("FAS"), the Fund's
sponsor, which will vote those Shares for the approval of the Investment
Advisory Agreement between the Fund and the General Partner, appointing the
General Partner as the Fund's investment adviser effective immediately after
consummation of the Exchange.
Upon consummation of the Exchange and the Share
Distribution, the only shareholders of the Fund will be FAS and the
Participating Partners. As soon as is practicable thereafter, additional Shares
will be available for purchase and redemption by Limited Partners as well as by
other investors. Limited Partners that do not want to remain invested in the
Fund will be able to redeem their Shares beginning on the Business Day next
following the Exchange, in the same manner as any other Shareholder pursuant to
the redemption procedures set forth in Appendix A. See "Part I - Comparison of
the Partnership to the Fund - Purchases and Redemptions."
THE PROPOSALS
In order the effectuate the Conversion, the General Partner
is soliciting the Limited Partners' written consent to two related proposals, as
described below.
PROPOSAL 1: AMENDMENTS TO THE PARTNERSHIP AGREEMENT. The
Global Value Limited Partnership Amended and Restated Agreement of Limited
Partnership dated as of January 1, 1996 (the "Current Partnership Agreement")
does not expressly contemplate a conversion of the Partnership into a registered
investment company. Proposal 1 is to make certain amendments to the Current
Partnership Agreement expressly authorizing the General Partner, subject to
Limited Partner approval, to effectuate the transactions comprising the
Conversion and, to the extent required by applicable law, to permit dissenting
Limited Partners to make a complete withdrawal prior to the Exchange (the
"Amendments"). Section 3.1 ("Management and Control") of the Partnership
Agreement, which expressly authorizes the General Partner to perform certain
acts on behalf of the Partnership, is proposed to be amended to expressly
authorize the General Partner to effectuate the conversion by re-designating
Subsection 3.1(i) in the Partnership Agreement as Subsection "3.1(k)" and adding
a new Subsection 3.1(i) as follows:
(i) to convert the Partnership into a registered open-end management
investment company (a "Fund") by transferring substantially all of the assets of
the Partnership to a Fund in exchange for shares of beneficial interest in that
Fund, distributing those Fund shares to the Partners of record as of the date of
that exchange pro rata in proportion to their positive capital accounts, and
then dissolving and terminating the Partnership pursuant to Article 14, all upon
the vote of such Limited Partners as specified in Section 14.2; and
Section 3.1 ("Management and Control") is proposed to be
amended, further, by adding a new Subsection 3.1(j) as follows:
(j) to permit a Partner to make a complete withdrawal
immediately prior to a conversion (an "extraordinary withdrawal") pursuant to
Section 3.1(i) if a Partner makes such an extraordinary withdrawal request and
the General Partner determines that such a withdrawal is required by applicable
law or is in the best interests of the Partnership; and
Section 8.1 ("General Partner May Authorize Distributions")
is proposed to be amended by revising the first sentence of that section (the
bold language is new) as follows:
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8.1 GENERAL PARTNER MAY AUTHORIZE DISTRIBUTIONS. The amount
of any distribution to be made to the Partners, EXCEPT DISTRIBUTIONS MADE
PURSUANT TO SECTIONS 3.1(I) OR (J), shall be determined in the sole discretion
of the General Partner within 90 days after the close of each Fiscal Year.
Section 8.3 ("Payment of Distributions") is proposed to be
amended by revising the first sentence of that section (the bold language is
new) as follows:
8.3 PAYMENT OF DISTRIBUTIONS. Distributions, if any, other
than distributions upon termination and winding up of the Partnership shall be
made in the same proportion as the allocations of profits and losses of the
Partnership pursuant to Section 7.3 and, EXCEPT FOR DISTRIBUTIONS MADE PURSUANT
TO SECTIONS 3.1(I) OR (J), shall be paid to one or more Partners within 90 days
after the close of the Fiscal Year.
The Current Partnership Agreement may be amended by the
General Partner with the written consent of the Limited Partners holding at
least two-thirds of the amount of Partnership Interest at the most recent fiscal
quarter end. The General Partner is seeking the written consent of the Limited
Partners to make the Amendments, effective May 29, 1998.
PROPOSAL 2: APPROVAL OF THE CONVERSION. Assuming approval of
Proposal 1, the General Partner may, pursuant to the New Partnership Agreement,
effectuate the Conversion upon the written consent, as of the most recent fiscal
quarter end, of the General Partner and of the Limited Partners holding at least
two-thirds of the Partnership Interests in amount and constituting at least
two-thirds of the Limited Partners in number. Accordingly, the General Partner
is seeking the written consent of the Limited Partners for the Conversion, which
consists of the Exchange, the Share Distribution and the Liquidation. The
General Partner intends to give its written consent to the Conversion. Unless
both approvals are approved, the Conversion may not occur. In that event, the
Fund's Board of Trustees and the General Partner will determine what course of
action should be taken.
SECURITIES TO BE ISSUED
The Trust has an unlimited number of authorized shares of
beneficial interest. The Board of Trustees of the Trust may, without shareholder
approval, divide the authorized shares into an unlimited number of separate
portfolios or series ("Series") and may in the future divide the Series into two
or more classes of shares. The Fund is a newly created separate Series.
Currently, the authorized shares of the Trust are divided into 23 separate
Series (including the Fund).
Each share of each of the separate Series (including the
Fund) and each class of those shares, as applicable, has dividend, distribution,
liquidation and voting rights equal to other shares of the Trust and fractional
shares have those rights proportionately, except that expenses related to the
distribution of the shares of each Series or class (and certain other expenses
such as transfer agency and administration expenses) are borne solely by shares
of that Series or class, and other expenses in the future may be borne by those
shares.
Each Series (including the Fund) or class votes separately
with respect to matters for which separate series or class voting is required or
appropriate under applicable law. Generally, shares are voted in the aggregate
without reference to a particular Series or class. If the matter affects only
one Series or class or voting by Series or class is required by law, however,
shares will be voted separately by Series or class, as appropriate.
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Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that Shareholder meetings will
be held with respect to the Fund 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 the Shares. All Shares are fully paid and non-assessable. The Shares are
redeemable (at the net asset value per Share next-determined after receipt of a
redemption order in proper form) at the option of the Shareholders. A
Shareholder is entitled to a pro rata share of all dividends and distributions
arising from the Fund's assets and, upon redeeming Shares, receives the portion
of the Fund's net assets represented by those redeemed Shares. From time to
time, certain Shareholders may own a large percentage of Shares. Accordingly,
those Shareholders may be able to significantly affect (if not determine) the
outcome of a Shareholder vote.
ADVANTAGES TO FUND SHAREHOLDERS
Shares are more liquid than Partnership Interests and
investments in the Fund are more flexible than investments in the Partnership
for several reasons. First, Shares may be purchased on any Business Day without
a sales charge. Subscriptions for Partnership Interests, in contrast, require
the consent of the General Partner. Second, Shares may be redeemed on any
Business Day without a redemption fee. Partnership Interests, in contrast, may
be redeemed (by a Partner making a withdrawal from its positive capital account)
quarterly, upon proper advance notice to the Partnership, and with the potential
imposition of a withdrawal fee of 1/2 of 1% of the amount withdrawn. Third,
Shareholders will be able to shift investments between the Fund and another
Series of the Trust by exchanging their Shares for shares of Daily Assets
Treasury Fund (to be renamed "Daily Assets Government Fund," effective May 25,
1998) a Series that is a money market fund. See "Part I-Exchanges" in Appendix
A. Fourth, Shares are transferable and Partnership Interests are
nontransferable. Finally, although the Fund will initially incur expenses higher
than those currently incurred by the Partnership, the possibility exists that,
because the Fund will be publicly offered, per Share expenses lower than those
currently incurred by the Partnership may be achieved through economies of scale
if the Fund attracts a substantial amount of assets from new investors and the
Fund's fixed expenses are accordingly spread over a substantially larger number
of investors. The Partnership, however, is limited as to its ability to attract
assets from new investors because the Partnership may not have more than one
hundred investors.
In addition, the Form 1099 tax reporting forms that the Fund
will issue to its Shareholders are considerably more simple than the complex
Schedule K-1s issued by the Partnership. Furthermore, the 1099s will be issued
earlier in the year than the K-1s.
FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION
The Exchange is conditioned upon the receipt by the Parties
of an opinion by Dechert Price & Rhoads, counsel to the Partnership,
substantially to the effect that, based upon certain facts, assumptions, and
representations, the Exchange constitutes a tax free exchange to the Fund and
the Partnership for federal income tax purposes.
That opinion is not binding on the Internal Revenue Service
or the courts. Moreover, the conclusions reached in that opinion are based upon
current law and authorities, all of which are subject to change. Any such change
may be retroactive.
If any of the assets transferred by the Partnership to the
Fund in the Exchange are debt securities that were purchased by the Partnership
at a discount, such transfer could result in the recognition of income to the
Partnership in an amount equal to the accrued market discount on those
securities at the time of the Exchange. It is expected that none of the assets
transferred will be debt securities with accrued market discount and that if any
are, the amount of that accrued market discount will be minimal.
The Conversion should have the following income tax
consequences to Limited Partners that participate in the Exchange: (i) a Limited
Partner's basis for its Shares generally will be equal to the Limited
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<PAGE>
Partner's adjusted basis of its former Partnership Interest minus the amount of
cash, if any, received pursuant to the liquidation of its Partnership Interest
(Code Section 732(b)); (ii) a Limited Partner's holding period with respect to
its Shares generally will include the Partnership's holding period of such
Shares (Code Section 735(b)); and (iii) the distribution of the Shares from the
Partnership to a Limited Partner, which will be in liquidation of its
Partnership Interest, generally will not cause taxable gain or loss to be
recognized by the Limited Partner, although gain may be recognized if any cash
actually distributed or deemed to be distributed (a partner will be deemed to
have received a cash distribution equal to its allocable share of Partnership
liabilities assumed by the Fund) exceeds the Limited Partner's adjusted basis in
its Partnership Interest (Code Section 731(a)). The General Partner does not
expect that any Limited Partner will receive cash in excess of its basis in its
Partnership Interest.
Each Limited Partner must include in taxable income for its
tax year its share of Partnership income for any Partnership tax year that ends
with or within that Limited Partner's tax year. Consequently, because the
Partnership's current tax year will end when the Partnership terminates, if a
taxable Limited Partner is not a calendar year taxpayer, the Conversion could
cause such a Limited Partner to pay taxes on Partnership income sooner than it
otherwise would have paid those taxes.
The discussion contained herein is general in nature and is
not intended as tax advice. This discussion does not purport to be complete or
to deal with all aspects of federal income taxation that may be relevant to
specific taxpayers in light of their particular circumstances. Limited Partners
should consult their own tax advisers regarding the tax consequences of the
Exchange to them, including federal, state, local and, if applicable, foreign
tax consequences.
ERISA CONSIDERATIONS
Assets of the Partnership may be deemed to be "plan assets"
within the meaning of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Department of Labor rules promulgated thereunder. As a
result, the General Partner may be deemed to be a fiduciary under ERISA with
respect to Limited Partners that are employee benefit plans subject to ERISA or
section 4975 of the Code ("Qualified Plans").
Certain transactions involving plan assets are prohibited
under ERISA unless an exemption is available. Because the Conversion may be
viewed as such a prohibited transaction, the Conversion will be effected in
accordance with Prohibited Transaction Exemption 97-41 ("PTE 97-41"), issued by
the Pension and Welfare Benefits Administration, Department of Labor. PTE 97-41
provides an exemption for certain otherwise prohibited transactions, including a
transaction in which a Qualified Plan acquires shares of an open-end management
investment company (a "fund") through a transfer of assets from a pooled
investment vehicle, such as the Partnership, to a fund where the same entity
serves as the investment adviser to the transferor and transferee.
The exemption requires, among other things, (i) that the
assets be valued in accordance with Rule 17a-7 under the l940 Act, (ii) that
certain information and disclosure is provided to each Qualified Plan and (iii)
that an independent plan fiduciary for each Qualified Plan approves the
transaction. In addition, any Qualified Plan that does not approve the
transaction will be given the opportunity prior to the date of the transaction
to withdraw from the Partnership and to receive a payment of cash or its pro
rata share of the assets, as determined by the General Partner. This Proxy
Statement/Prospectus together with any lists identifying securities required to
be provided by Section II, paragraphs (e) (5) or (6) of PTE 97-41 (such lists to
be sent under separate cover) constitutes the advance written notice required to
be provided to fiduciaries of Qualified Plans. After the Conversion, fiduciaries
of Qualified Plans also will receive certain confirmation statements in
accordance with PTE 97-41. Each fiduciary of a Qualified Plan should consult its
legal adviser concerning the ERISA and other considerations discussed above
before voting on each of the Proposals.
COMPARISON OF THE PARTNERSHIP TO THE FUND
DISTRIBUTIONS. The General Partner has the sole authority to
determine whether the Partnership will make a distribution and if so, the amount
of that distribution and whether it will be in cash or in kind. Any such
11
<PAGE>
distribution will be paid within 90 days of the close of the Partnership's
fiscal year to which the distribution relates, and is payable to each Partner in
the same proportion as allocations of profits and losses.
In contrast to the Partnership, dividends representing the
net investment income of the Fund will be declared and paid at least annually.
In addition, any net capital gain realized by the Fund will be distributed
annually. Shareholders may choose either to have all distributions paid in cash,
to have all distributions reinvested in additional Shares, or to have dividends
of net investment income paid in cash and distributions of net capital gain
reinvested in additional Shares. All dividends and other distributions are
automatically reinvested in additional Shares unless a Shareholder elects
otherwise. See "Part I - Dividends and Tax Matters" in Appendix A.
Reinvested dividends of net income will be reinvested at the
Fund's net asset value per Share as of the last day of the period with respect
to which the dividends are paid. Reinvested distributions of net capital gain
will be reinvested at the net asset value per Share of the Fund on the payment
date for that distribution.
Fund dividends and distributions will be recognized by
Shareholders for federal income tax purposes regardless of whether those
dividends and distributions are reinvested. See "Part I - Dividends and Tax
Matters" in Appendix A.
PURCHASES AND REDEMPTIONS. As mentioned above, Partnership
Interests generally are offered in minimum initial subscription amounts of
$100,000 and additional capital contributions generally may be made in minimum
amounts of $25,000, although each minimum amount may be increased at the
discretion of the General Partner. In contrast, Shares will be available for
purchase with a minimum initial investment of $2,500 and additional investments
of at least $250, and will be available for purchase by an investor either
directly or through certain brokers and financial institutions of which the
investor is a customer. All transactions in the Shares will be effected through
a transfer agent, which will accept orders for purchases and redemptions from
Shareholders of record and from new investors. Shares will be available for
purchase without a sales charge at their net asset value next-determined after
receipt of a purchase order in proper form on any Business Day. Subscriptions
for the Partnership Interests, in contrast, can only be made upon the approval
of the General Partner.
A Limited Partner may withdraw all or any part of its
positive capital account in the Partnership as of the last day of any fiscal
quarter. Such a Limited Partner must give written notice to the Partnership at
least 30 days before the date of that fiscal quarter end. Payments for
withdrawals will be made by the Partnership no later than fifteen Business Days
after the effective date of the withdrawal and a fee may be imposed as described
below in "Advisory Fees and Other Expenses."
The Fund, in contrast, will redeem Shares at their net asset
value next-determined following receipt of a redemption order in proper form on
any Business Day. There is no redemption charge, no minimum period of
investment, and no limit on the frequency of redemptions. Normally, redemption
proceeds are paid immediately and, in any event, within seven days, following
receipt of a redemption order by the Fund's transfer agent. See "Part I -
Purchases and Redemptions of Shares" in Appendix A.
FEDERAL INCOME TAX STATUS. The Fund intends to qualify each
fiscal year to be taxed as a regulated investment company (a "RIC") under the
Internal Revenue Code of 1986, as amended (the "Code"). As a RIC, the Fund
generally 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.
Dividends paid by the Fund out of its net investment income
(including realized net short term capital gain) will be taxable to the
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
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<PAGE>
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
the 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 outside
the United States may be subject to foreign income or other taxes. Under certain
circumstances, Shareholders will be notified of their share of those 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.
The Fund will be 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.
The discussion contained herein is general in nature and is
not intended as tax advice. This discussion does not purport to be complete or
to deal with all aspects of federal income taxation that may be relevant to
specific taxpayers in light of their particular circumstances. Limited Partners
should consult their own tax advisers regarding the tax consequences of
investing in the Fund as compared to the Partnership.
For additional information regarding the federal income tax
consequences of an investment in the Fund, see "Part I - Dividends and Tax
Matters" and "Part II - Tax Matters" in Appendix A.
RIGHTS OF HOLDERS. The rights of Limited Partners in the
Partnership are determined by the Current Partnership Agreement and by the
Massachusetts Uniform Limited Partnership Act (the "Partnership Act"). The
General Partner is exclusively responsible for the management of the Partnership
and has full authority to manage the Partnership affairs within the framework
established by the Current Partnership Agreement and by the Partnership Act. In
general, the Limited Partners are not permitted to participate in the management
of the Partnership and they have very limited voting rights. For further details
regarding those rights, see the Current Partnership Agreement.
Limited Partners that participate in the Conversion will
become shareholders in the Fund, which is a Delaware business trust. As such,
they will have certain rights granted under the Trust's Declaration of Trust and
under Delaware law. See "Securities To Be Issued" above, and "Part I -
Management" in Appendix A. In addition, because the Trust is registered under
the 1940 Act, Shareholders will have certain rights granted under the federal
securities laws.
ADVISORY RELATIONSHIPS AND MANAGEMENT. The Conversion will
not substantially affect the day-to-day portfolio management of the
Partnership's assets because the General Partner serves as investment adviser to
the Partnership and will do so for the Fund. It is expected that the same
personnel who manage the Partnership investments will manage the Fund
investments. Moreover, the General Partner will employ a basic
13
<PAGE>
investment strategy on behalf of the Fund that is substantially the same as that
employed on behalf of the Partnership.
In terms of overall management, however, the Fund is
somewhat different from the Partnership in that the Fund is a Series of a
business trust that is a registered open-end management investment company.
Accordingly, key policy decisions affecting the Fund are made by the Fund's
Board of Trustees. For example, the Board, in its discretion, may terminate the
advisory contract with its investment adviser. See "Part II- Management" in
Appendix A. The Partnership, in contrast, is managed exclusively by the General
Partner. In addition, the Fund, as a registered open-end management investment
company, is subject to more federal regulations that may impact management than
the Partnership.
INVESTMENT RESTRICTIONS. Although the Fund will follow a
basic investment strategy that is substantially the same as that followed by the
Partnership, certain secondary investment techniques and certain investment
restrictions differ between the Partnership and the Fund.
In particular, the Fund, unlike the Partnership, 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 10% of the outstanding voting
securities of any single issuer. Additionally, the Fund, unlike the Partnership,
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 securities of issuers
conducting their principal business activities in the same industry. The Fund
may not invest more than 15% of its assets in illiquid securities, including
repurchase agreements and other securities not entitling the Fund to payment of
principal within seven days. The Fund may borrow money up to 33 1/3% of the
Fund's total assets. The Fund may engage in leveraged transactions, such as
reverse repurchase agreements, short sales, securities lending and the purchase
of securities on a when-issued or firm commitment basis, as long as the Fund
limits the risks associated with certain of these transactions by maintaining a
segregated account of cash and securities in accordance with Commission
guidelines.
In general, the Partnership has fewer investment
restrictions than the Fund, although with respect to a particular type of
portfolio security or investment technique, the Partnership may face narrower
limitations. The Partnership is not required to maintain a diversified portfolio
although it currently holds a diversified portfolio. The Partnership is not
limited to any specific dollar amount or percentage of the securities of a
single issuer except as limited by the terms of a particular offering. The
Partnership does not, however, invest more than 10% of the value of its net
assets in securities for which no public market exists at the time of the
investment. Additionally, although the Partnership may use leverage, it borrows
only to provide additional funds for portfolio investments to the extent that
those borrowings are outstanding for 90 or fewer days.
CAPITALIZATION
The following table shows (i) the capitalization each of the
Partnership and the Fund at December 31, 1997, the Partnership's most recent
fiscal year end, and (ii) the pro forma combined capitalization of the
Partnership and the Fund:
<TABLE>
<S> <C> <C> <C> <C>
Fund Pro Forma Pro Forma Pro Forma
Partnership Initial Net Combined Shares Fund
Net Assets Assets Net Assets Outstanding NAV/
(000's) (000's) (000's) (000's) Share
- ----------- ---------- ---------- ---------- ----------
$18,353 $0 $18,353 $1,835 $10/share
</TABLE>
14
<PAGE>
FINANCIAL INFORMATION
Appendix C contains recent historical financial information
with respect to the Partnership, as well as certain pro forma financial
information with respect to the Fund.
ADVISORY FEES AND OTHER EXPENSES
The following tables show the fees for the Partnership and the
Fund, including pro forma fees. The purpose of the table is to assist investors
in understanding the various costs and expenses that an investor in the
Partnership or the Fund will bear directly and indirectly.
TRANSACTION EXPENSES.
PARTNERSHIP FUND
Redemption Fees
(as a % of amount 0.50 0.00
redeemed)
TRANSACTION EXPENSES. The Partnership may impose a redemption
charge. A Limited Partner may voluntarily withdraw all or part of its capital
account at the end of any fiscal quarter upon thirty (30) days' prior written
notice. In the event of such withdrawal, the withdrawing Limited Partner incurs
a redemption charge of 1/2 of 1% applied to and reducing the amount of that
withdrawal. That redemption charge may be waived by the General Partner. The
Fund, in contrast, does not impose any sales or transaction charges in
connection with the purchase or redemption of Shares.
ANNUAL OPERATING EXPENSES.
(as a percentage of average net assets
after any applicable waivers
except as otherwise indicated)
<TABLE>
<S> <C> <C>
PARTNERSHIP FUND
(pro forma)
Management Fees 1.00 1.00
12b-1 Fees 0.00 0.00
Other Expenses 0.35 0.75
- -------------- ------------ -----------
Total Fund Operating Expenses 1.35 1.75
</TABLE>
PARTNERSHIP ANNUAL OPERATING EXPENSES. The amounts of the
management fees are based on quarterly charges that have been annualized to
conform to the requirements of this registration statement. As compensation for
management of the Partnership, for each quarter of the Partnership's fiscal
year, the General Partner receives a fee equal in the aggregate to the greater
of either 1/4 of 1% of the net portfolio value of the Partnership as of the end
of that quarter, or $10,000, payable as soon as practicable after the end of
that quarter. Other Expenses include custody, auditing, accounting and legal
fees.
FUND ANNUAL OPERATING EXPENSES. The amounts of the fees and
expenses are based on anticipated amounts projected for the Fund's first fiscal
year ending May 31, 1999. The Fund's investment adviser (the "Adviser") has
determined voluntarily to cap advisory fees or to reimburse expenses so that
Total Fund Operating Expenses through May 31, 1999 will not exceed 1.75%. Absent
fee waivers 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 "Part I - Expenses of Investing In The Fund" in Appendix A.
HYPOTHETICAL EXAMPLES. The following are hypothetical examples
that illustrate the dollar amount of expenses an investor in each of the
Partnership and the Fund would pay based upon certain assumptions. The
15
<PAGE>
examples assume a $1,000 investment and a 5% annual rate of return. The examples
assume, further, in the case of the Partnership, no distributions and full
withdrawal (without a fee waiver) at the end of each period, and in the case of
the Fund, reinvestment of all dividends and distributions, and full redemption
at the end of each period.
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
PARTNERSHIP $ 14 $ 43 $ 74 $ 162
FUND $ 18 $ 55 N/A N/A
</TABLE>
For the Partnership, the example is based upon the expenses
for the fiscal year ended December 31, 1997. For the Fund, the example is based
upon the estimated expenses listed in "Annual Operating Expenses" above, which
includes fee waivers.
The 5% annual return is not a prediction of and does not
represent either the Partnership's or the Fund's projected returns. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES or RETURN
FOR EITHER THE PARTNERSHIP, OR THE FUND, OR BOTH. ACTUAL EXPENSES AND RETURN MAY
BE GREATER OR LESS than INDICATED.
EXPENSES OF THE CONVERSION
Each party will pay its own expenses incurred in connection
with the Conversion.
This means that the Partnership will pay all of the costs it
incurs in connection with the Conversion, including the costs associated with
soliciting the written consent of the Limited Partners to the Amendments and to
the Conversion.
The Fund will pay certain expenses connected with the
organization and start-up of the Fund. Those expenses will be amortized over a
60-month period and accordingly, it is expected that those costs will be borne,
indirectly, by former Limited Partners and new Shareholders. If the Fund does
not grow as expected, those costs could be borne primarily by Limited Partners
that remain in the Fund as Shareholders.
VOTING INFORMATION
VOTING PROCEDURE. As described in "The Proposals" above, the
General Partner is soliciting the Limited Partners' written consent to (i) the
Amendments and (ii) the Conversion. Limited Partners of record on March 31, 1998
(the "Record Date"), the end of the Partnership's most recent fiscal quarter
end, are entitled to vote.
In order to approve the Amendments, the written consent of the
Limited Partners holding at least two-thirds of the Partnership Interests in
amount, as of the Record Date, is required. The General Partner, which has
proposed the Amendments, recommends that the Limited Partners approve the
Amendments.
In order to approve the Conversion, the written consent of the
General Partner, and the written consent of the Limited Partners holding at
least two-thirds of the Partnership Interests in amount and constituting at
least two-thirds of the Limited Partners in number, as of the Record Date, are
required. The General Partner intends to provide its written consent pursuant to
the Plan.
The Consent Form that is enclosed with this Proxy
Statement/Prospectus (the "Consent Form") may be used by the Limited Partners to
vote on the Amendments and on the Conversion. A Limited Partner should indicate
separately (i) whether it approves, disapproves, or abstains from approving or
disapproving the Amendments by checking the appropriate box on the Consent Form,
and (ii) whether it approves, disapproves, or abstains from approving or
disapproving the Conversion by checking the appropriate box on the Consent Form,
signing and dating the Consent Form, and returning it to the Partnership in the
enclosed postage-paid envelope. A
16
<PAGE>
Limited Partner also may approve or disapprove the Amendments or the Conversion
by returning an alternative written instrument that clearly identifies the
Limited Partner, sets forth the Limited Partner's decision with respect to the
Amendments and the Conversion, and is signed and dated by the Limited Partner (a
"Suitable Alternative"). To be counted, a Consent Form or Suitable Alternative
must be received by the Partnership on or before May 29, 1998. A Limited Partner
that does not return the Consent Form or a Suitable Alternative by that date
will be treated as not having provided its written consent for both the
Amendments and the Conversion.
To change a vote after returning a Consent Form or Suitable
Alternative to the Partnership, a Limited Partner must provide the Partnership
with a written statement identifying the Limited Partner and stating that the
Limited Partner, as a Limited Partner in Global Value Limited Partnership, (i)
revokes its prior decisions as set forth in the previously returned Consent Form
or Suitable Alternative and (ii) for each of Proposal 1 (to make the Amendments)
and Proposal 2 (to effectuate the Conversion), gives, does not give, or abstains
from giving its consent to the proposal (a "Revocation Letter"). Any such
Revocation Letter must be received by the Partnership on or before May 29, 1998.
Any Limited Partner that does not return a Consent Form or
Suitable Alternative by May 29, 1998 will be treated as not having consented to
both the Amendments and the Conversion. If the Amendments and the Conversion are
approved by the Limited Partners, such a Limited Partner will, at the discretion
of the General Partner, either be treated as a Participating Partner or be
permitted to make a complete withdrawal from the Partnership on the business day
immediately preceding the Exchange. It is anticipated that the General Partner
will permit such complete withdrawals only when required by applicable law. If
you will be permitted to make such a withdrawal, you will be notified within a
reasonable time after submitting your consent form or Suitable Alternative.
Please see "ERISA Considerations" for additional discussion of this choice.
Participating Partners will receive Shares in the Conversion.
Those Participating Partners that prefer not to invest in the Fund may redeem
their Shares on the Business Day next following the Exchange in accordance with
the Fund's normal redemption procedures as provided in "Part I -- Purchases and
Redemptions of Shares" of Appendix A. As described above, the Fund does not
impose any fees for redemptions.
CONTROL. The General Partner may be deemed to control the
Partnership. In addition, two persons own beneficially 5 percent or more of the
Partnership Interests. Mr. David Solomont, 60 Health Hill, Brookline, MA 02416
owns approximately 9.72% of the Partnership Interests and is expected to own
approximately the same percentage of Shares immediately after the Share
Distribution. Dr. Audrey A. Lewis, 10 Rogers Street, 806, Cambridge, MA 02412,
owns approximately 5.76% of the Partnership Interests and is expected to own
approximately the same percentage of Shares after the Share Distribution.
The Fund has issued a nominal number of Shares to FAS so that
it may approve the Fund's Investment Advisory Agreement, as described above in
"The Conversion." As the sole holder of the initial Shares outstanding, FAS may
be deemed to control the Fund. FAS is located at Two Portland Square, Portland,
ME 04101. Upon completion of the Exchange, FAS will own a nominal amount of the
Shares. The officers and trustees of the Trust own less than one percent of the
outstanding shares of beneficial interest of the Trust.
INTEREST OF MR. JOHN Y. KEFFER
Mr. John Y. Keffer, as chairman and president of the Fund and
owner of certain of the service providers of the Fund, including Forum
Administrative Services, LLC, Forum Financial Corp. and Forum Accounting
Services, LLC, may be deemed to have a material interest in the Conversion to
the extent that the service providers receive for their services fees paid out
of the assets of the Fund.
LEGAL MATTERS RELATING TO THE CONVERSION
Dechert Price & Rhoads is acting as counsel for the
Partnership and Seward & Kissel is acting as counsel for the Trust.
17
<PAGE>
Neither Dechert Price & Rhoads nor Seward & Kissel should be
deemed to represent the Limited Partners or the Shareholders in connection with
the Conversion, or any related transactions.
FINANCIAL STATEMENTS
Audited financial statements of the Partnership, which are
included in Appendix C, have been examined by Coopers & Lybrand L.L.P.
18
<PAGE>
APPENDIX A
PART I
INFORMATION REGARDING THE FUND
------------------------------
1. 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. 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 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
<PAGE>
entitled to receive dividends and expressed 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.
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.
3. 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.
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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 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.
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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 "Part II - Certain Additional Information About the Fund" for
descriptions of these hedging practices.
ADDITIONAL INVESTMENT POLICIES
The Fund's investment objective and fundamental investment
limitations, as described in Part II, 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 (the "Board") without shareholder
approval. A further description of the Fund's investment policies is contained
in Part II.
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.
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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 Investment Company Act of 1940 (the "Investment
Company 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: (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.
As a fundamental policy, the Fund may not purchase securities
if, immediately after the purchase, more than 25% of the value of the Fund's
total assets would be invested in the securities of issuers conducting their
principal business activities in the same industry. For purposes of determining
industry concentration, (i) 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 (ii)
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
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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 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 the Attachment to this part of 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
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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 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.
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 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.
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.
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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.
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
Proxy Statement/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 the date
of this Proxy Statement/Prospectus, FAdS and FFSI provided management,
administrative and distribution services to registered investment companies and
collective investment funds with assets of approximately $18 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.
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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 the Transfer Agent. 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; (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 Financial Corp. (the "Transfer Agent") under which the Transfer Agent acts
as the Fund's transfer agent and dividend disbursing agent. The Transfer Agent
maintains for each shareholder of record, an account (unless such accounts are
maintained by sub-transfer agents) to which all shares purchased are credited,
together with any dividends or distributions that are reinvested in additional
shares. The Transfer Agent also performs other transfer agency functions and
acts as dividend disbursing agent for the Trust. Forum Accounting Services, LLC
("FAcS") performs fund accounting services for the Fund, including determination
of the Fund's net asset value. As of the date of this Proxy Statement/Prospectus
each of FAdS, FFSI, the Transfer Agent and FAcS was controlled by John Y.
Keffer, President and Chairman of the Trust.
EXPENSES OF THE TRUST
The Fund's expenses comprise Trust expenses attributable to
the Fund, which are charged to the Fund, and those not attributable to a
particular fund of the Trust, which are allocated among the Fund and all other
funds of the Trust in proportion to their average net assets. The Adviser, FAdS
and the Transfer Agent 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.
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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
the Transfer Agent, which accepts orders for purchases and redemptions from
shareholders of record and new investors. Shareholders of record will receive
from the Trust periodic statements listing all account activity during the
statement period. The Trust reserves the right in the future to modify, limit or
terminate any shareholder privilege upon appropriate notice to shareholders.
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 "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 the Transfer Agent. The Fund's net asset value is calculated as of
the close of the Exchange (normally, 4:00 p.m., Eastern time) on each Business
Day. Fund shares become entitled to receive dividends on the next 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.
REDEMPTIONS. Fund shares may be redeemed without charge on any
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 the Transfer Agent 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 the Transfer
Agent. 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 the Transfer Agent 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
Transfer Agent 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 the Transfer Agent by telephone, these requests
may be mailed or hand-delivered to the Transfer Agent.
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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 the
Fund's Prospectus or by contacting the Transfer Agent at the address on the
first page of the Fund's Prospectus. For shareholder services described in the
Fund's 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 the Transfer Agent.
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.
INITIAL PURCHASE OF SHARES
MAIL. Investors may send a check made payable to the Trust along with a
completed account application to the Transfer Agent 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, the Transfer Agent or
FFSI.
BANK WIRE. To make an initial investment in the Fund using the
fed wire system for transmittal of money among banks, an investor should first
telephone the Transfer Agent at 888-263-5594 or 207-879-0001 to obtain an
account number for an initial investment. The investor should then instruct a
member commercial bank to wire the money immediately to:
The Chase Manhattan Bank
New York, NY
ABA # 021000021
For Credit to: Forum Financial Corp.
Account # 910-2-718187
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
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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 Fund's 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 the
Transfer Agent at 888-263-5594 or 207-879-0001 to notify it of 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 the
Transfer Agent. Shareholders may terminate their automatic investments or change
the amount to be invested at any time by written notification to the Transfer
Agent.
REDEMPTION OF SHARES
Shareholders 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 the Transfer Agent accompanied by any
share certificate that was issued to the
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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 the Transfer Agent at 207-879-0001. Shareholders must
provide the Transfer Agent 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 the Transfer Agent.
AUTOMATIC REDEMPTIONS. Shareholders may redeem Fund shares at
regular, preselected intervals by authorizing the automatic redemption of shares
from their Fund account. Redemption proceeds 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 the Transfer Agent.
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 the Transfer Agent, including a bank, a broker, a
dealer, a national securities exchange, a credit union, or a savings association
that is authorized to guarantee signatures. Whenever a signature guarantee is
required, the signature of each person required to sign for the account must be
guaranteed. A notarized signature is not sufficient.
The Transfer Agent may deem a shareholder's account "lost" if
correspondence to the shareholder's address of record is returned for six
months, unless the Transfer Agent determines the shareholder's new address. When
an account is deemed lost, all distributions on the account 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 the Transfer Agent 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
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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 its Transfer Agent 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 Treasury Fund (to be renamed Daily Assets Government
Fund, effective May 25, 1998), another series of the Trust that is a money
market fund. A prospectus for Daily Assets Treasury Fund may be obtained by
contacting the Transfer Agent.
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 Treasury 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 Part II.
EXCHANGES BY MAIL. You may make an exchange by sending a written request to
the Transfer Agent accompanied by any share certificates for the shares to be
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 the Transfer Agent at
888-263-5594 or 207-879-0001 and
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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.
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Investment income received by the Fund from sources within
foreign countries may be subject to foreign income or other taxes. Under certain
circumstances, shareholders will be notified of their share of these taxes and
will be required to include that amount as income. In that event, the
shareholder may be entitled to claim a credit or deduction for those taxes.
GENERAL. The Fund is required by federal law to withhold 31%
of reportable payments (which may include dividends, capital 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
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 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.
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 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
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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.
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ATTACHMENT
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.
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PART II
CERTAIN ADDITIONAL INFORMATION ABOUT THE FUND
---------------------------------------------
1. INVESTMENT POLICIES AND LIMITATIONS
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.
<PAGE>
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 the Attachment to this
Part of Appendix A. The Fund may use these ratings in determining whether to
purchase, sell or hold a security. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
securities with the same maturity, interest rate and rating may have different
market prices. Subsequent to its purchase by the Fund, an issue of securities
may cease to be rated or its rating may be reduced. The Adviser will consider
such an event in determining whether the Fund should continue to hold the
obligation. Credit ratings attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock of the
same or a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to
nonconvertible debt securities in that they ordinarily provide a stable stream
of income with generally higher yields than those of common stocks of the same
or similar issuers. Although no securities investment is without some risk,
investment in convertible securities generally entails less risk than in the
issuer's common stock. However, the extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells above
its value as a fixed income security. Convertible securities have unique
investment characteristics in that they generally (1) have higher yields than
common stocks, but lower yields than comparable non-convertible securities, (2)
are less subject to fluctuation in value than the underlying stocks since they
have fixed income characteristics and (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
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time. To the extent that the market value of the security that may be purchased
upon exercise of the warrant rises above the exercise price, the value of the
warrant will tend to rise. To the extent that the exercise price equals or
exceeds the market value of such security, the warrants will have little or no
market value. If a warrant is not exercised within the specified time period, it
will become worthless and the Fund will lose the purchase price paid for the
warrant and the right to purchase the underlying security.
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve
currencies of foreign countries. In addition, the Fund may temporarily hold
funds in bank deposits in foreign currencies during the completion of investment
programs. Accordingly, the value of the assets of the Fund as measured in United
States dollars may be affected by changes in foreign currency exchange rates and
exchange control regulations, and the Fund may incur costs in connection with
conversions between various currencies. The Fund 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
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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.
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.
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OPTIONS STRATEGIES
The Fund may purchase put and call options written by others
and write (sell) put and call options covering specified securities, stock
index-related amounts or currencies. A put option (sometimes called a "standby
commitment") gives the buyer of the option, upon payment of a premium, the right
to deliver a specified amount of a security or currency to the writer of the
option on or before a fixed date at a predetermined price. A call option
(sometimes called a "reverse standby commitment") gives the purchaser of the
option, upon payment of a premium, the right to call upon the writer to deliver
a specified amount of a security or currency on or before a fixed date, at a
predetermined price. The predetermined prices may be higher or lower than the
market value of the underlying currency or security. The Fund may buy or sell
both exchange-traded and over-the-counter ("OTC") options. The Fund will
purchase or write an option only if that option is traded on a recognized U.S.
options exchange or if the Adviser believes that a liquid secondary market for
the option exists. When the Fund purchases an OTC option, it relies on the
dealer from which it has purchased the OTC option to make or take delivery of
the securities or currency underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. OTC options and the securities
underlying these options currently are treated as illiquid securities.
The Fund may purchase call options on equity securities that
the Adviser intends to include in the Fund's portfolio in order to fix the cost
of a future purchase. Call options may also be purchased as a means of
participating in an anticipated price increase of a security on a more limited
risk basis than would be possible if the security itself were purchased. In the
event of a decline in the price of the underlying security, use of this strategy
would serve to limit the potential loss to the Fund to the option premium paid;
conversely, if the market price of the underlying security increases above the
exercise price and the Fund either sells or exercises the option, any profit
eventually realized will be reduced by the premium paid. The Fund may similarly
purchase put options in order to hedge against a decline in market value of
securities held in its portfolio. The put enables the Fund to sell the
underlying security at the predetermined exercise price; thus the potential for
loss to the Fund is limited to the option premium paid. If the market price of
the underlying security is lower than the exercise price of the put, any profit
the Fund realizes on the sale of the security would be reduced by the premium
paid for the put option less any amount for which the put may be sold.
The Fund may write covered call options. The Fund may write
call options when the Adviser believes that the market value of the underlying
security will not rise to a value greater than the exercise price plus the
premium received. Call options may also be written to provide limited protection
against a decrease in the market price of a security, in an amount equal to the
call premium received less any transaction costs. The Fund may write covered put
options only to effect closing transactions.
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.
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The value of foreign currency options is dependent upon the
value of the foreign currency relative to the U.S. dollar and has no
relationship to the investment merits of a foreign security. Because foreign
currency transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign currency
options, the Fund may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
To the extent that the U.S. options markets are closed while
the market for the underlying currencies remains open, significant price and
rate movements may take place in the underlying markets that cannot be reflected
in the options markets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
The Fund may effectively terminate its right or obligation
under an option contract by entering into a closing transaction. For instance,
if the Fund wished to terminate its potential obligation to sell securities or
currencies under a call option it had written, a call option of the same type
would be purchased by the Fund. Closing transactions essentially permit the Fund
to realize profits or limit losses on its options positions prior to the
exercise or expiration of the option. In addition:
(1) The successful use of options depends upon the Adviser's
ability to forecast the direction of price fluctuations in the underlying
securities or currency markets, or in the case of a stock index option,
fluctuations in the market sector represented by the index.
(2) Options normally have expiration dates of up to nine
months. Options that expire unexercised have no value. Unless an option
purchased by the Fund is exercised or unless a closing transaction is effected
with respect to that position, a loss will be realized in the amount of the
premium paid.
(3) A position in an exchange-listed option may be closed out
only on an exchange which provides a market for identical options. Most
exchange-listed options relate to equity securities. Exchange markets for
options on foreign currencies are relatively new and the ability to establish
and close out positions on the exchanges is subject to the maintenance of a
liquid secondary market. Closing transactions may be effected with respect to
options traded in the over-the-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
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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.
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
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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.
(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
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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).
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.
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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 moneys.
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 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.
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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 securities will be
purchased 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, determined by the Adviser to be of comparable
quality; and (4) 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.
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<PAGE>
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. The Fund may not:
(1) 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: (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) Purchase securities if, immediately after the purchase,
more than 25% of the value of the Fund's total assets would be invested in the
securities of issuers conducting their principal business activities in the same
industry. For purposes of determining industry concentration, (i) 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 (ii) 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.
(3) 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) Act as an underwriter of securities of other issuers,
except to the extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed to be an underwriter for purposes of the
Securities Act of 1933.
(5) Make loans to other persons except for loans of portfolio
securities and except through the use of repurchase agreements and through the
purchase of debt securities which are otherwise permissible investments.
(6) Purchase or sell real estate or any interest therein,
except that the Fund may invest in securities issued or guaranteed by corporate
or governmental entities secured by real estate or interests therein, such as
mortgage pass-through and collateralized mortgage obligations, or issued by
companies that invest in real estate or interests therein.
(7) Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall not
prevent the Fund from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities).
(8) Issue senior securities, except that: (a) the Fund may
engage in transactions that may result in the issuance of senior securities to
the extent permitted under applicable regulations and interpretations of the
Investment Company Act or an exemptive order; (b) the Fund may acquire
securities to the extent otherwise permitted by its investment policies, the
acquisition of which may result in the issuance of a senior security, to the
extent permitted under applicable regulations or interpretations of the
Investment Company Act; and (c) subject to the restrictions set forth above, the
Fund may borrow money as authorized by the Investment Company Act.
The Fund has adopted the following nonfundamental investment limitations
that may be changed by the Trust's Board of Trustees without shareholder
approval. The Fund:
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<PAGE>
(a) 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) May not invest in securities of another registered
investment company, except to the extent permitted by the Investment Company
Act.
(c) 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) May not acquire securities or invest in repurchase
agreements that do not provide for termination within in seven days with respect
to any securities if, as a result, more than 15% of the Fund's net assets (taken
at current value) would be invested in securities that are not readily
marketable, including securities that are illiquid by virtue of restrictions on
the sale of such securities to the public without registration under the
Securities Act of 1933 ("Restricted Securities").
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.
In performance advertising the Fund may compare any of its
performance information with data published by independent evaluators such as
Morningstar, Lipper Analytical Services, Inc., IBC/Donoghue, Inc.,
CDA/Wiesenberger or other companies which track the investment performance of
investment companies ("Fund Tracking Companies"). The Fund may also compare any
of its performance information with the performance of recognized stock, bond
and other indices, including but not limited to the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, the Salomon
Brothers Bond Index, the Shearson Lehman Bond Index, U.S. Treasury bonds, bills
or notes and changes in the Consumer Price Index as published by the U.S.
Department of Commerce. The Fund may refer to general market performances over
past time periods such as those published by Ibbotson Associates. In addition,
the Fund may refer in such materials to mutual fund performance rankings and
other data published by Fund Tracking Companies. Performance advertising may
also refer to discussions of the Fund and comparative mutual fund data and
ratings reported in independent periodicals, such as newspapers and financial
magazines.
TOTAL RETURN CALCULATIONS
The Fund may advertise total return. Total returns quoted in
advertising reflect all aspects of the Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in the Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the
13
<PAGE>
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.
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 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), Forum Financial Corp. (a registered transfer agent)
and Forum 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.
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<PAGE>
James C. Cheng, Trustee (age 54)
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President
and Chief Executive Officer of Network Dynamics, Incorporated (a
software development company). His address is 27 Temple Street,
Belmont, Massachusetts 02178.
J. Michael Parish, Trustee (age 53)
Partner at the law firm of 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 35)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1991. Prior thereto, Mr. Goldstein was associated
with the law firm of Kirkpatrick & Lockhart. Mr. Goldstein is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
Max Berueffy, Assistant Secretary (age 44)
Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto, Mr. Berueffy was on the staff of
the U.S. Securities and Exchange Commission for seven years, first in
the appellate branch of the Office of the General Counsel, then as a
counsel to Commissioner Grundfest and finally as a senior special
counsel in the Division of Investment Management. Mr. Berueffy is also
Secretary or Assistant Secretary of various registered investment
companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has
been associated since July 1996. Prior thereto, Ms. Tumlin was on the
staff of the U.S. Securities and Exchange Commission as an attorney in
the Division of Market Regulation and prior thereto Ms. Tumlin was an
associate with the law firm of Robinson Silverman Pearce Aronsohn &
Berman in New York, New York. Ms. Tumlin is also Assistant Secretary
of various registered investment companies for which Forum
Administrative Services, LLC or Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. Her address is Two
Portland Square, Portland, Maine 04101.
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<PAGE>
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 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
16
<PAGE>
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 Financial Corp. ("FFC") 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.
18
<PAGE>
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 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
19
<PAGE>
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
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, N.A. 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.
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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 Treasury Fund (to be
renamed Daily Assets Government Fund effective May 25, 1998), 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.
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
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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.
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
22
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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 April 30, 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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ATTACHMENT
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".
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(B) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt
issues, as follows:
Bonds rated "AAA" have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated "AA" have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated "A" have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated "BBB" are regarded as having an adequate capacity to pay interest
and repay principal. Whereas, they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Bonds rated "BB" have less near-term
vulnerability to default than other speculative issues. However, they face major
ongoing uncertainties or exposure to adverse business, financial, or economic
conditions 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:
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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.
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
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<PAGE>
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.
27
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Appendix B
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is
made as of this ____ day of ________________, 1998, by and among Forum Funds
("Forum"), a Delaware Business Trust with its principal place of business at Two
Portland Square, Portland, ME, on behalf of Polaris Global Value Fund ("Polaris
Fund"), a newly formed separate series of Forum, Global Value Limited
Partnership (the "Partnership"), a Massachusetts limited partnership with its
principal place of business at 125 Summer Street, Boston, MA, and Polaris
Capital Management, Inc., as general partner of the Partnership (the "General
Partner" or the "Adviser"). The term "Acquiring Fund" is used herein, as the
context requires, to refer to Forum, or Polaris Fund, or both.
This Agreement is intended to be and is adopted as a plan of
exchange within the meaning of section 351 of the Internal Revenue Code of 1986,
as amended (the "Code"). Subject to the terms and representations set forth
herein, that exchange (the "Exchange") will consist of the transfer of
substantially all of the assets of the Partnership to the Acquiring Fund in
exchange solely for over 80% of the shares of beneficial interest (no par value
per share) of the Acquiring Fund (the "Acquiring Fund Shares" or "Shares of the
Acquiring Fund"). Immediately following the Exchange, the Partnership will
distribute the Acquiring Fund Shares to the General Partner and the limited
partners of the Partnership (the "Limited Partners" and together with the
General Partner, the "Partners" and each, a "Partner") in proportion to their
positive capital account balances, followed as soon as practicable by the
liquidation and termination of the Partnership, all upon the terms and
conditions hereinafter set forth in this Agreement.
WHEREAS, the parties hereto wish to effect the Exchange to
attempt to increase liquidity and flexibility through daily purchases and
redemptions, and to obtain economies of scale as a result of a larger asset
base;
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements hereinafter set forth, the parties hereto covenant and
agree as follows:
1. TRANSFER OF ASSETS OF THE PARTNERSHIP TO THE ACQUIRING FUND IN EXCHANGE
FOR THE ACQUIRING FUND SHARES AND THE LIQUIDATION OF THE PARTNERSHIP
1.1 Subject to the terms and conditions herein set forth and
on the basis of the representations and warranties contained herein, the
Partnership agrees to transfer to the Acquiring Fund substantially all of the
Partnership's assets as set forth in section 1.2, and the Acquiring Fund agrees
in exchange therefor to deliver to the Partnership that number of full and
fractional Acquiring Fund Shares computed in the manner set forth in section
2.3. Such transactions shall take place at the closing provided for in section
3.1 (the "Closing").
1.2 The assets of the Partnership to be acquired by the
Acquiring Fund (the "Assets") shall consist of all assets, including, without
limitation, all cash, cash equivalents, securities, commodities and futures
interests and dividends or interest or other receivables that are owned by the
Partnership and any deferred or prepaid expenses shown on the balance sheet of
the Partnership prepared as of the Valuation Date (as defined in section 2.1),
prepared in accordance with generally accepted accounting principles ("GAAP")
applied consistently with those of the Partnership's most recent audited balance
sheet, except for cash and cash equivalents retained by the Partnership in an
amount estimated by it to be sufficient to discharge in full all its
liabilities, including the expenses of its liquidation and termination, (the
"Expense Reserve") and any assets which the Acquiring Fund is not permitted to
acquire (the "Retained Assets"). Any assets retained by the Partnership, after
paying or providing for the payment of all its liabilities, shall be distributed
by the Partnership or its agent to the Partners of record as of the
<PAGE>
Valuation Date pursuant to Article 14 of the Partnership's Partnership Agreement
(as defined in section 4.1(a)).
1.3 The Partnership will pay or cause to be paid to the
Acquiring Fund any interest or dividends received on or after the Closing with
respect to securities transferred to the Acquiring Fund hereunder. The
Partnership will transfer to the Acquiring Fund any distributions, rights, stock
dividends or other securities received by the Partnership after the Closing as
distributions on or with respect to the securities transferred, which shall be
deemed included in the Assets and shall not be separately valued unless the
securities in respect of which such distribution is made shall have gone "ex"
such distribution prior to the Valuation Date. Notwithstanding the foregoing,
the Acquiring Fund shall not be entitled to receive any interest or dividends or
other distributions on securities not transferred to the Acquiring Fund
hereunder.
1.4 Immediately after the transfer of Assets in exchange for
Acquiring Fund Shares provided for in section 1.1 (the "Distribution Time"), the
Partnership will distribute to the Partners of record, determined as of the
Valuation Date (the "Participating Partners"), pro rata in the proportion that
each Partner's Capital Account bears to the aggregate Capital Accounts of all
Partners, the Acquiring Fund Shares received by the Partnership pursuant to
section 1.1. Such distribution (the "Distribution") will be accomplished by the
transfer of the Acquiring Fund Shares then credited to the account of the
Partnership on the books of the Acquiring Fund to open accounts on the share
records of the Acquiring Fund in the names of the Participating Partners. The
aggregate net asset value of Acquiring Fund Shares to be so credited to the
Participating Partners shall be equal to the aggregate net asset value at the
Valuation Date of the Assets, which shall be transferred to the Acquiring Fund
pursuant to section 1.1. All issued and outstanding interests in the Partnership
will simultaneously be cancelled on the books of the Partnership. The Acquiring
Fund will not issue certificates representing Acquiring Fund Shares in
connection with the Exchange.
1.5 Ownership of Acquiring Fund Shares will be shown on the
books of the Acquiring Fund. Shares of the Acquiring Fund will be issued in the
manner described in the Acquiring Fund's then-current prospectus and statement
of additional information.
1.6 The General Partner will liquidate and terminate the
Partnership after the Distribution. As soon as is reasonably practicable after
the Distribution, but not until the earlier of (i) payment by the Partnership of
all the Partnership's liabilities or (ii) 90 days after the Closing Date (as
defined in section 3.1), the Partnership shall be completely liquidated and its
Certificate of Cancellation shall have been filed under the laws of the
Commonwealth of Massachusetts. The Partnership shall not conduct any business on
and after the Closing Date except in connection with its dissolution,
liquidation, and termination.
1.7 Any reporting responsibility of the Partnership including,
but not limited to, the responsibility for filing of regulatory reports, tax
returns, or other documents with the Securities and Exchange Commission (the
"Commission"), any state securities commission, any federal, state or local tax
authorities, or any other relevant regulatory authority, is and shall remain the
responsibility of the Partnership.
1.8 All books and records of the Partnership shall be
available to the Acquiring Fund from and after the Closing Date and shall be
turned over to the Acquiring Fund as soon as practicable following the Closing
Date. All such books and records shall be available to the Partnership
thereafter until the Partnership is completely liquidated and has filed its
Certificate of Cancellation with the Commonwealth of Massachusetts.
1.9 The Acquiring Fund shall not assume, and shall not be
obligated to assume, any liabilities (absolute or contingent) of the
Partnership.
2
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2. VALUATION
2.1 The value of the Assets, of the Expense Reserve, and of
the Retained Assets shall be computed as of the close of regular trading on the
New York Stock Exchange (normally, 4:00 P.M., Eastern time) on the business day
immediately preceding the Closing and after the payment of any distributions or
other amounts by the Partnership (such time and date, the "Valuation Date").
2.2 The net asset value of an Acquiring Fund Share shall be
determined by the Acquiring Fund in the manner described in the Acquiring Fund's
then-current prospectus and statement of additional information in its N-1A (as
defined in Section 5.9) prior to the Closing Date.
2.3 The number of the Acquiring Fund Shares to be issued
(including fractional shares, if any) in exchange for the Assets shall be
determined by dividing the value of the net Assets, determined pursuant to
section 2.1 by the net asset value of one Acquiring Fund Share determined
pursuant to section 2.2.
2.4 The value of the Assets, of the Expense Reserve, and of
the Retained Assets, and all other computations of value that may be required
shall be determined in the manner described in the Acquiring Fund's then-current
prospectus and statement of additional information included in its N-1A (as
defined in section 5.9).
3. CLOSING AND CLOSING DATE
3.1 The Closing of the transactions contemplated by this
Agreement shall be on or about 8:00 A.M., Eastern time, on June 1, 1998, or such
later date as the parties may agree in writing (the "Closing Date"). All acts
taking place at the Closing shall be deemed to take place simultaneously as of
12:00 A.M., Eastern time, on the Closing Date, unless otherwise agreed to by the
parties. The Closing shall be held at the offices of the Partnership or at such
other place and time as the parties shall mutually agree.
3.2 The Partnership shall deliver to Acquiring Fund on the
Closing Date a schedule of Assets, a schedule of Retained Assets, and a schedule
of assets in the Expense Reserve.
3.3 Chase Manhattan Bank (the "Partnership Custodian"), as
custodian for the Partnership, shall deliver at the Closing a certificate of an
authorized officer stating that (i) the Assets shall have been delivered in
proper form to BankBoston, N.A. (the "Fund Custodian"), custodian for the
Acquiring Fund, prior to or on the Closing Date, and (ii) all necessary taxes in
connection with the delivery of the Assets, including all applicable federal and
state stock transfer stamps, if any, have been paid or provision for payment has
been made. The Partnership's portfolio securities represented by a certificate
or other written instrument shall be presented by the Partnership Custodian to
the Fund Custodian for examination no later than five business days preceding
the Closing Date and those portfolio securities comprising the Assets shall be
transferred and delivered as of the Closing Date by the Partnership for the
account of the Acquiring Fund duly endorsed in proper form for transfer in such
condition as to constitute good delivery thereof. The Partnership's portfolio
securities and instruments deposited with a securities depository, as defined in
Rule 17f-4 under the Investment Company Act of 1940 (the "1940 Act"), shall be
delivered as of the Closing Date by book entry in accordance with the customary
practices of such depositories and the Fund Custodian. The cash to be
transferred by the Partnership shall be delivered by wire transfer of Federal
Funds on the Closing Date.
3.4 The Partnership shall deliver at the Closing a certificate
executed by the General Partner stating that the Partnership's records contain
the names and addresses of the Participating Partners and the percentage
ownership to 5 decimal places that each Partner's capital account bears to the
Capital Accounts of all Participating Partners immediately prior to the Closing.
The Acquiring Fund shall issue and deliver a confirmation evidencing the
Acquiring Fund Shares to be credited on the Closing Date
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to the Partnership or provide evidence satisfactory to the General Partner that
such Acquiring Fund Shares have been credited to the Partnership's account on
the books of the Acquiring Fund. At the Closing, each party shall deliver to the
other such bills of sale, checks, assignments, share certificates, if any,
receipts or other documents as such other party or its counsel may reasonably
request to effect the transactions contemplated by this Agreement.
3.5 In the event that immediately prior to the Valuation Date
(a) the New York Stock Exchange or another primary trading market for portfolio
securities of the Partnership shall be closed to trading or trading thereupon
shall be restricted, or (b) trading or the reporting of trading on such exchange
or elsewhere shall be disrupted so that, in the judgment of the General Partner,
or the board of trustees of the Acquiring Fund, or both, accurate appraisal of
the value of the net assets of the Partnership is impracticable, the Closing
Date shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1 The General Partner and the Partnership represent and
warrant to the Acquiring Fund as follows:
(a) The Partnership is a limited partnership duly organized
and validly existing under the laws of the Commonwealth of Massachusetts with
power under the Partnership's Amended and Restated Agreement of Limited
Partnership dated as of January 1, 1996 (the "Partnership Agreement") to own all
of its properties and assets and to carry on its business as it is now being
conducted;
(b) Polaris Capital Management, Inc. is the general partner
of the Partnership;
(c) The General Partner has approved this Agreement and the
transactions contemplated by it hereunder, including the Exchange, and the
subsequent dissolution, liquidation, and termination of the Partnership;
(d) No consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by the Partnership of
the transactions contemplated herein, except such as have been obtained under
the Securities Act of 1933, as amended, (the "1933 Act") the Securities Exchange
Act of 1934, as amended, (the "1934 Act") and the 1940 Act, or state securities
laws;
(e) The Partnership is not, and the execution, delivery and
performance of this Agreement by the Partnership will not result, in violation
of the laws of the Commonwealth of Massachusetts, or of the Partnership
Agreement, or of any material agreement, indenture, instrument, contract, lease
or other undertaking to which the Partnership is a party or by which it is
bound; and the execution, delivery and performance of this Agreement by the
General Partner and the Partnership will not result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement, indenture,
instrument, contract, lease, judgment or decree to which the Partnership is a
party or by which it is bound;
(f) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or to the General Partner or the Partnership's knowledge threatened against the
General Partner, the Partnership, or any properties or assets held by the
Partnership. Neither the General Partner nor the Partnership knows of any facts
which might form the basis for the institution of such proceedings which would
materially and adversely affect their respective businesses and neither is a
party to or subject to the provisions of any order, decree, or judgment of any
court or governmental body which materially and adversely affects its business
or its ability to consummate the transactions herein contemplated;
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(g) There are no material contracts outstanding to which the
Partnership is a party, other than those that have been disclosed to the
Acquiring Fund;
(h) The Statement of Assets and Liabilities and for the fiscal
year ended December 31, 1997 has been audited by Coopers & Lybrand L.L.P.,
independent certified public accountants, and is in accordance with GAAP
consistently applied, and such statement (a copy of which has been furnished to
the Acquiring Fund) presents fairly, in all material respects, the financial
position of the Partnership as of such date in accordance with GAAP, and there
are no known contingent liabilities of the Partnership required to be reflected
on a balance sheet (including the notes thereto) in accordance with GAAP as of
such date not disclosed therein;
(i) Since December 31, 1997, there has not been any material
adverse change in the Partnership's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business. For
purposes of this subsection, a decline in net value of a Partnership interest
due to declines in market values of securities in the Partnership's portfolio,
the discharge of Partnership liabilities, or the partial or complete withdrawal
of a Partner shall not constitute a material adverse change;
(j) At the date hereof and at the Closing Date, all federal
and other tax returns and reports of the Partnership required by law to have
been filed by such dates (including any extensions) shall have been filed and
are or will be correct in all material respects, and all federal and other taxes
shown as due or required to be shown as due on said returns and reports shall
have been paid or provision shall have been made for the payment thereof, and,
to the best of the Partnership's knowledge, no such return is currently under
audit and no assessment has been asserted with respect to such returns;
(k) The interests of each Partner in the Partnership, as they
appear on the Partnership books as of the Valuation Date (the "Partnership
Interests"), (i) in each jurisdiction where offered for sale and sold, have been
offered for sale or sold in compliance in all material respects with applicable
registration requirements of the 1933 Act or exemptions therefrom, state
securities laws and other applicable laws of the jurisdiction in which offered
or sold, (ii) are, and on the Closing Date will be, duly authorized, duly and
validly issued and fully paid, and (iii) will be held at the time of the Closing
by the persons and in the amounts set forth in the records of the Partnership,
as provided in section 3.4. The Partnership does not have outstanding any
options, warrants or other rights to subscribe for or to purchase any
Partnership Interests nor is there outstanding any security convertible into any
Partnership Interests;
(l) At the Closing Date, the Partnership will have good and
marketable title to the Assets, which are to be transferred to the Acquiring
Fund pursuant to section 1.1, and full right, power, and authority to sell,
assign, transfer and deliver such Assets hereunder free of any liens,
encumbrances, security interests, or other transfer restrictions except those
liens, encumbrances, security interests, or other transfer restrictions as to
which the Acquiring Fund has received notice of and agreed to prior to the
Closing or those liens, encumbrances, security interests, or other transfer
restrictions created by the Acquiring Fund, and upon delivery and payment for
such Assets, the Acquiring Fund will acquire good and marketable title thereto,
subject to no restrictions on the full transfer thereof, including such
restrictions as might arise under the 1933 Act, except those restrictions which
the Acquiring Fund has received notice of and agreed to prior to the Closing;
(m) The execution, delivery and performance of this Agreement
will have been duly authorized prior to the Closing Date by all necessary action
on the part of the General Partner, and subject to the written consent, pursuant
to the Partnership Agreement, of the General Partner and the Limited Partners
holding at least two-thirds of the amount of the Partnership Interests and
constituting at least two-thirds of the number of Limited Partners, this
Agreement will constitute a valid and binding obligation of the Partnership,
enforceable pursuant to its terms, subject, as to enforcement, to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and other laws
relating to or affecting creditors' rights and to general equity principles. The
General Partner shall use its reasonable best efforts to obtain that written
consent from the Limited Partners;
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(n) The information to be furnished by the Partnership or the
General Partner to the Acquiring Fund for use in advertisements, applications
for orders, registration statements, annual reports, proxy materials, or for use
in any other document filed or to be filed with any federal, state or local
regulatory authority (including the National Association of Securities Dealers,
Inc.), which may be necessary in connection with the transactions contemplated
herein, shall be true, accurate and complete in all material respects, shall
comply in all material respects with federal securities and other laws and
regulations applicable thereto and shall not omit to state any material fact
necessary in order to make the information not misleading;
(o) The Registration Statement (as defined in section 5.6),
except insofar as it relates to Polaris Fund or Forum, or both, will, on the
effective date of the Registration Statement and on the Closing Date: (i)
conform in all material respects to applicable requirements of the 1933 Act, the
1934 Act, and the 1940 Act, and the rules and regulations of the Commission
thereunder, (ii) not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such statements
are made, not materially misleading; provided, however, that the representations
and warranties in this section shall not apply to statements in or omissions
from the Registration Statement made in reasonable reliance upon and in
conformity with information that was furnished or should have been furnished by
Polaris Fund or Forum, or both, for use therein; and
(p) The Assets will satisfy the 50-percent and 25-percent
tests of Code sections 851(b)(3)(A) and 851(b)(3)(B).
4.2 Forum, on behalf of the Acquiring Fund, represents and
warrants to the Partnership as follows:
(a) Forum is a business trust duly organized, validly
existing, and in good standing under the laws of the State of Delaware with
power under its Declaration of Trust, as amended, to own all of its properties
and assets and to carry on its business as it is now being conducted;
(b) Forum, which is organized as a "series mutual fund," is
registered with the Commission as an open-end management investment company
under the 1940 Act, and such registration is in full force and effect;
(c) No consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by the Acquiring Fund
of the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act, and the 1940 Act, and such as may be required by
state securities laws;
(d) The Acquiring Fund is not, and the execution, delivery,
and performance of this Agreement by the Acquiring Fund will not result in
violation of Delaware law or of the Acquiring Fund's Declaration of Trust, as
amended, or any material agreement, indenture, instrument, contract, lease or
other undertaking to which the Acquiring Fund is a party or by which it is
bound, and the execution, delivery and performance of this Agreement by the
Acquiring Fund will not result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, indenture, instrument, contract,
lease, judgment or decree to which the Acquiring Fund is a party or by which it
is bound;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Acquiring Fund or any properties or
assets held by it. The Acquiring Fund knows of no facts which might form the
basis for the institution of such proceedings which would materially and
adversely affect the Acquiring Fund's business and the Acquiring Fund is not a
party to or subject to the provisions of any
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order, decree or judgment of any court or governmental body which materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated;
(f) At the date hereof and at the Closing Date, all federal
and other tax returns and reports of the Acquiring Fund required by law to have
been filed by such dates (including any extensions) shall have been filed and
are or will be correct in all material respects, and all federal and other taxes
shown as due or required to be shown as due on said returns and reports shall
have been paid or provision shall have been made for the payment thereof, and,
to the best of the Acquiring Fund's knowledge, no such return is currently under
audit and no assessment has been asserted with respect to such returns;
(g) The Acquiring Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any Acquiring Fund Shares
nor is there outstanding any security convertible into any Acquiring Fund
Shares;
(h) The Acquiring Fund Shares to be issued and delivered to
the Partnership pursuant to the terms of this Agreement, and all other issued
and outstanding Acquiring Fund Shares, will at the Closing Date have been duly
authorized and, when so issued and delivered, will be duly and validly issued
and outstanding Acquiring Fund Shares, and will be fully paid and
non-assessable;
(i) At the Closing Date, the Acquiring Fund will have good and
marketable title to the Assets, free of any liens, encumbrances, security
interests, or other transfer restrictions, except those liens, encumbrances,
security interests, or other transfer restrictions, which the Partnership has
received notice of and agreed to prior to the Closing;
(j) The execution, delivery and performance of this Agreement
will have been duly authorized prior to the Closing Date by all necessary
action, if any, on the part of the trustees of the Acquiring Fund and this
Agreement constitutes a valid and binding obligation of the Acquiring Fund,
enforceable pursuant to its terms, subject, as to enforcement, to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and other laws
relating to or affecting creditors' rights and to general equity principles;
(k) The information to be furnished by the Acquiring Fund for
use in advertisements, applications for orders, registration statements, annual
reports, proxy materials, or for use in any other document filed or to be filed
with any federal, state or local regulatory authority (including the National
Association of Securities Dealers, Inc.), which may be necessary in connection
with the transactions contemplated herein, shall be true, accurate and complete
in all material respects, shall comply in all material respects with federal
securities and other laws and regulations applicable thereto, and shall not omit
to state any material fact necessary in order to make the information not
misleading;
(l) The Registration Statement, only insofar as it relates to
Polaris Fund or Forum, or both, will, on the effective date of the Registration
Statement and on the Closing Date: (i) conform in all material respects to
applicable requirements of the 1933 Act, the 1934 Act, and the 1940 Act, and the
rules and regulations of the Commission thereunder, (ii) not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements are made, not materially misleading;
provided, however, that the representations and warranties in this section shall
not apply to statements in or omissions from the Registration Statement made in
reasonable reliance upon and in conformity with information that was furnished
or should have been furnished by the Partnership for use therein; and
(m) For its first taxable year, which includes the date of the
Exchange, Acquiring Fund will elect and qualify to be treated as a "regulated
investment company" under subchapter M of the Code and will for that taxable
year compute its federal income tax under Code section 852.
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5. COVENANTS OF THE ACQUIRING FUND AND THE PARTNERSHIP
5.1 The General Partner and the Partnership covenant to
operate the Partnership's business in the ordinary course between the date
hereof and the Closing Date, it being understood that (i) such ordinary course
of business will include such changes as are contemplated by the Partnership's
normal operations and preparing for its dissolution, liquidation, and
termination, and (ii) the Partnership shall retain exclusive control of the
composition of its Assets until the Closing Date.
5.2 The General Partner and the Partnership covenant that upon
reasonable notice, the Acquiring Fund's officers and agents shall have
reasonable access to the Partnership's books and records necessary to maintain
current knowledge of the Partnership and to ensure that the representations and
warranties made by the Partnership are accurate.
5.3 The General Partner and the Partnership covenant that the
Shares of the Acquiring Fund to be issued hereunder are not being acquired for
the purpose of making any distribution thereof other than pursuant to the terms
of this Agreement.
5.4 The General Partner and the Partnership covenant that they
will assist the Acquiring Fund in obtaining such information as the Acquiring
Fund reasonably requests concerning the beneficial ownership of the Partnership
Interests.
5.5 Subject to the provisions of this Agreement, each of the
Acquiring Fund, the General Partner, and the Partnership, covenants that it will
take, or cause to be taken, all actions, and do or cause to be done, all things
reasonably necessary, proper, and/or advisable to consummate and make effective
the transactions contemplated by this Agreement.
5.6 The Acquiring Fund and the Partnership each covenant to
prepare the Registration Statement on Form N-14 (the "Registration Statement")
in compliance with the 1933 Act, the 1934 Act, and the 1940 Act, and the rules
and regulations promulgated thereunder by the Commission, in connection with the
consideration by the Partners of the transactions contemplated herein. The
Acquiring Fund covenants to file the Registration Statement with the Commission.
The General Partner and the Partnership covenant to provide the Acquiring Fund
with information reasonably necessary for the preparation of the Registration
Statement, in compliance in all material respects with the 1933 Act, the 1934
Act, and the 1940 Act.
5.7 The General Partner and the Partnership covenant that they
will, from time to time, as and when reasonably requested by the Acquiring Fund,
execute and deliver or cause to be executed and delivered all such assignments
and other instruments, and will take or cause to be taken such further action as
the Acquiring Fund may reasonably deem necessary or desirable in order to vest
in and confirm the Acquiring Fund's title to and possession of all the Assets
and otherwise to carry out the intent and purpose of this Agreement.
5.8 The General Partner and the Partnership covenant to use
all reasonable efforts to obtain approvals and authorizations required by the
1933 Act, the 1934 Act, the 1940 Act, and such of the state securities laws and
the laws of The Commonwealth of Massachusetts, as it deems appropriate to
consummate the transactions contemplated herein, which approvals include the
written consent of the Limited Partners holding at least two-thirds of the
amount of the Partnership Interests and constituting at least two-thirds of the
number of Limited Partners, as specified in the Partnership Agreement.
5.9 The Acquiring Fund covenants to use all reasonable efforts
to obtain the approvals and authorizations required by the 1933 Act, the 1934
Act, the 1940 Act, and such of the state securities laws, as it deems
appropriate to consummate the transactions contemplated herein and to continue
its operations after the Closing Date as a Regulated Investment Company under
the Code, including having a registration statement on Form N-1A (the "N-1A")
effective at the Closing Date that covers the continuous public offering of
shares of the Acquiring Fund; provided, however, that the
8
<PAGE>
Acquiring Fund may take such actions it reasonably deems advisable after the
Closing Date as circumstances change.
5.10 The Acquiring Fund covenants that it will, from time to
time, as and when reasonably requested by the Partnership, execute and deliver
or cause to be executed and delivered all such assignments, assumption
agreements, releases, and other instruments, and will take or cause to be taken
such further action, as the Partnership may reasonably deem necessary or
desirable in order to vest and confirm to the Partnership title to and
possession of all Acquiring Fund shares to be transferred to the Partnership
pursuant to this Agreement.
5.11 The Partnership covenants to make a distribution,
pursuant to section 1.4, at the Distribution Time to the Participating Partners
consisting of the Shares of the Acquiring Fund received at the Closing.
5.12 Each of the Acquiring Fund, the General Partner and the
Partnership covenants that it shall use its reasonable best efforts to fulfill
or obtain the fulfillment of the conditions precedent to effect the transactions
contemplated by this Agreement as promptly as practicable.
5.13 Before the Closing, the Acquiring Fund covenants to issue
a nominal number of Acquiring Fund Shares to Forum Administrative Services, LLC
(the "Sponsor").
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTNERSHIP
The obligations of the Partnership to consummate the
transactions provided for herein shall be subject, at its election, to the
performance by the Acquiring Fund of all the obligations to be performed by the
Acquiring Fund hereunder on or before the Closing Date, and, in addition
thereto, the following further conditions:
6.1 All representations and warranties of Forum, with respect
to the Acquiring Fund, contained in this Agreement shall be true and correct in
all material respects as of the date hereof and, except as they may be affected
by the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date; and there
shall be (i) no pending or threatened litigation brought by any person (other
than Acquiring Fund, its adviser or any of their affiliates) against the
Partnership, the Acquiring Fund or their advisers, directors, trustees or
officers arising out of this Agreement and (ii) no facts known to the
Partnership which the Partnership reasonably believes might result in such
litigation;
6.2 The Acquiring Fund shall have delivered to the Partnership
on the Closing Date a certificate executed in its name by the President or Vice
President of Forum, in a form reasonably satisfactory to the Partnership and
dated as of the Closing Date, to the effect that the representations and
warranties of Forum with respect to the Acquiring Fund made in this Agreement
are true and correct on and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as the Partnership shall reasonably request;
6.3 The Partnership shall have received on the Closing Date an
opinion of Seward & Kissel, counsel to Forum, in a form reasonably satisfactory
to the Partnership, and dated as of the Closing Date, to the effect that: (i)
Forum has been duly formed and is a validly existing Delaware business trust in
good standing; (ii) the Acquiring Fund has the power to carry on its business as
presently conducted pursuant to the description thereof in Forum's registration
statement under the 1940 Act; (iii) this Agreement has been duly authorized,
executed and delivered by the Acquiring Fund, and constitutes a valid and
legally binding obligation of the Acquiring Fund, enforceable pursuant to its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and laws of general applicability relating to or affecting creditors'
rights and to general equity principles; (iv) the execution and delivery of this
Agreement did not, and the exchange of substantially all of the Partnership's
assets for Shares of the
9
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Acquiring Fund pursuant to this Agreement will not, violate the Acquiring Fund's
Declaration of Trust, as amended; and (v) to the knowledge of such counsel, all
regulatory consents, authorizations, approvals or filings required to be
obtained or made by the Acquiring Fund under the federal laws of the United
States or the laws of the State of Delaware for the exchange of substantially
all of the Partnership's assets for Shares of the Acquiring Fund pursuant to
this Agreement have been obtained or made;
6.4 The Acquiring Fund shall have performed all of the
covenants and complied with all of the provisions required by this Agreement to
be performed or complied with by the Acquiring Fund on or before the Closing
Date; and
6.5 Before the Closing, the Acquiring Fund shall have issued
to the Sponsor a nominal number of Acquiring Fund Shares; and Sponsor, as the
sole shareholder in the Acquiring Fund, shall have approved the Investment
Advisory Agreement between the Acquiring Fund and the Adviser to become
effective immediately following the Closing.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to consummate the
transactions provided for herein shall be subject, at its election, to the
performance by the Partnership of all of the obligations to be performed by the
Partnership hereunder on or before the Closing Date and, in addition thereto,
the following further conditions:
7.1 All representations and warranties of the General Partner,
with respect to the Partnership, contained in this Agreement shall be true and
correct in all material respects as of the date hereof and, except as they may
be affected by the transactions contemplated by this Agreement, as of the
Closing Date, with the same force and effect as if made on and as of the Closing
Date; and there shall be (i) no pending or threatened litigation brought by any
person (other than the Partnership or any of its affiliates) against the
Partnership, or the Acquiring Fund, its advisers, directors, trustees or
officers, arising out of this Agreement and (ii) no facts known to the Acquiring
Fund which the Acquiring Fund reasonably believes might result in such
litigation;
7.2 The Partnership shall have delivered to the Acquiring Fund
a statement of the Partnership's assets and liabilities as of the Valuation
Date, certified by the General Partner, including a list of securities owned by
the Partnership with their respective tax costs and values determined as
provided in section 2 above, all as of the Valuation Date;
7.3 The Partnership shall have delivered to the Acquiring Fund
on the Closing Date a certificate executed in its name by its General Partner,
in a form reasonably satisfactory to the Acquiring Fund and dated as of the
Closing Date, to the effect that the representations and warranties of the
General Partner with respect to the Partnership made in this Agreement are true
and correct on and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as the
Acquiring Fund shall reasonably request;
7.4 The Acquiring Fund shall have received on the Closing Date
an opinion of Dechert Price & Rhoads, counsel to the Partnership, in a form
reasonably satisfactory to the Acquiring Fund, and dated as of the Closing Date,
to the effect that: (i) the Partnership has been duly formed and is a validly
existing Massachusetts limited partnership; (ii) the Partnership has the power
to carry on its business as presently conducted pursuant to the description
thereof in the Partnership Agreement; (iii) the Agreement has been duly
authorized, executed and delivered by the General Partner, on behalf of the
Partnership, and constitutes a valid and legally binding obligation of the
Partnership, enforceable pursuant to its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and laws of general
applicability relating to or affecting creditors' rights and to general equity
principles; (iv) the execution and delivery of the Agreement did not, and the
exchange of substantially all of the Partnership's assets for Shares of the
Acquiring Fund pursuant to the Agreement will not, violate the Partnership
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Agreement; (v) to the knowledge of such counsel, all regulatory consents,
authorizations, approvals or filings required to be obtained or made by the
Partnership under the federal laws of the United States or the laws of the
Commonwealth of Massachusetts for the exchange of substantially all of the
Partnership's assets for Shares of the Acquiring Fund pursuant to this Agreement
have been obtained or made; (vi) the Registration Statement (except as to the
financial statements and schedules contained therein and except as to Appendix A
to Part A contained therein) complies as to form in all material respects with
the requirements of the 1933 Act and the 1934 Act, and with the rules and
regulations of the Commission thereunder; and (vii) the Registration Statement
(except as to the financial statements and schedules contained therein and
except as to Appendix A to Part A contained therein), as to the Partnership, to
the knowledge of counsel based upon representations made by the General Partner
or obtained in the due course of counsel's engagement, and without having made
an independent investigation thereof, does not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading; and
7.5 The Partnership shall have performed all of the covenants
and complied with all of the provisions required by this Agreement to be
performed or complied with by the Partnership on or before the Closing Date.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
PARTNERSHIP
If any of the conditions set forth below have not been met on
or before the Closing Date with respect to the Partnership or the Acquiring
Fund, the other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein
shall have been approved by the written consent of the General Partner and the
Limited Partners holding at least two-thirds of the amount of Partnership
Interests and constituting at least two-thirds of the number of Limited
Partners, pursuant to the Partnership Agreement, applicable laws of the
Commonwealth of Massachusetts, and applicable federal securities laws.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Partnership may waive the conditions set forth in this section 8.1;
8.2 On the Closing Date, no action, suit or other proceeding
shall be pending or to either party's knowledge threatened before any court or
governmental agency in which it is sought to restrain or prohibit, or obtain
material damages or other relief in connection with, this Agreement or the
transactions contemplated herein;
8.3 All consents of other parties and all other consents,
orders and permits of federal, state and local regulatory authorities deemed
necessary by the Acquiring Fund or the Partnership to permit consummation, in
all material respects, of the transactions contemplated herein shall have been
obtained, except where failure to obtain any such consent, order or permit would
not involve a risk of a material adverse effect on the assets or properties of
the Acquiring Fund or the Partnership, provided that either party hereto may for
itself waive any of such conditions;
8.4 Each of the N-1A and the Registration Statement shall have
become effective under the 1933 Act and no stop orders suspending the
effectiveness thereof shall have been issued and, to the best knowledge of the
parties hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act; and
8.5 The parties shall have received an opinion of Dechert
Price & Rhoads addressed to each of the Partnership and the Acquiring Fund
substantially to the effect that, based upon certain facts, assumptions and
representations, the Exchange contemplated by this Agreement constitutes a tax
free exchange for federal income tax purposes. The delivery of such opinion is
conditioned upon
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receipt by Dechert Price & Rhoads of representations it shall request of each of
the Partnership and the Acquiring Fund.
9. INDEMNIFICATION
9.1 The Acquiring Fund agrees to indemnify and hold harmless
the Partnership, each of the Partners, and the Partnership's employees, from and
against any and all losses, claims, damages, liabilities or expenses (including,
without limitation, the payment of reasonable legal fees and reasonable court
costs, but excluding any indirect, consequential, or special damages) to which
jointly and severally, the Partnership or any of its Partners or employees may
become subject, insofar as any such loss, claim, damage, liability, or expense
arises out of or is based on (i) any breach by the Acquiring Fund of any of its
representations, warranties, covenants or agreements set forth in this
Agreement, or (ii) the negligent or reckless acts or omissions or willful
misfeasance of the Acquiring Fund in connection with this Agreement.
9.2 The General Partner and the Partnership agree to indemnify
and hold harmless the Acquiring Fund and each of the Acquiring Fund's trustees,
officers or employees from and against any and all losses, claims, damages,
liabilities or expenses (including, without limitation, the payment of
reasonable legal fees and reasonable court costs, but excluding any indirect,
consequential, or special damages) to which jointly and severally, the Acquiring
Fund or any of its trustees, officers, or employees may become subject, insofar
as any such loss, claim, damage, liability, or expense arises out of or is based
on (i) any breach by the General Partner or the Partnership of any of their
representations, warranties, covenants or agreements set forth in this
Agreement, or (ii) the negligent or reckless acts or omissions or willful
misfeasance of the General Partner and the Partnership in connection with this
Agreement, or (iii) any action brought by a Limited Partner that does not
consent to the transactions contemplated by this Agreement, which action results
from the distribution of Acquiring Fund Shares to that Limited Partner in
cancellation of its Partnership Interest pursuant to this Agreement, excluding
any action resulting from adverse tax consequences to that Limited Partner,
provided, however, that any indemnification under this section 9.2(iii) shall be
limited to reasonable legal fees and reasonable court costs, excluding any
indirect, consequential, or special damages, and to the difference between the
proceeds that would have been received by that Limited Partner if that Limited
Partner's Fund Shares were redeemed on the Business Day next following the
Closing and the value of that Limited Partner's Partnership Interest on the
Valuation Date.
10. FEES AND EXPENSES
10.1 Each of Forum and the General Partner represents and
warrants to the other that it has no obligations to pay any brokers or finders
fees in connection with the transactions provided for herein.
10.2 Each party will pay its own expenses incurred in
connection with the Exchange.
11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
11.1 The Acquiring Fund, the General Partner and the
Partnership agree that no party has made any representation, warranty or
covenant not set forth herein and this Agreement constitutes the entire
agreement between the parties.
11.2 Except as specified in the next sentence set forth in
this section 11.2, the representations, warranties and covenants contained in
this Agreement or in any document delivered pursuant hereto or in connection
herewith shall not survive the consummation of the transactions contemplated
hereunder. The covenants to be performed after the Closing and the obligations
of each of Forum, Polaris Fund, the General Partner and the Partnership in
Sections 9.1 and 9.2 shall survive the Closing.
12
<PAGE>
12. TERMINATION
This Agreement may be terminated and the transactions
contemplated herein may be abandoned by either party by (i) mutual agreement of
the parties, or (ii) by either party if the Closing shall not have occurred on
or before June 30, 1998, unless such date is extended by mutual agreement of the
parties, or (iii) by either party if the other party shall have materially
breached its obligations under this Agreement or made a material and intentional
misrepresentation herein or in connection herewith. In the event of any such
termination, this Agreement shall become void and there shall be no liability
hereunder on the part of any party or their respective trustees, or officers, as
the case may be, except for any such material breach or intentional
misrepresentation, as to each of which all remedies at law or in equity of the
party adversely affected shall survive.
13. WAIVER
At any time prior to the Closing Date, the General Partner or
the Acquiring Fund may (i) extend the time for the performance of the
obligations or other acts of the other; (ii) waive any inaccuracy in the
representations of the other; and (iii) waive compliance by the other with any
of the agreements or conditions set forth herein. Any such extension or waiver
must be in writing.
14. AMENDMENTS
This Agreement may be amended, modified or supplemented in
such manner as may be mutually agreed upon in writing by the authorized officers
of the Partnership and the Acquiring Fund; provided, however, that following
approval by the Limited Partners pursuant to section 5.8 of this Agreement, no
such amendment may have the effect of changing the provisions for determining
the number of the Acquiring Fund shares to be issued to the Participating
Partners under this Agreement to the detriment of those Participating Partners
without their further approval.
15. NOTICES
Any notice, report, statement or demand required or permitted
by any provisions of this Agreement shall be in writing and shall be deemed duly
given if delivered by hand (including by Federal Express or similar express
courier) or transmitted by facsimile or three days after being mailed by prepaid
registered or certified mail, return receipt requested, addressed to the
Partnership, 125 Summer Street, Boston, MA 02110 with a copy to Dechert Price &
Rhoads, Ten Post Office Square South, Boston, MA 02109, Attention: Sheldon A.
Jones, Esq., or to the Acquiring Fund, Two Portland Square, Portland, ME 04101,
Attention: David I. Goldstein, Esq., with a copy to Seward & Kissel, 1200 G
Street, N.W., Washington, D.C. 20005, Attention: Anthony C.J. Nuland, Esq., or
to any other address that the Partnership or the Acquiring Fund shall have last
designated by duly given notice to the other party.
16. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY
16.1 The Article and section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
16.2 This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
16.3 This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and the shareholders of the
Acquiring Fund and the Limited
13
<PAGE>
Partners and their respective successors and assigns, any rights or remedies
under or by reason of this Agreement.
16.4 This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of The Commonwealth of Massachusetts,
without regard to its principles of conflicts of laws.
16.5 The trustees of Forum and the shareholders of each series
of Forum shall not be liable for any obligations of Forum or Polaris Fund under
this Agreement, and the General Partner and the Partnership agree that, in
asserting any rights or claims against Forum or Polaris Fund under this
Agreement, they shall look only to the assets and property of Forum or Polaris
Fund in settlement of such rights or claims, and not to the trustees of Forum or
the shareholders of the series of Forum.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed and attested on its behalf by its duly authorized
representatives, all as of the ___ day of _________________ , 1998.
Attest: Forum Funds
on behalf of Polaris Global Value Fund
By:_____________________________
Its:____________________________
Attest: Global Value Limited Partnership
By General Partner:
Polaris Capital Management, Inc.
By:_____________________________
Its:____________________________
Attest: Polaris Capital Management, Inc., as General Partner of Global Value
Limited Partnership
By:_____________________________
Its:____________________________
14
<PAGE>
Appendix C
GLOBAL VALUE LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Global Value Limited Partnership
(A Massachusetts Limited Partnership):
We have audited the accompanying statement of assets and liabilities of the
Global Value Limited Partnership (a Massachusetts Limited Partnership),
including the related statement of investments, as of December 31, 1997, and the
related statement of operations for the year then ended and changes in net
assets for each of the two years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997 by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Global Value Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1997, and
the results of its operations for the year then ended and changes in its net
assets for each of the two years then ended, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 29, 1998
<PAGE>
GLOBAL VALUE LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENT OF INVESTMENTS
AS OF DECEMBER 31, 1997
The accompanying notes are an integral part of the financial statements.
(Showing Percentage of Total Investments)
<TABLE>
<S> <C> <C>
COMMON STOCK - 100.0%
Austria 1.6%
- --------------
Radex - Heraklith Ind, AG 8,200 $ 281,957
Canada 1.7%
- --------------
Methanex Corporation 40,000 317,255
Denmark 2.1%
- --------------
JYSKE Bank 3,100 378,037
Finland 4.6%
- --------------
Kesko OY 22,000 348,251
Rautaruukki OY 32,100 259,370
SILJA OY AB - A Shares 51,200 217,194
---------
824,815
France 1.5%
- -------------
Elf Aquitaine, Ord 100 11,636
Christian Dior, SA 2,550 261,534
---------
273,170
Germany 5.5%
- --------------
Continental AG 13,400 295,866
Veba AG 5,500 374,712
Walter AG 950 317,012
---------
987,590
<PAGE>
Hong Kong 0.8%
- ----------------
Semi-Tech (Global) Company Limited 922,644 $ 151,228
Ireland 1.8%
- ---------------
Crean (James) PLC 162,500 331,112
Italy 3.0%
- ------------
ENI SPA, ADR 9,300 530,681
Japan 6.0%
- -------------
Arisawa Manufacturing Co., Ltd. 24,000 227,040
Futaba Industrial Co., Ltd. 25,000 269,187
TDK Corporation ADR 3,550 260,925
Toyota Motor Corporation ADR 5,425 311,259
---------
1,068,411
Mexico 1.7%
- -------------
Cemex, SA ADR - B shares 27,700 297,775
Netherlands 5.3%
- ------------------
KLM (Royal Dutch Airlines) N.V. 8,912 329,711
N.V. Koninklijke KNP BT 13,200 304,080
Schuttersveld (Holding) N.V. 13,920 323,413
---------
957,204
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
Norway 5.5%
- -------------
Nycomed Amersham ASA NOK4 Series "A" 9,179 $ 344,900
Nycomed Amersham ASA NOK4 Series "B" 308 11,187
Norsk Hydro a.s ADR 5,354 273,054
ORKLA a.s - Class A Free Shares 4,100 353,151
---------
982,292
Russia 1.8%
- -------------
Lukoil Oil Co-Spons ADR 3,500 320,250
South Africa 2.3%
- -------------------
Palabora Mining Co. 20,150 205,999
Sappi, Ltd. 42,800 215,479
---------
421,478
Spain 5.7%
- ------------
Banco Popular EspanOl, S.A. 4,720 329,809
Repsol, S.A. ADR 7,250 308,578
Union Electrica Fenosa SA 39,600 379,331
---------
1,017,718
Sweden 3.2%
- -------------
SKF AB - B Shares 11,600 247,077
Volvo AB A Shares 12,100 323,302
---------
</TABLE>
570,379
3
<PAGE>
<TABLE>
<S> <C> <C>
Switzerland 0.1%
- ------------------
Ciba Specialty Chemical Shares 32 $ 3,817
Novaritis, AG Regd Shares 10 16,249
---------
20,066
United Kingdom 0.0%
- ---------------------
BTR Warrants* 310 4
United States 45.8%
- ---------------------
Abington Bancorp, Inc. 11,600 243,600
Adflex Solutions Inc.* 14,400 232,200
Affiliated Community Bancorp. 10,750 405,812
American Bank of Connecticut 7,050 341,043
Asyst Technologies Inc.* 8,300 180,525
BT Office Products International, Inc. 26,400 204,600
Cendant Corporation 11,043 379,603
Dime Financial Corp. 9,500 289,750
Eagle Financial Corp. 7,614 418,770
Emerald Isle Bancorp, Inc. 1 2,600 405,562
Fedder Corp. 58,769 359,960
Gainsco, Inc. 35,184 299,064
General Electric Company 5,100 374,212
Goodyear Tire & Rubber Company 4,950 314,943
Intel Corp. 3,695 259,574
Ipswich Savings Bank 31,000 511,500
Massbank Corp. 8,800 419,100
Mechanics Savings Bank* 14,500 377,906
4
<PAGE>
Peoples Heritage Financial Group 6,881 $ 316,526
Phelps Dodge Corp. 4,400 273,900
SIS Bancorp Inc. 9,250 371,748
Teradyne Inc.* 6,650 212,800
Utopia Inc.+ 37,500 75,000
Warren Bancorp, Inc. 13,450 309,350
Webster Financial Corp. 5,500 365,750
Wellman Inc. 14,400 280,800
---------
8,223,598
---------
Total Investments-100% (identified cost
$14,368,978) $17,955,020
</TABLE>
* Nonincome-producing security
+ Security valued at estimated fair value as determined in good faith
under procedures established by and under the supervision of the
General Partner of the Partnership.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for income tax
purposes was $14,368,978. Net unrealized appreciation aggregated $3,586,042, of
which $4,912,285 related to appreciated investment securities and $1,326,243
related to depreciated investment securities.
5
<PAGE>
<TABLE>
<S> <C>
Market Sector Diversification (Unaudited)
As a Percentage of Total Value of Investments in Securities
Brick Refractory 1.57%
Chemicals 4.62%
Banking 30.55%
Consumer Goods 8.04%
Steel 1.44%
Leisure and Tourism 1.21%
Metals 4.40%
Industrial Component 3.02%
Energy 6.46%
Utility - Electric 6.26%
Electric Products 0.84%
Machinery 2.77%
Multi Industry 3.81%
Auto Parts 6.80%
Electronics 5.38%
Transportation - Air 1.84%
Materials 1.52%
Medical 1.98%
Drugs 0.09%
Paper Products 1.20%
Services 2.11%
Appliances 2.00%
Insurance 1.67%
Capital Equipment 0.42%
---------
100 %
---------
</TABLE>
6
<PAGE>
GLOBAL VALUE LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market
value (identified cost: $14,368,978) $ 17,955,020
Cash and cash equivalents 1,302,636
------------
Total assets $ 19,257,656
LIABILITIES
Partners' capital withdrawals payable 161,324
Partners' capital paid in advance 674,640
Accrued management fee (Note C) 46,402
Accrued expenses 22,166
-----------
Total liabilities 904,532
------------
NET ASSETS
Contributed capital 10,733,037
Accumulated net investment income 121,359
Accumulated net realized gain on investments 3,912,686
Net unrealized appreciation of investments 3,586,042
------------
Net assets $ 18,353,124
</TABLE>
<PAGE>
GLOBAL VALUE LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Investment income:
Interest $ 29,886
Dividends 227,184
Other income 1,125
------------
258,195
Less foreign tax withholdings (25,129)
------------
Total investment income 233,066
Operating expenses:
Management fee (Note C) 152,443
Custodian fees 16,963
Accounting, audit and tax preparation 23,100
Legal fees 641
Other 235
------------
Total operating expenses 193,382
------------
Net investment income 39,684
------------
Realized and unrealized gain on investments:
Net realized gain on investments 2,285,289
Change in net unrealized appreciation
on investments 1,379,045
------------
Net realized and unrealized gain on investments 3,664,334
------------
Net increase in net assets resulting
from operations $ 3,704,018
</TABLE>
2
<PAGE>
GLOBAL VALUE LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C> <C>
1997 1996
Operations:
Net investment income $ 39,684 $ 22,021
Net realized gain on investment 2,285,289 891,194
Change in net unrealized
appreciation on investments 1,379,045 525,362
---------- ----------
Net increase in net assets
resulting from operations 3,704,018 1,438,577
Capital transactions:
Capital contributions (Note E) 7,212,576 1,240,604
Withdrawals (Note E) (538,527) (118,975)
---------- ----------
Net increase in net assets
resulting from capital transactions 6,674,049 1,121,629
---------- ----------
Net increase in net assets 10,378,067 2,560,206
Net assets:
Beginning of period 7,975,057 5,414,851
---------- ----------
End of period $ 18,353,124 $ 7,975,057
</TABLE>
3
<PAGE>
GLOBAL VALUE LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
A. THE PARTNERSHIP:
----------------
Global Value Limited Partnership (the "Partnership") was formed for the
purpose of investing in a portfolio of globally diversified securities.
The investment objective of the Partnership is to seek opportunities to
realize a substantial rate of return on its investments through capital
appreciation.
The Partnership commenced operations on July 31, 1989.
Effective January 1, 1996, the Partnership amended its partnership
agreement. The amendments incorporated various changes including:
1. Establishing Polaris Capital Management, Inc. (the "General
Partner") in place of Bernard R. Horn, Jr., as the general
partner and investment advisor. Bernard R. Horn, Jr. is the
president and sole owner of Polaris Capital Management, Inc.
Bernard R. Horn, Jr., is also a limited partner of the
Partnership. In order to facilitate this change in general
partner, Bernard R. Horn, Jr. withdrew his general partnership
interest (held in the form of a Simplified Employee Pension plan)
and contributed it as a limited partner interest. Polaris Capital
Management, Inc. subsequently deposited $10,000 as its general
partner interest.
2. Changing the methodology for allocating Partnership income from a
straight one percent of the General Partner's interest to one
based on the General Partner's capital interest on a quarterly
basis.
3. Facilitating the Partnership's investment in "hot issues" as
defined by the Rules of Fair Practice of the National Association
of Security Dealers, Inc.
B. SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------
PREPARATION OF FINANCIAL STATEMENTS
The Partnership's policy is to prepare its financial
statements on the accrual basis of accounting. The preparation
of financial statements in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a majority of three months
or less at the date of acquisition are classified as cash
equivalents. Cash balances are maintained in various interest
bearing custody accounts to facilitate investment
transactions. At December 31, 1997 approximately $1,290,300 in
cash was placed in the Chase Money Market Fund at Chase
Manhattan Bank, the custodian of the Partnership's funds and
securities.
4
<PAGE>
VALUATION OF SECURITIES
The valuation of investments in the portfolio is determined by
the General Partner in conformity with the following
guidelines established by the partnership agreement:
1. Marketable securities listed on one or more national
securities exchange will be valued at their last
sales price on the date of valuation (or, in the
absence of sales on that date, at the last closing
bid price less normal commissions);
2. Marketable securities traded in the over-the-counter
markets or quoted on NASDAQ or similar quotation
systems will be valued at their last sales price as
of the closing price on the date of valuation (or, in
the absence of sales, on that date, at the last
closing bid price less normal commissions);
3. Securities not marketable due to investment letter
restrictions or other reasons but part of a class of
publicly traded securities will be valued at an
appropriate discount from the public market value;
and
4. All other securities will be valued at cost or at a
valuation based on contemporaneous third party
transactions in the private market or at fair market
value determined by the General Partner taking into
consideration the cost of the securities, the quoted
prices of securities of comparable publicly traded
companies, market conditions, the underlying
collateral, financial data and projections of the
issuer furnished to the General Partner and such
other facts as the General Partner may deem relevant;
and
5. All foreign currencies and securities prices quoted
in foreign currencies will be converted to U.S.
dollars at the exchange rates published in the Wall
Street Journal or other reliable publications.
INCOME TAXES
The Partnership files informational returns with the
Internal Revenue Service and the Commonwealth of
Massachusetts and other states. As a partnership, income and
losses are passed through to the individual partners and,
accordingly, there is no provision for income taxes.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Partnership are maintained in
U.S. dollars. Investment securities, other assets, and
liabilities denominated in a foreign currency are translated
into U.S. dollars at the current exchange rate as of the end
of the period. Purchases and sales of securities, income
receipts and expense payments are translated into U.S.
dollars at the exchange rate on the dates of the
transactions.
FORWARD FOREIGN CURRENCY CONTRACTS
In connection with the Partnership's purchase and sale of
securities denominated in foreign currency, the Partnership
may enter into forward foreign currency exchange contracts
for the purchase or sale, for a fixed amount of U.S.
dollars, of the amount of foreign currency involved in the
underlying security transaction.
5
<PAGE>
INVESTMENT TRANSACTIONS
Security transactions are accounted for as of the trade
date. The Partnership uses the identified cost method to
determine gains and losses on securities sold. The effects
of changes in foreign currency exchange rates on investments
in securities are included with the net realized and
unrealized gain or loss on investment securities.
INVESTMENT INCOME
Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
C. MANAGEMENT FEE:
--------------
Under the partnership agreement, the General Partner is paid an annual
management fee equal to the greater of $40,000 or 1.0% of the Net
Portfolio Value of the Partnership, payable quarterly. Net Portfolio
Value represents the market value of the Partnership's securities plus
cash and cash equivalents less the Partnership's liabilities.
D. ALLOCATION OF PROFITS AND LOSSES:
---------------------------------
The Partnership Agreement, amended in 1996, provides that gains and
losses, which include net investment income (loss) and net realized and
unrealized appreciation (depreciation) on investments, be allocated
among the partners pro rata in the proportion that each partners'
capital account bears to the aggregated capital of all partners.
Allocation of profits and losses are made at such time as capital
contributions and withdrawals are allowed.
E. CONTRIBUTIONS AND WITHDRAWALS:
------------------------------
A Limited Partner may withdraw all or any part of his capital account
as of the last day of the calendar quarter upon 30 days prior written
notice. New subscriptions from new or existing Limited Partners will be
accepted on the first day of each calendar quarter or such other times
as shall be designated by the General Partner.
All withdrawals by partners are subject to a redemption fee equal to
1/2 of 1% of the amount withdrawn, such amount to be paid to the
Partnership. The redemption fee may be waived by the General Partner as
its sole discretion.
F. INVESTMENT TRANSACTIONS:
------------------------
Purchases and sales of investment securities, other than short-term
investment securities, during 1997 totaled $10,091,677 and $4,898,470,
respectively.
G. CONCENTRATION OF MARKET RISK:
-----------------------------
At December 31, 1997, the Partnership's total holdings in the banking
industry represent $5,484,263 (30% of net assets).
6
<PAGE>
H. RELATED PARTIES:
----------------
During 1997 and 1996, Bernard R. Horn, Jr. and certain family members
made contributions and held equity interests in the Partnership in
accordance with the Partnership Agreement. Amounts contributed and
withdrawn by related parties during the year ended December 31, 1997
totaled $11,275 and $20,000, respectively. At December 31, 1997, the
related party equity interest was $799,870, or 4% of total partners'
capital.
Amounts contributed by related parties during the year ended December
31, 1996 totaled $199,913.
I. NON-CASH TRANSACTIONS:
----------------------
During 1997, the Partnership received capital contributions of
$7,212,576. Approximately $1,456,000 of these contributions represent
securities transferred at market value. The remaining balance of these
capital contributions represent cash contributions.
7
<PAGE>
POLARIS GLOBAL VALUE FUND
GLOBAL VALUE LIMITED PARTNERSHIP & POLARIS GLOBAL VALUE FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
YEAR ENDING DECEMBER 31, 1997
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Global Value Polaris Global Pro Forma Pro Forma
Limited Partnership Value Fund Combined Adjustments Combined
------------------- -------------- --------- ------------- ---------
Income:
INTEREST $29,886 $29,886 $29,886
DIVIDENDS $227,184 $227,184 $227,184
OTHER $1,125 $1,125 $1,125
------------- ------------- ------------ ------------ ---------
$258,195 $258,195 $258,195
LESS FOREIGN TAXES ($25,129) ($25,129) ($25,129)
------------- ------------- ------------ ------------ ---------
$233,066 $0 $233,066 $233,066
------------- ------------- ------------ ------------ ---------
Expenses:
ADVISORY $152,443 $152,443 ($9,481) (a) $142,962
ADMINISTRATION $0 $40,000 (b) $40,000
TRANSFER AGENT $0 $26,500 (c) $26,500
CUSTODY $16,963 $16,963 ($8,104) (d) $8,859
LEGAL $641 $641 $9,359 (e) $10,000
COMPLIANCE $0 $11,701 (f) $11,701
SEC FEES $0 $4,217 (g) $4,217
ACCOUNTING $0 $42,480 (h) $42,480
AUDITING $23,100 $23,100 $23,100
AMORTIZATION OF ORG. COSTS $0 $6,000 (i) $6,000
DIRECTORS $0 $746 (j) $746
REPORTING $0 $12,300 (k) $12,300
OTHER $235 $235 $2,265 (l) $2,500
------------- ------------- ------------ ------------ ---------
GROSS EXPENSES $193,382 $0 $193,382 $137,983 $331,365
------------- ------------- ------------ ------------ ---------
LESS WAIVERS:
Investment Advisory ($81,383) (m) ($81,383)
------------- ------------- ------------ ------------ ---------
TOTAL WAIVERS $0 $0 $0 ($81,383) ($81,383)
------------- ------------- ------------ ------------ ---------
NET EXPENSES $193,382 $0 $193,382 $56,600 $249,982
============= ============= ============ ============ =========
</TABLE>
8
<PAGE>
POLARIS GLOBAL VALUE FUND
GLOBAL VALUE LIMITED PARTNERSHIP & POLARIS GLOBAL VALUE FUND
PRO FORMA COMBINING STATEMENT OF ASSETS & LIABILITIES
AS OF DECEMBER 31, 1997
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Global Value Polaris Global Pro Forma Pro Forma
Limited Partnership Value Fund Combined Adjustments Combined
------------------ ------------- -------- ------------- ---------
Assets
INVESTMENTS IN
SECURITIES, AT COST
(identifed cost: $14,368,978
+$615,660(q) = $14,984,638) $17,955,020 $17,955,020 $615,660 (q) $18,570,680
CASH & CASH EQUIVALENTS $1,302,636 $1,302,636 ($684,640) (n) $12,336
TOTAL ASSETS $19,257,656 $0 $19,257,656 $615,660 (q) $18,583,016
-
----------- ----------- ------------ ---------- -----------
Liabilities
PARTNER'S CAPITAL
WITHDRAWLS PAYABLE/
PAYABLE FOR FUND SHARES SOLD $161,324 $161,324 $161,324
PARTNER'S CAPITAL
PAID IN ADVANCE $674,640 $674,640 ($674,640) (n) $0
ACCRUED MGMT FEE $46,402 $46,402 $46,402
ACCRUED EXPENSES $22,166 $22,166 $22,166
----------- ----------- ------------ ---------- -----------
TOTAL LIABILITES $904,532 $0 $904,532 $229,892
----------- ----------- ------------ ---------- -----------
NET ASSETS $18,353,124 $0 $18,353,124 $18,353,124
=========== =========== ============ ========== ==========
Net Assets Consist of:
CONTRIBUTED CAPITAL / $10,733,037 $10,733,037 $3,912,686 (o)
PAID IN CAPITAL $121,359 (p) $14,767,082
ACCUMULATED NET INVESTMENT
INCOME $121,359 $121,359 ($121,359) (p) $0
ACCUMULATED NET REALIZED GAIN
ON INVESTMENTS $3,912,686 $3,912,686 ($3,912,686) (o) $0
NET UNREALIZED APP/(DEP)
ON INVESTMENTS $3,586,042 $3,586,042 $3,586,042
----------- ----------- ------------ ---------- -----------
NET ASSETS $18,353,124 $18,353,124 $18,353,124
=========== =========== ============ ========== ==========
Net Assets $18,353,124
Net Asset Value, offering price and redemption price $10.00
Shares Outstanding 1,835,312.40
</TABLE>
9
<PAGE>
POLARIS GLOBAL VALUE FUND
GLOBAL VALUE LIMITED PARTNERSHIP & POLARIS GLOBAL VALUE FUND
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited Pro Forma Combining Statement of Assets and
Liabilities as of December 31, 1997 and the unaudited Pro Forma Combining
Statement of Operations for the year ended December 31, 1997 are intended to
present the financial condition and related results of operations of Polaris
Global Value Fund ("Fund") as if the reorganization with Global Value Limited
Partnership had been consummated as of January 1, 1997.
A Pro Forma Combining Schedule of Investments has been omitted from these pro
forma financial statements since there were no pro forma adjustments to the
Schedule of Investments as included in the December 31, 1997 Global Value
Limited Partnership Financial Statements.
The pro forma adjustments to these pro forma financial statements are comprised
of:
(a) Decrease in fees reflects calculation of investment advisory fee
on average net assets as opposed to quarter end net portfolio
value
(b) Reflects minimum fee for administration services by Forum
Administrative Services, LLC to the Fund
(c) Reflects transfer agent base fee and estimated account fees by
Forum Financial Corp. to the Fund
(d) Reflects decrease in custody fees through change in custodian for
the Fund
(e) Reflects legal fees associated with independent counsel to the
Fund
(f) Reflects blue sky registration fees associated with initial and
ongoing registration of the shares of the Fund for sale in all
fifty states
(g) Reflects fees charged by the Securities & Exchange Commission
under Section 24f2 to the Fund
(h) Reflects fund accounting fees charged by Forum Fund Accounting
Services, LLC and related out of pocket expenses for pricing
services
(i) Reflects twelve months amortization of organizational costs
associated with the establishment of the Fund
(j) Reflects pro rata share of board of trustee fees and expenses for
the Fund
(k) Reflects the costs of printing, filing and mailing semiannual and
annual financial statements as well as fund prospectuses
(l) Reflects increase in miscellaneous costs due to out of pocket
expense incurred as a regulated investment company
(m) Reflects reduction in expenses due to Polaris Capital
Management's agreement to voluntarily limit the fund expense to
1.75% of average net assets
10
<PAGE>
(n) Reflects the return of cash contributed to the partnership in
anticipation of purchasing partnership interests on January 1,
1998
(o) Reflects reclassification of gains previously recognized by the
partners for tax purposes as paid in capital
(p) Reflects reclassification of income previously recognized by the
partners for tax purposes as paid in capital
(q) Reflects reclassification of cash equivalents to short-term
investments in securities for the Fund.
The unaudited combining statements should be read in conjunction with the
separate annual audited financial statements as of December 31, 1997 for Global
Value Limited Partnership, which are also included in Appendix C to this proxy
and prospectus.
11
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 8, 1998
FORUM FUNDS
Two Portland Square
Portland, Maine 04101
(207) 879-1900
Acquisition of the Assets of
GLOBAL VALUE LIMITED PARTNERSHIP
125 Summer Street
Boston, MA 02110
(617) 951 1365
By and in Exchange for the Shares of
POLARIS GLOBAL VALUE FUND
(A Series of Forum Funds)
This Statement of Additional Information (the "Statement")
relates to the proposed transfer of substantially all of the assets of Global
Value Limited Partnership (the "Partnership") to Polaris Global Value Fund (the
"Fund"), a newly created series of Forum Funds (the "Trust"), in exchange solely
for over 80% of shares of the Fund (the "Exchange"); and the subsequent
distribution of those shares pro rata to the Partnership's partners immediately
thereafter, followed as soon as practicable by the liquidation and termination
of the Partnership.
This Statement is not a prospectus and is meant to be read in
conjunction with the Proxy Statement/Prospectus dated May 8, 1998, which this
Statement accompanies.
A copy of that Proxy Statement/Prospectus may be obtained
without charge by writing to or calling: Forum Financial Corporation; Two
Portland Square; Portland, ME 04101; (888) 263-5594.
<PAGE>
TABLE OF CONTENTS
Page
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THE TRUST
FINANCIAL STATEMENTS
2
<PAGE>
THE TRUST
For further information about the Trust and the Fund (the
"Parties"), Limited Partners in the Partnership should refer to the information
regarding the Fund that is attached to the Proxy Statement/Prospectus as
Appendix A. For further information about the Partnership, Limited Partners
should refer to the Partnership's Partnership Agreement and Private Offering
Memorandum.
FINANCIAL STATEMENTS
Financial statements are included in Appendix C of the Proxy
Statement/Prospectus dated May 8, 1998.
47180.060 # 3246
3
