INVESTORS HIGH GRADE BOND FUND
INVESTORS BOND FUND
TAXSAVER BOND FUND
MAINE MUNICIPAL BOND FUND
NEW HAMPSHIRE BOND FUND
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Account Information and
Shareholder Servicing: Distributor:
Forum Shareholder Services, LLC Forum Financial Services, Inc.
P.O. Box 446 Two Portland Square
Portland, Maine 04112 Portland, Maine 04101
207-879-0001 207-879-1900
800-94FORUM
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STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
Investors High Grade Bond Fund, Investors Bond Fund, TaxSaver Bond Fund, Maine
Municipal Bond Fund and New Hampshire Bond Fund (the "Funds" and individually
each a "Fund") are series of Forum Funds (the "Trust"), a registered open-end
investment company. This Statement of Additional Information supplements the
Prospectuses dated August 1, 1998 offering shares of the Funds and should be
read only in conjunction with the Prospectuses, copies of which may be obtained
by an investor without charge by contacting the Funds' shareholder servicing
agent at the address and number listed above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
TABLE OF CONTENTS
PAGE
1. General...................................................... 2
2. Investment Policies.......................................... 4
3. Additional Investment Policies...............................10
4. Certain Information Concerning the States of Maine
and New Hampshire............................................13
5. Performance Data.............................................20
6. Management...................................................23
7. Determination of Net Asset Value.............................33
8. Portfolio Transactions.......................................34
9. Additional Purchase and
Redemption Information.......................................34
10. Tax Matters..................................................36
11. Other Information............................................37
Appendix A - Control Persons and Principal Holders of Securities ....A-1
Appendix B - Description of Securities Ratings ......................B-1
Appendix C - Description of Municipal Securities ....................C-1
Appendix D - Hedging Strategies .....................................D-1
Appendix E - Additional Advertising Materials .......................E-1
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1. GENERAL
THE TRUST. The Trust is registered with the Securities and Exchange Commission
(the "SEC") as an open-end, management investment company and was organized as a
business trust under the laws of the State of Delaware on August 29, 1995. On
January 5, 1996 the Trust succeeded to the assets and liabilities of Forum
Funds, Inc. Forum Funds, Inc. was incorporated on March 24, 1980 and assumed the
name of Forum Funds, Inc. on March 16, 1987. The Board, without shareholder
approval, has the authority to issue an unlimited number of shares of beneficial
interest of separate series with no par value per share and to create separate
classes of shares within each series (such as Investor and Institutional
Shares). The Trust currently offers shares of twenty-three series. The series of
the Trust are as follows:
Daily Assets Cash Fund Austin Global Equity Fund
Daily Assets Treasury Obligations Fund Oak Hall Equity Fund
Daily Assets Government Fund
Daily Assets Government Obligations Fund Quadra Growth Fund
Daily Assets Municipal Fund Quadra Equity Fund
Investors High Grade Bond Fund Equity Index Fund
Investors Bond Fund Investors Growth Fund
TaxSaver Bond Fund Investors Equity Fund
Maine Municipal Bond Fund International Equity Fund
New Hampshire Bond Fund Emerging Markets Fund
Small Company Opportunities Fund
Payson Value Fund Polaris Global Value Fund
Payson Balanced Fund
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when required by Federal or state law. Shareholders (and Trustees)
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. A shareholder in a portfolio is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that portfolio's assets
and, upon redeeming shares, will receive the portion of the portfolio's net
assets represented by the redeemed shares.
As of July 1, 1998, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of each Fund. Also as of that date, Appendix A
identifies all shareholders who own of record 5% or more of the outstanding
shares of any of the Registrant's series.
DEFINITIONS. As used in this Statement of Additional Information, the following
terms shall have the meanings listed:
"Adviser" means Forum Investment Advisors, LLC.
"Board" means the Board of Trustees of Forum Funds.
"FAdS" means Forum Administrative Services, LLC.
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"FAcS" means Forum Accounting Services, LLC.
"FFC" means Forum Financial Corp.
"FFSI" means Forum Financial Services, Inc.
"Fund" means Investors High Grade Bond Fund, Investors Bond Fund, Taxsaver Bond
Fund, Maine Municipal Bond Fund and New Hampshire Bond Fund
"Fund Business Day" has the meaning ascribed thereto in the current Prospectuses
of the Funds.
"NRSRO" means a nationally recognized statistical rating organization.
"SAI" means this Statement of Additional Information.
"SEC" means the U.S. Securities and Exchange Commission.
"Trust" means Forum Funds, a Delaware business trust.
"U.S. Government Securities" has the meaning ascribed thereto by the current
Prospectuses of the Funds.
"1940 Act" means the Investment Company Act of 1940, as amended.
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2. INVESTMENT POLICIES
GENERAL
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") and other nationally recognized statistical rating organizations
("NRSROs") are private services that provide ratings of the credit quality of
debt obligations, including convertible securities. A description of the range
of ratings assigned to various types of bonds and other securities by several
NRSROs is included in Appendix B to this Statement of Additional Information.
The Funds may use these ratings to determine whether to purchase, sell or hold a
security. However, ratings are general and are not absolute standards of
quality. Consequently, securities with the same maturity, interest rate and
rating may have different market prices. If an issue of securities ceases to be
rated or if its rating is reduced after it is purchased by a Fund, the
investment adviser of a Fund will determine whether a Fund should continue to
hold the obligation. Credit ratings attempt to evaluate the safety of principal
and interest payments and do not evaluate the risks of fluctuations in market
value. Also, rating agencies may fail to make timely changes in credit ratings.
An issuer's current financial condition may be better or worse than a rating
indicates.
Each Fund may retain securities whose rating has been lowered below the lowest
permissible rating category (or that are unrated and determined by the
investment adviser to be of comparable quality) if the investment adviser
determines that retaining such security is in the best interests of a Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but settlements delayed beyond two
months may be negotiated. During the period between a commitment and settlement,
no payment is made for the securities purchased by the purchaser and, thus, no
interest accrues to the purchaser from the transaction. At the time a Fund makes
the commitment to purchase securities on a when-issued or delayed delivery
basis, a Fund will record the transaction as a purchase and thereafter reflect
the value each day of such securities in determining its net asset value.
The use of when-issued transactions and forward commitments enables the Funds to
hedge against anticipated changes in interest rates and prices. For instance, in
periods of rising interest rates and falling bond prices, a Fund might sell
securities that it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, a
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the investment adviser to a Fund were
to forecast incorrectly the direction of interest rate movements, a Fund might
be required to complete such when-issued or forward commitment transactions at
prices inferior to the current market values.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Funds enter into when-issued and forward commitment
transactions only with the intention of actually receiving or delivering the
securities, as the case may be. If a Fund, however, chooses to dispose of the
right to acquire a when-issued security prior to its acquisition or to dispose
of its right to deliver or receive against a forward commitment, it can incur a
gain or loss. When-issued securities may include bonds purchased on a "when, as
and if issued" basis under which the issuance of the securities depends upon the
occurrence of a subsequent event. Any significant commitment of a Fund's assets
to the purchase of securities on a "when, as and if issued" basis may increase
the volatility of its net asset value.
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Each Fund will establish and maintain with its custodian a separate account with
cash, U.S. Government Securities (as defined in the Prospectus) and other liquid
high-grade debt securities in an amount at least equal to its commitments to
purchase securities on a when-issued or delayed delivery basis.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Trust's Board of Directors ("Board") has the ultimate responsibility for
determining whether specific securities are liquid or illiquid. The Board has
delegated the function of making day-to-day determinations of liquidity to the
investment adviser of each Fund, pursuant to guidelines approved by the Board.
The investment adviser takes into account a number of factors in reaching
liquidity decisions, including but not limited to: (1) the frequency of trades
and quotations for the security; (2) the number of dealers willing to purchase
or sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; and (4)
the nature of the marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the transfer.
The investment adviser monitors the liquidity of the securities in each Fund's
portfolio and reports periodically on such decisions to the Board.
REPURCHASE AGREEMENTS
The Funds may seek additional income by entering into repurchase agreements.
Repurchase agreements are transactions in which a Fund purchases a security and
simultaneously commits to resell that security to the seller at an agreed-upon
price on an agreed-upon future date, normally one to seven days later. The
resale price reflects a market rate of interest that is not related to the
coupon rate or maturity of the purchased security. The Trust's custodian
maintains possession of the underlying collateral, which is maintained at not
less than 100% of the repurchase price, and which consists of the types of
securities in which the Fund may invest directly.
LENDING OF PORTFOLIO SECURITIES
Each Fund may from time to time lend securities from its portfolio to brokers,
dealers and other financial institutions. Securities loans must be continuously
secured by cash or U.S. Government Securities with a market value, determined
daily, at least equal to the value of the Fund's securities loaned, including
accrued interest. The Fund receives interest in respect of securities loans from
the borrower or from investing cash collateral. The Funds may pay fees to
arrange the loans. Each Fund will, as a fundamental policy, limit securities
lending to not more than 10% of the value of its total assets.
TEMPORARY DEFENSIVE POSITION
When a Fund assumes a temporary defensive position it may invest without limit
in (i) short-term U.S. Government Securities, (ii) certificates of deposit,
bankers' acceptances and interest-bearing savings deposits of commercial banks
doing business in the United States that have, at the time of investment, total
assets in excess of one billion dollars and that are insured by the Federal
Deposit Insurance Corporation, (iii) commercial paper of prime quality rated
Prime-2 or higher by Moody's or A-2 or higher by S&P or, if not rated,
determined by the adviser to be of comparable quality, (iv) repurchase
agreements covering any of the securities in which the Fund may invest directly
and (v) money market mutual funds.
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OTHER INVESTMENT COMPANIES
The Funds may invest in the securities of other investment companies within the
limits proscribed by the 1940 Act. Under normal circumstances, each Fund intends
to invest less than 5% of the value of its net assets in the securities of other
investment companies. In addition to the Fund's expenses (including the various
fees), as a shareholder in another investment company, a Fund would bear its pro
rata portion of the other investment company's expenses (including fees).
INVESTORS HIGH GRADE BOND FUND, INVESTORS BOND FUND AND TAXSAVER BOND FUND
FUTURES CONTRACTS AND OPTIONS
Currently Investors High Grade Bond Fund and TaxSaver Bond Fund do not invest in
futures contracts and options. Investors Bond Fund (and, in the future, each
other Fund) may in the future seek to hedge against a decline in the value of
securities it owns or an increase in the price of securities which it plans to
purchase through the writing and purchase of exchange-traded and
over-the-counter options and the purchase and sale of futures contracts and
options on those futures contracts. TaxSaver Bond Fund may buy or sell municipal
bond index futures contracts and both Funds may buy or sell futures contracts on
Treasury bills, Treasury bonds and other financial instruments. The Funds may
write covered options and buy options on the futures contracts in which they may
invest.
If the Adviser anticipates that interest rates will rise, a Fund may sell
futures contracts as a hedge against a decrease in the value of the Fund's
portfolio securities. Conversely, if the Adviser anticipates a decline in
interest rates, a Fund may purchase futures contracts to protect itself against
an increase in the price of the debt securities that the Fund might wish to
purchase.
In addition, each Fund may write (sell) covered put and call options and may buy
put and call options on debt securities and bond indices. An option is covered
if, so long as the Fund is obligated under the option, it owns an offsetting
position in the underlying security, currency or futures contract or maintains
cash, U.S. Government Securities or other liquid assets in a segregated account
with a value at all times sufficient to cover the Fund's obligation under the
option.
The Funds' use of options and futures contracts would subject the Funds to
certain investment risks and transaction costs to which they might not otherwise
be subject. These risks include: (1) dependence on the Adviser's ability to
predict movements in the prices of individual securities and fluctuations in the
general securities markets; (2) imperfect correlation between movements in the
prices of options, futures contracts or related options and movements in the
price of the securities hedged or used for cover; (3) the fact that skills and
techniques needed to trade these instruments are different from those needed to
select the other securities in which the Funds invest; (4) lack of assurance
that a liquid secondary market will exist for any particular instrument at any
particular time; and (5) the possible need to defer closing out of certain
options, futures contracts and related options to avoid adverse tax
consequences. Other risks include the inability of the Fund, as the writer of
covered call options, to benefit from the appreciation of the underlying
securities above the exercise price and the possible loss of the entire premium
paid for options purchased by the Fund. In addition, options and futures
contracts do not pay interest, but may produce taxable capital gains.
Each Fund will not hedge more than 30% of its total assets by selling futures
contracts, buying put options and writing call options. In addition, each Fund
will not buy futures contracts or write put options whose underlying value
exceeds 5% of the Fund's total assets and will not purchase call options if the
value of purchased call options would exceed 5% of the Fund's total assets. A
Fund will not enter into futures contracts and options thereon if immediately
thereafter more than 5% of the value of the Fund's total assets would be
invested in these options or committed to margin on futures contracts.
A Fund will only invest in futures and options contracts after providing notice
to its shareholders, filing a notice of eligibility (if required) and otherwise
complying with the requirements of the Commodity Futures Trading Commission
("CFTC"). The CFTC's rules provide that the Funds are permitted to purchase
futures or options
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contracts subject to CFTC jurisdiction only (1) for bona fide hedging purposes
within the meaning of the rules of the CFTC; provided, however, that in the
alternative with respect to each long position in a futures or options contract
entered into by a Fund, the underlying commodity value of such contract at all
times does not exceed the sum of cash, short-term United States debt obligations
or other United States dollar denominated short-term money market instruments
set aside for this purpose by the Fund, cash proceeds from existing Fund
investments due in 30 days and accrued profit on the contract held with a
futures commissions merchant; and (2) subject to certain limitations.
INVESTORS HIGH GRADE BOND FUND AND INVESTORS BOND FUND
MORTGAGE-RELATED SECURITIES. As described in the Prospectus, Investors High
Grade Bond Fund and Investors Bond Fund and Investors High Grade Bond Fund may
invest in mortgage-related securities, including Collateralized Mortgage
Obligations ("CMOs"). CMOs are typically structured with a number of classes or
series (often referred to as tranches) that have different maturities and are
generally retired in sequence. Each class of bonds receives periodic interest
payments according to the coupon rate on the bonds. However, all monthly
principal payments and any prepayments from the collateral pool are paid first
to the "Class 1" bondholders. The principal payments are such that the Class 1
bonds will be completely repaid no later than, for example, five years after the
offering date. Thereafter, all payments of principal are allocated to the next
most senior class of bonds until that class of bonds has been fully repaid.
Although full payoff of each class of bonds is contractually required by a
certain date, any or all classes of bonds may be paid off sooner than expected
because of an acceleration in prepayments of the obligations comprising the
collateral pool.
The final tranche of a CMO may be structured as an accrual bond (sometimes
referred to as a Z-tranche). Holders of accrual bonds receive no cash payments
for an extended period of time. During the time that earlier tranches are
outstanding, accrual bonds receive accrued interest which is a credit for
periodic interest payments that increases the face amount of the security at a
compounded rate, but is not paid to the bond holder. After all previous tranches
are retired, accrual bond holders start receiving cash payments that include
both principal and continuing interest. The market value of accrual bonds can
fluctuate widely and their average life depends on the other aspects of the CMO
offering. Interest on accrual bonds is taxable when accrued even though the
holders receive no accrual payment. The Fund distributes all of its net
investment income, and may have to sell portfolio securities to distribute
imputed income, which may occur at a time when the Adviser would not have chosen
to sell such securities and which may result in a taxable gain or loss. The
Adviser's analyses of particular CMO issues and estimates of future economic
indicators (such as interest rates) become more important to the performance of
a Fund as the securities become more complicated.
ASSET-BACKED SECURITIES. As described in the Prospectus, Investors High Grade
Bond Fund and Investors Bond Fund may invest in asset-backed securities, which
have structural characteristics similar to mortgage-backed securities but have
underlying assets that are not mortgage loans or interests in mortgage loans.
Asset-backed securities are securities that represent direct or indirect
participations in, or are secured by and payable from, assets such as motor
vehicle installment sales contracts, installment loan contracts, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts and special purpose corporations.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. Payments of principal and interest
may be guaranteed up to certain amounts and for a certain time period by a
letter of credit issued by a financial institution.
Asset-backed securities present certain risks that are not presented by
mortgage-related debt securities or other securities in which Investors Bond
Fund may invest. Primarily, these securities do not always have the benefit of a
security interest in comparable collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and Federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to
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that of the holders of the asset-backed securities. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
TAXSAVER BOND FUND, MAINE MUNICIPAL BOND FUND
AND NEW HAMPSHIRE BOND FUND
MUNICIPAL SECURITIES
The term "municipal securities," as used in the Prospectuses and this Statement
of Additional Information means obligations of the type described in Appendix C
issued by or on behalf of states, territories, and possessions of the United
States and their political subdivisions, agencies and instrumentalities, the
interest on which is exempt from Federal income tax. The municipal securities in
which the Funds invest are limited to those obligations which at the time of
purchase: (i) in the case of TaxSaver Bond Fund, are backed by the full faith
and credit of the United States; (ii) are municipal notes rated in the two
highest rating categories by an NRSRO, or, if not rated, are of comparable
quality as determined by the Adviser; (iii) are municipal bonds rated in the six
highest rating categories by an NRSRO or, if not rated, are of comparable
quality as determined by the Fund's investment adviser; or (iv) are other types
of municipal securities, provided that such obligations are of comparable
quality, as determined by the Adviser, to instruments in which the Fund may
invest.
MUNICIPAL NOTES. Municipal notes, which may be either "general obligation" or
"revenue" securities, are intended to fulfill short-term capital needs and
generally have original maturities of 397 days or less. They include tax
anticipation notes, revenue anticipation notes, bond anticipation notes,
construction loan notes and tax-exempt commercial paper.
MUNICIPAL LEASES. Municipal leases frequently have special risks not normally
associated with general obligation or revenue bonds or notes. Lease and
installment purchase or conditional sale contracts (which normally provide for
title to the leased assets to pass eventually to the government issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations of many state constitutions and statutes
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. To reduce this risk, TaxSaver Bond
Fund will only purchase municipal leases subject to a non-appropriation clause
when the payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit or guarantee of a bank or other entity that has
long term outstanding debt securities rated in one of the top two rating
categories by an NRSRO.
VARIABLE AND FLOATING RATE OBLIGATIONS. The interest rates payable on certain
municipal securities, including municipal leases, in which a Fund may invest are
not fixed and may fluctuate based upon changes in market rates. These securities
are referred to as variable rate or floating rate obligations. Other features of
these obligations may include the right whereby the Fund may demand prepayment
of the principal amount of the obligation prior to its stated maturity and the
right of the issuer to prepay the principal amount prior to maturity. The main
benefit of a variable or floating rate municipal security is that the interest
rate adjustment minimizes changes in the market value of the obligation. As a
result, the purchase of these municipal securities enhances the ability of each
Fund to sell an obligation prior to maturity at a price approximating the full
principal amount of the obligation. The payment of principal and interest by
issuers of certain municipal securities purchased by a Fund may be guaranteed by
letters of credit or other credit facilities offered by banks or other financial
institutions. Such guarantees will be considered in determining whether a
municipal security meets the Fund's investment quality requirements. The
investment adviser will monitor the pricing, quality and liquidity of variable
rate and floating rate demand obligations held by
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each Fund on the basis of published financial information, rating agency reports
and other research services to which a Fund or the Adviser may subscribe.
PARTICIPATION INTERESTS. Each Fund may purchase participation interests in
municipal bonds, including private activity bonds and floating and variable rate
securities that are owned by banks or other financial institutions. A
participation interest gives a Fund an undivided interest in a municipal
security owned by a bank or other financial institution. These instruments carry
a demand feature permitting the holder to tender them back to the bank or other
institution and are generally backed by an irrevocable letter of credit or
guarantee of the bank or institution. The Fund can exercise the right, on not
more than thirty days' notice, to sell such an instrument back to the bank or
institution from which it purchased the instrument and draw on the letter of
credit for all or any part of the principal amount of the Fund's participation
interest in the instrument, plus accrued interest. Generally, a Fund will do so
only (i) as required to provide liquidity to the Fund, (ii) to maintain a high
quality investment portfolio, or (iii) upon a default under the terms of the
demand instrument. Banks and other financial institutions retain portions of the
interest paid on such participation interests as their fees for servicing such
instruments and the issuance of related letters of credit, guarantees and
repurchase commitments. Exposure to credit losses arising from the possible
financial difficulties of borrowers might affect the bank's or other
institution's ability to meet its obligations under its letter of credit or
other guarantee.
No Fund will purchase participation interests unless it is advised by counsel or
receives a ruling of the Internal Revenue Service that interest earned by the
Fund from the obligations in which it holds participation interests is exempt
from Federal income tax. The Internal Revenue Service has announced that it
ordinarily will not issue advance rulings on certain of the Federal income tax
consequences applicable to securities, or participation interests therein,
subject to a put. The Adviser will monitor the pricing, quality and liquidity of
participation interests held by each Fund on the basis of published financial
information, rating agency reports and other research services to which the
Funds or the Adviser may subscribe.
STAND-BY COMMITMENTS. Each Fund acquires stand-by commitments solely to
facilitate portfolio liquidity and does not exercise its rights thereunder for
trading purposes. Since the value of a stand-by commitment is dependent on the
ability of the stand-by commitment writer to meet its obligation to repurchase,
each Fund's policy is to enter into stand-by commitment transactions only with
municipal securities dealers which in the opinion of the Adviser present minimal
credit risks.
The acquisition of a stand-by commitment does not affect the valuation or
maturity of the underlying municipal securities that continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by a
Fund are valued at zero in determining net asset value. When a Fund pays
directly or indirectly for a stand-by commitment, its cost is reflected as
unrealized depreciation for the period during which the commitment is held.
Stand-by commitments do not affect the average weighted maturity of a Fund's
portfolio of securities.
GENERAL. Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the money market and of the municipal bond
and municipal note markets, the size of a particular offering, the maturity of
the obligation and the rating of the issue. Municipal securities with longer
maturities tend to produce higher yields and are generally subject to greater
price movements than obligations with shorter maturities. An increase in
interest rates will generally reduce the market value of portfolio investments,
and a decline in interest rates will generally increase the value of portfolio
investments.
There can be no assurance that a Fund's objective will be achieved. The
achievement of a Fund's investment objective is dependent in part on the
continuing ability of the issuers of municipal securities in which the Fund
invests to meet their obligations for the payment of principal and interest when
due. Municipal securities historically have not been subject to registration
with the SEC, although there have been proposals which would require
registration in the future.
The obligations of municipal securities issuers may become subject to laws
enacted in the future by Congress, state legislatures, or referenda extending
the time for payment of principal and/or interest, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. There is also the possibility
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that, as a result of litigation or other conditions, the ability of any issuer
to pay, when due, the principal of and interest on its municipal securities may
be materially affected.
3. ADDITIONAL INVESTMENT POLICIES
The investment objective and all investment policies of the Fund that are
designated as fundamental may be changed only with the approval of the holders
of a majority of the outstanding voting securities of the Fund. A majority of
outstanding voting securities means the lesser of (i) 67% of the shares present
or represented at a shareholder meeting at which the holders of more than 50% of
the outstanding shares are present or represented, or (ii) more than 50% of
outstanding shares. Unless otherwise indicated, all investment policies are not
fundamental and may be changed by the Trust's Board of Trustees ("Board")
without approval by shareholders of the Fund.
Investors High Grade Bond Fund, Investors Bond Fund, TaxSaver Bond Fund and
Maine Municipal Bond Fund have adopted the following fundamental investment
policies which are in addition to those contained in the Funds' Prospectus and
which may not be changed without shareholder approval. No Fund may:
(1) Borrow money, except for temporary or emergency purposes
(including the meeting of redemption requests) and except for
entering into reverse repurchase agreements, and provided that
borrowings do not exceed 33 1/3% of the Fund's total assets
(computed immediately after the borrowing).
(2) 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.
(3) Make loans to other persons except for loans of portfolio
securities and except through the use of repurchase agreements
and through the purchase of commercial paper or debt
securities which are otherwise permissible investments.
(4) Purchase or sell real estate or any interest therein, except
that the Fund may invest in securities issued or guaranteed by
corporate or governmental entities secured by real estate or
interests therein, such as mortgage pass-throughs and
collateralized mortgage obligations, or issued by companies
that invest in real estate or interests therein.
(5) Purchase or sell physical commodities or contracts relating to
physical commodities, provided that currencies and
currency-related contracts will not be deemed to be physical
commodities.
(6) Issue senior securities except pursuant to Section 18 of the
Investment Company Act of 1940 ("1940 Act") and except that
the Fund may borrow money subject to investment limitations
specified in the Fund's Prospectus.
(7) Invest in interests in oil or gas or interests in other
mineral exploration or development programs.
In addition to the foregoing, Investors Bond Fund and TaxSaver Bond Fund have
adopted the following fundamental investment policies concerning diversification
and industry concentration. The Funds may not:
(1) Purchase securities, other than U.S. Government Securities, of
any one issuer, if (a) more than 5% of the Fund's total assets
taken at market value would at the time of purchase be
invested in the securities of that issuer, or (b) such
purchase would at the time of purchase cause the Fund to hold
more than 10% of the outstanding voting securities of that
issuer. Up to 50% of the Fund's total assets may be invested
without regard to this limitation. These limitations do not
apply to securities of an issuer payable solely from the
proceeds of escrowed U.S. Government securities.
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(2) Purchase securities, other than U.S. Government Securities,
if, immediately after each purchase, more than 25% of the
Fund's total assets taken at market value would be invested in
securities of issuers conducting their principal business
activity in the same industry.
Investors High Grade Bond Fund has adopted the following fundamental investment
policies concerning diversification and industry concentration. The Fund may
not:
(1) With respect to 75% of its assets, purchase securities, other
than U.S. Government Securities, of any one issuer, if (a)
more than 5% of the Fund's total assets taken at market value
would at the time of purchase be invested in the securities of
that issuer, or (b) such purchase would at the time of
purchase cause the Fund to hold more than 10% of the
outstanding voting securities of that issuer.
(2) Purchase securities, other than U.S. Government Securities,
if, immediately after each purchase, more than 25% of the
Fund's total assets taken at market value would be invested in
securities of issuers conducting their principal business
activity in the same industry.
Maine Municipal Bond Fund has adopted the following fundamental investment
policies concerning investment in securities of issuers in the same industry and
investment in securities having voting rights. The Fund may not:
(1) Purchase securities, other than U.S. Government Securities,
if, immediately after each purchase, more than 25% of the
Fund's total assets taken at market value would be invested in
securities of issuers conducting their principal business
activity in the same industry. For this purpose, consumer
finance companies, industrial finance companies, and gas,
electric, water and telephone utility companies are each
considered to be separate industries.
(2) Purchase securities having voting rights except securities of
other investment companies.
Investors Bond Fund, Investors High Grade Bond Fund, TaxSaver Bond Fund and
Maine Municipal Bond Fund have adopted the following nonfundamental investment
policies that may be changed by the Board without shareholder approval. No Fund
may:
(a) Pledge, mortgage or hypothecate its assets, except to secure
permitted indebtedness. The deposit in escrow of securities in
connection with the writing of put and call options,
collateralized loans of securities and collateral arrangements
with respect to margin for futures contracts are not deemed to
be pledges or hypothecations for this purpose.
(b) Invest in securities of another registered investment company,
except in connection with a merger, consolidation, acquisition
or reorganization; and except that the Fund may invest in
money market funds and privately-issued mortgage related
securities to the extent permitted by the 1940 Act.
(c) Purchase securities on margin, or make short sales of
securities, except for the use of short-term credit necessary
for the clearance of purchases and sales of portfolio
securities, except that the Fund may make margin deposits in
connection with permitted transactions in options, futures
contracts and options on futures contracts.
(d) Purchase securities for investment while any borrowing
equaling 10% or more of the Fund's total assets is outstanding
or borrow for purposes other than meeting redemptions in an
amount exceeding 10% of the value of the Fund's total assets.
(e) Acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15%
of the Fund's net assets (taken at current value) would be
invested in repurchase agreements not entitling the holder to
payment of principal within seven days and in securities which
are not readily marketable, including securities that are
illiquid by virtue of
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restrictions on the sale of such securities to the public
without registration under the Securities Act of 1933
("Restricted Securities") or (ii) 10% of the Fund's total
assets would be invested in Restricted Securities.
(f) Purchase or sell real property leases (including limited
partnership interests, but excluding readily marketable
interests in real estate investment trusts or readily
marketable securities of companies that invest in real
estate.)
In addition to the foregoing, Investors Bond Fund, Investors High Grade Bond
Fund and TaxSaver Bond Fund have adopted the following nonfundamental investment
policy concerning investment in securities having voting rights.
The Funds may not:
(a) Purchase securities having voting rights except securities of
other investment companies.
The New Hampshire Bond Fund has adopted the following fundamental investment
policies that cannot be changed without the affirmative vote of a majority of
the Fund's outstanding voting securities. The Fund may not:
(1) With respect to 50% of its assets, purchase a security other
than a U.S. Government Security of any one issuer if, as a
result, more than 5% of the Fund's total assets would be
invested in the securities of that issuer or the Fund would
own more than 10% of the outstanding voting securities of that
issuer.
(2) Purchase securities if, immediately after the purchase, more
than 25% of the value of the Fund's total assets would be
invested in the securities of issuers having their principal
business activities in the same industry, provided there is no
limit on investments in U.S. Government Securities, municipal
securities or in the securities of domestic financial
institutions (not including their foreign branches). For this
purpose, consumer finance companies, industrial finance
companies, and gas, electric, water and telephone utility
companies are each considered to be separate industries.
(3) Underwrite securities of other issuers, except to the extent
that the Fund may be considered to be acting as an underwriter
in connection with the disposition of portfolio securities.
(4) Purchase or sell real estate or any interest therein, except
that the Fund may invest in debt obligations secured by real
estate or interests therein or issued by companies that invest
in real estate or interests therein.
(5) Invest in commodities or in commodity contracts, except that,
to the extent the Fund is otherwise permitted, the Fund may
enter into financial futures contracts and options on those
futures contracts and may invest in currencies and
currency-related contracts.
(6) Borrow money, except for temporary or emergency purposes
(including the meeting of redemption requests) and except for
entering into reverse repurchase agreements, provided that
borrowings do not exceed 33 1/3% of the Fund's net assets.
(7) Issue senior securities except as appropriate to evidence
indebtedness that the Fund is permitted to incur, and provided
that the Fund may issue shares of additional series or classes
that the Board may establish.
(8) Make loans except for loans of portfolio securities, through
the use of repurchase agreements, and through the purchase of
debt securities that are otherwise permitted investments.
The New Hampshire Bond Fund has adopted the following nonfundamental investment
limitations that may be changed by the Board without shareholder approval. The
Fund may not:
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<PAGE>
(a) Purchase securities for investment while any borrowing
equaling 10% or more of the Fund's total assets is
outstanding; and if at any time the Fund's borrowings exceed
the Fund's investment limitations due to a decline in net
assets, such borrowings will be promptly (within three days)
reduced to the extent necessary to comply with the
limitations.
(b) Purchase securities that have voting rights, except the Fund
may invest in securities of other investment companies to the
extent permitted by the Investment Company Act of 1940 (the
"1940 Act").
(c) Purchase securities on margin, or make short sales of
securities, except for the use of short-term credit necessary
for the clearance of purchases and sales of portfolio
securities.
(d) Acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15%
of the Fund's net assets (taken at current value) would be
invested in repurchase agreements not entitling the holder to
payment of principal within seven days and in securities which
are not readily marketable or (ii) 10% of the Fund's total
assets would be invested in securities that are illiquid by
virtue of restrictions on the sale of such securities to the
public without registration under the Securities Act of 1933.
(e) Purchase or sell real property (including limited partnership
interests, but excluding readily marketable interests in real
estate investment trusts or readily marketable securities of
companies that invest in real estate.)
For purposes of the policy set forth above with respect to TaxSaver Bond Fund,
which relates to the diversification of the Fund's assets, the District of
Columbia, each state, each political subdivision, agency, instrumentality and
authority thereof, and each multi-state agency of which a state is a member is
deemed to be a separate "issuer." When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from the
government creating the subdivision and the security is backed only by the
assets and revenues of the subdivision, such subdivision would be deemed to be
the sole issuer. Similarly, in the case of private activity bonds, if the bond
is backed only by the assets and revenues of the nongovernmental user, then such
nongovernmental user would be deemed to be the sole issuer. However, if in
either case, the creating government or some other agency guarantees a security,
that guarantee would be considered a separate security and would be treated as
an issue of such government or other agency.
No more than 25% of a Fund's total assets may be invested in the securities of
one issuer. However, this limitation does not apply to securities of an issuer
payable solely from the proceeds of U.S. Government Securities.
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of the
Fund's assets or purchases and redemptions of shares will not be considered a
violation of the limitation.
4. CERTAIN INFORMATION CONCERNING THE STATE OF MAINE AND NEW HAMPSHIRE
STATE OF MAINE
Material in this section has been compiled from numerous sources including "The
Maine Economy: Year-End Review and Outlook, 1997" prepared and published by the
Economics Division of the Maine State Planning Office; "State of Maine, General
Fund Budget, Revenue and Economic Data, May 13, 1998;" and "State of Maine
Presentation to Moody's Investors Service, Standard and Poors, and Fitch
Investors Service, Inc., May 13, 1998." In addition, certain information was
obtained from the Official Statement of the State of Maine published in
connection with the issuance on June 25, 1998 of $85,500,000 general obligation
bonds dated June 1, 1998 Other information concerning Maine budgetary matters
was obtained from official legislative documents, the Office of the Commissioner
of the Maine Department of Administrative and Financial Services, the Office of
the Treasurer of the State of Maine, the Bureau of the Budget of the
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Maine Department of Administrative and Financial Services, the Office of Fiscal
and Program Review of the Maine Legislature, the Maine State Planning Office,
and the Maine State Retirement System. The most recent information concerning
credit ratings on debt issued by or on behalf of the State of Maine and its
subordinate agencies was obtained from credit reports for the State of Maine
published by S&P on June 5, 1998, by Moody's on June 5, 1998, and by Fitch IBCA,
Inc. ("Fitch"), on June 8, 1998.
Although the information derived from the above sources is believed to be
accurate, none of the information obtained from these sources has been verified
independently. While the following summarizes the most current information
available from the above sources, it does not reflect economic conditions or
developments which may have occurred or trends which may have materialized since
the dates indicated.
The State of Maine, which includes nearly one-half of the total land area of the
six New England states, currently has a population of approximately 1,242,000.
The structure of the Maine economy is similar to that of the nation as a whole,
except that the Maine economy historically has had more activity in
manufacturing, defense-related activities, and tourism, and less activity in
finance and services. Recently, however, the manufacturing and defense-related
sectors of Maine's economy have decreased significantly, and the service
industry, retail, and financial services sectors of Maine's economy have
increased significantly.
During the 1980's, Maine's economy surpassed national averages in virtually all
significant measures of economic growth. During this ten-year period, Maine real
economic growth was 40% as measured by the Maine Economic Growth Index ("EGI"),
a broad-based measure of economic growth which is corrected for inflation. This
economic growth compares to national real economic growth during the 1980's of
26% and 29%, measured by the United States Economic Growth Index and real Gross
National Product respectively. During this time period, resident employment in
Maine increased by 21%, while resident employment nationally increased by 19%.
Inflation-adjusted retail sales in Maine during this period increased by 72%, as
opposed to a 32% increase in such retail sales nationally. During the 1980's,
per capita personal income in Maine rose from 44th in the nation in 1979, to
26th in the nation in 1989, or from 81% to 92% of the national average of per
capita personal income.
Beginning in the fourth quarter of 1989, however, the Maine economy experienced
a substantial temporary decline. For example, the Maine economy sustained only
0.8% real growth in 1989, and experienced real growth of -1.1% in 1990 and -2.6%
in 1991. Data show that the Maine economy began a sustained decline during the
fourth quarter of 1989, and the second quarter of 1991 saw the seventh
consecutive quarterly decline in the Maine EGI. The third and fourth quarters of
1991 showed barely positive economic growth of 0.9% and 0.2% respectively.
Economic recovery in Maine also has been hindered by significant losses in
defense-related jobs, with the State losing since 1990 approximately 20% of its
defense-dependent employment which peaked at 63,000 jobs in 1989. During the
1989-1991 period also, the State lost 6% of its entire job base.
Since 1991 the Maine economy has experienced a modest and sustained recovery,
and this recovery has continued slowly through the end of calendar year 1997. In
the words of the Economics Division of the Maine State Planning Office, "Maine
economic performance in 1997 was stronger than in recent years, with nearly all
major indicators describing improvement over last year. However, national
economic growth was again stronger than Maine's." This conclusion is illustrated
by the fact that growth of Maine total personal income in 1997, while strong,
continued to lag behind that of the nation as a whole, with real growth in Maine
total personal income during 1997 of approximately 5.0% compared to real growth
in national total personal income during 1997 of approximately 5.7%. This means
that for 1997 Maine total personal income in Maine grew at only approximately
88% of the national average. Furthermore, these data are part of a continuing
trend that show the growth of the Maine economy consistently lagging behind that
of the nation as a whole for the past several years.
On the positive side, in spite of the fact that the growth of the Maine economy
continues to be less than the growth of the national economy, most of the major
economic indicators monitored by the Economics Division of the Maine State
Planning Office, show that the Maine economy in 1997 improved steadily over its
performance in 1996. For example, Maine payroll employment in 1997 expanded
2.0%, or more than twice the 0.8% expansion in Maine payroll employment
experienced in 1996. During 1997, the Maine economy added 11,000 new jobs - more
than in any year since 1994. In addition, Maine construction contract awards
increased 14.2% in 1997 as opposed to an 8.7% decrease
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in such awards in 1996. State government General Fund revenues grew at a rate of
7.3% in 1997 as opposed to a 6.4% growth rate in 1996. Help wanted advertising
in Portland-area newspapers increased 27.4% over the amount of such advertising
recorded in the same geographic area in 1996, and social assistance caseloads in
Maine (Aid to Families with Dependent Children and Food Stamps) decreased 11.4%
and 6.0% respectively over such caseload totals for 1996. Additional positive
indicators were that, during 1997, unit sales of homes in Maine increased 5%
over such sales in 1996, the average sales price of a home in Maine increased to
over $114,000, and the average time on the market prior to sale for homes in
Maine decreased to less than 100 days. Another indicator of the basic soundness
of Maine's economy through the first nine months of fiscal year 1998 was that
Maine individual income tax payments for the period were 10% above official
projections.
A further positive factor in the growth of Maine's economy is that Maine
employers recently have experienced a substantial decrease in workers'
compensation costs. For many years, Maine possessed the highest workers'
compensation insurance rates in the country. The issue was so decisive that it
caused a shutdown of State government in 1992. Since that time, however, the
Maine Legislature has created the Maine Employers' Mutual Insurance Co. and has
passed numerous reforms in Maine's workers' compensation laws. As a result,
workers compensation loss ratios have declined 79% since 1991, and workers'
compensation insurance rates in Maine have declined 41% since 1994. Another
positive step concerning workers' compensation insurance rates in Maine was
taken in May of 1997 when the Maine Legislature, at the request of the Governor,
refused to accede to a effort by organized labor to roll back many of the
reforms in Maine's workers' compensation laws enacted since 1992.
The only major economic indicators for Maine not showing significant improvement
in 1997 were taxable consumer retail sales, Maine manufacturing employment, and
personal bankruptcy filings. Specifically, Maine taxable consumer retail sales
in 1997 increased 3.8% over the same sales figures for 1996, but slowed from the
5.1% annual increase in such sales recorded in 1996. Also, Maine manufacturing
employment decreased by 0.9% in 1997, continuing its long-term decline. Also,
the number of personal bankruptcies approved in Maine over the Federal fiscal
year ended September 30, 1997 increased by 44% over that of the previous Federal
fiscal year ended September 30, 1996 (nationally, bankruptcies increased during
the same period by only 24%). The slowing of the rate of increase in Maine
taxable consumer retail sales (including, among other items, taxable retail
sales related to the tourist industry) is particularly significant for State of
Maine credit purposes. Since over one-third of Maine State government General
Fund revenues are derived from a 6% retail sales tax, the performance of taxable
retail sales in Maine is directly related to the ability of Maine State
government to fund necessary governmental expenditures, and to repay its debt.
In addition, at the close of fiscal year 1998, on June 30, 1998, General Fund
revenues of the State of Maine exceeded those of the previous year by more than
8%, on a base-to-base comparison excluding one-time revenue gains and losses.
Because of this, State law may require that the 6% State of Maine sales tax on
the sale of tangible personal property and taxable services be reduced on
October 1, 1998 to 5.5%. Such a reduction in the sales tax would reduce revenues
to the State of Maine by approximately $60 million per year. It is the opinion
of the Bureau of the Budget of the Maine Department of Administrative and
Financial Services, however, that such a reduction in tax revenues would not
adversely affect the fiscal status of Maine State government in fiscal year
1999.
One other negative factor in the Maine economy is that while the statewide
economic statistics show, in the words of the Economics Division of the State
Planning Office, "fairly solid economic performance," the data tend to mask
regional disparities in economic performance within the State of Maine. For
example, by all of the usual indicators of economic performance, the southern
and mid-coastal counties of Maine are experiencing rapid economic growth.
Cumberland County (including the Portland metropolitan area) alone accounted for
80% of all job gains in the State from 1990 to 1996 and Cumberland County has a
per capita income level that is 25% above the statewide average. The counties
that lie along the I-95 corridor are also experiencing some economic prosperity.
The "rim counties" of Maine, however, from Oxford County in the West, to
Aroostook County in the North, to Washington County in the East are struggling
economically.
On the whole, however, according to the Economics Division of the State Planning
Office, "the outlook for Maine's economy is for slow but steady growth.
The fiscal policies of the State of Maine are very conservative, and the State
is required by its Constitution to operate on a balanced budget. The Maine
Constitution does this by prohibiting the Legislature, by itself, from issuing
any debt by or on
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behalf of the State which exceeds $2,000,000 "except to suppress insurrection,
to repel invasion, or for purposes of war, and except for temporary loans to be
paid out of money raised by taxation during the fiscal year in which they are
made." The Maine Constitution also provides for the prohibition of debt issued
by or on behalf of the State to fund "current expenditures." The Maine
Constitution allows the issuance of long-term debt when two-thirds of both
houses of the Legislature pass a law authorizing the issuance of such debt, and
when the voters of the State ratify and enact such a law at a general or special
statewide election. Amendments to the Maine Constitution also have been adopted
to permit the Legislature to authorize the issuance of bonds to insure payment
of up to: (i) $6,000,000 of revenue bonds of the Maine School Building
Authority; (ii) $4,000,000 of loans to Maine students attending institutions of
higher education; (iii) $1,000,000 of mortgage loans for Indian housing; (iv)
$4,000,000 of mortgage loans to resident Maine veterans including businesses
owned by resident Maine veterans; and (v) $90,000,000 of mortgage loans for
industrial, manufacturing, fishing, agricultural and recreational enterprises.
The Maine Constitution provides that if the Legislature fails to appropriate
sufficient funds to pay principal and interest on general obligation bonds of
the State, the State Treasurer is required to set aside sufficient funds from
the first General Fund revenues received thereafter by the State to make such
payments.
In recent years, Maine State government has skirted the Maine constitutional
balanced budget requirement by annually issuing significant amounts of tax
anticipation notes ("TANs") during the first few days after the July 1 beginning
of each new fiscal year and leaving such TANs outstanding until almost the
beginning of the next fiscal year. For example, on June 26, 1996 the State
issued $150,000,000 in TANs due June 27, 1997. Both the size of these issues and
fiscal legitimacy for them, however, have recently been criticized, and the
State is becoming more conservative with regard to what amounts to a former
practice of maintaining almost permanent TANS of significant size. This has been
made possible largely by the continued imposition of tightly conservative State
fiscal policies that allowed the State to end fiscal year 1997 solidly in the
black with an estimated approximate $59.7 million surplus, and to end fiscal
year 1998 with an estimated approximate $125 million surplus. No TAN was issued
immediately following the July 1 start of the 1998 fiscal year, and no TANs
currently are planned for issuance in fiscal year 1999.
As of April 30, 1998, there were outstanding general obligation bonds of the
State in the principal amount of $444,157,945. On June 25, 1998, the State
issued $84,500,00 general obligation bonds dated June 1,, 1998. On June 10,
1998, there were outstanding bond anticipation notes of the State in the
principal amount of $35,500,000 with a maturity of June 29,1998. As of June 10,
1998, there were outstanding bond anticipation notes of the State in the
principal amount of $33,500,000 with a maturity of June 29, 1998. As of June 10,
1998, there were authorized by the voters of the State for certain purposes but
unissued, general obligation bonds of the State in the aggregate principal
amount of $127,305,316, including the $84,500,000 in general obligation bonds to
be issued on June 25, 1998. As of June 10, 1998, there were authorized by the
Constitution of the State and implementing legislation but unissued, general
obligation bonds of the State in the aggregate principal amount of $99,000,000.
Various other Maine governmental agencies and quasi-governmental agencies
including, but not limited to, the Maine Municipal Bond Bank, the Maine Court
Facilities Authority, the Maine Health and Higher Educational Facilities
Authority, Maine Turnpike Authority, the Maine State Housing Authority, the
Maine Public Utility Financing Bank, and the Maine Educational Loan Authority,
issue debt for Maine governmental purposes, but this debt does not pledge the
credit of the State.
The strength of Maine's economy during the 1980's enabled the State to
accumulate relatively large unappropriated surpluses of general fund revenues.
During the economic recession of 1989 through 1992, however, Maine State
government repeatedly reduced its expenditures in order to comply with the
requirement of the Maine Constitution that State government operate on a
balanced budget. More recently, Maine State government has continued to downsize
and restructure its operations as part of an overall effort to improve the
management of numerous governmental programs. For example, recently the Maine
Legislature created a Productivity Realization Task Force and charged it with
identifying more than $45,000,000 of savings in State General Fund expenditures.
The Task Force, in fact, completed the identification of $45.28 million in cuts
to General Fund expenditures and passed legislation to implement those cuts
during the 1996-1997 biennium. The work of the Task Force also will result in
additional ongoing cuts of $60.1 million in General Fund expenditures during the
1998-1999 biennium, and the permanent elimination of approximately 1352 State
jobs. Such cuts in General Fund expenditures, other fiscal cost reductions, and
a continuing policy by the Governor not to allow the creation of significant new
State governmental programs or the taxes to fund such programs, have allowed the
Governor and Legislature to enact and amend a series of balanced budgets funding
State services for fiscal years 1998 and 1999. The most recent laws authorizing
expenditures for fiscal years 1998 and 1999 were enacted in the Second Regular
Session and Second Special Session of the 118th Maine Legislature in 1998 and
provide, for fiscal year 1998, total
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General Fund expenditures of $1,888,812,553 and total Highway Fund expenditures
of $215,984,090 and for fiscal year 1999, total General Fund expenditures of
$2,167,432,623 and total Highway Fund expenditures of $220,267,045. During the
First Regular Session of the 118th Maine Legislature, the Governor and the
Legislature also took several steps to adjust the State's fiscal condition.
First, the Legislature passed and the Governor signed into law a repeal of an
across the board State income tax cap that was enacted in 1995 and scheduled to
go into effect on July 1, 1997. If this State income tax cap had not been
repealed, income tax revenues expendable by the State beginning in fiscal year
1998 would have been restricted to $676,230,000. Second, the Legislature and the
Governor refused to eliminate prior to its scheduled elimination on June 30,
1998, an excise tax on the value of gross hospital patient service revenue, and
increased this tax for hospital payment years that end in fiscal year 1998 from
3.56% to 5.27%. Third, the Legislature and the Governor enacted into law a "Tax
Relief Fund for Maine Residents" which requires, according to a formula, that
75% of General Fund Revenues which exceed officially accepted estimates be used
to increase the personal exemption amount of the Maine Individual Income Tax up
to the personal exemption amount of the Federal Individual Income Tax. Also
according to the formula provided by the tax-relief statute, 25% of General Fund
revenues which exceed accepted estimates must be used to reduce the unfunded
liability of the Maine State Retirement System. As of the close of State's
fiscal year on June 30, 1997, Maine General Fund Revenues exceeded accepted
estimates by approximately $59.7 million. Accordingly, 75% of such excess
General Fund revenues, or an estimated $44.8 million, will be allocated to tax
relief for Maine residents, and 25% of such excess General Fund revenues, or an
estimated $14.9 million will be allocated to reduce the unfunded liability of
the Maine State Retirement System. Similarly, as of the close of the State's
fiscal year on June 30, 1998, it is expected that Maine General Fund Revenues
will exceed accepted estimates by approximately $125 million. Such a surplus can
be appropriated by the Legislature for any purpose, but it is expected that it
will be used for purposes such as reducing the unfunded liability of the Maine
State Retirement System, increasing amounts in the State's Rainy Day Fund
(described below), and contributing to unappropriated revenues of the State.
During the Second Regular Session of the 118th Maine Legislature, the State also
enacted a Maine Resident Homestead Property Tax Exemption providing
approximately $50 million in property tax relief to Maine residents. The State
also maintains a "Rainy Day Fund" to be used for significant unforeseen capital
and operational expenditures. As of June 30, 1998 the balance in the State's
Rainy Day Fund was approximately $64.1 million, the highest amount ever.
There can be no assurance that the budget acts for fiscal years 1998 and 1999,
and the various other statutes passed by the Maine Legislature which affect the
State's fiscal position, will not be amended by the Legislature from time to
time.
The unfunded liability of the Maine State Retirement System is a significant
problem for Maine State government. This unfunded liability currently is
certified by the State's independent actuaries as of June 30, 1997 to be
approximately $2.6 billion. Because of this, the State has adopted a
constitutional amendment (Me. Const. art. IX, ss.18-B) that requires the Maine
Legislature, beginning in fiscal year 1997, annually to appropriate funds that
will retire in 31 years or less the System's unfunded liability attributable to
State employees and teachers. In the Second Regular Session of the 118th Maine
Legislature, the State reduced by statute the amount of time to retire the
unfunded liability to 25 years from June 30, 1998. The State has also adopted a
separate constitutional amendment (Me. Const. art. IX, ss.18-A) that requires
the Maine Legislature, beginning in fiscal year 1998, annually to appropriate
monies to fund the System on an actuarially sound basis. Under Article IX,
ss.18-B of the Maine Constitution, unfunded liabilities henceforth may not be
created for the System except those resulting from experience losses, and such
unfunded liabilities resulting from experience losses must be retired over a
period not exceeding 10 years.
Because of Maine's conservative debt policies and its constitutional requirement
that the State government operate under a balanced budget, Maine general
obligation bonds had been rated AAA by S&P and Aa1 by Moody's for many years.
On June 6, 1991, however, S&P lowered its credit rating for Maine general
obligation bonds from AAA to AA+, and at the same time lowered its credit rating
on bonds issued by the Maine Municipal Bond Bank and the Maine Court Facilities
Authority, and on State of Maine Certificates of Participation for highway
equipment, from AA to A+. In taking this action, S&P said, "The rating action is
a result of declines in key financial indicators, and continued softness in the
state economy. The new rating continues to reflect the low debt burden of the
state, an economic base that has gained greater income levels and diversity over
the 1980's, and a legislative history of dealing effectively with financial
difficulties." These ratings have remained unchanged since June 6, 1991. Because
of slow but continuing improvements in the State of Maine economy, S&P currently
views the State's financial outlook as "stable," stating in its most recent June
5, 1998 credit
17
<PAGE>
report: "The AA+ rating on Maine's bonds reflects the state's: Diversifying
economy, which is growing at a slow, steady pace; Improving financial
performance; and Low debt burden with a rapid amortization schedule." On August
24, 1993, citing the "effects of protracted economic slowdown and the
expectation that Maine's economy will not soon return to the pattern of robust
growth evident in the mid-1980's," Moody's lowered its State of Maine general
obligation bond rating from Aa1 to Aa. At the same time, Moody's lowered from
Aa1 to Aa the ratings assigned to state-guaranteed bonds of the Maine School
Building Authority and the Finance Authority of Maine, and confirmed at A1 the
ratings assigned to the bonds of the Maine Court Facilities Authority and State
of Maine Certificates of Participation. These ratings remained unchanged until
1997. On May 13, 1997, Moody's "confirmed and refined from Aa to Aa3" the
State's general obligation bond rating. Moody's refinement of the State's bond
rating on May 13, 1997 was part of a general redefinition by Moody's of its bond
rating symbols published on January 13, 1997, and was not a substantive rating
change. In its most recent June 5, 1998 credit report, Moody's raised its credit
rating for Maine general obligation bonds from Aa3 to Aa2, stating: "The Aa2
rating upgrade reflects steady improvement in fund balances and spending
control, an increased pace of economic recovery, and moderate debt ratios. The
rating also acknowledges the ongoing fixed costs associated with the state's
unfunded pension liability."
For its June 25, 1998 general obligation bond issue dated June 1, 1998, Maine
also received a credit report from Fitch. In this credit report dated June 8,
1998, Fitch assigned a rating of AA to Maine general obligation bonds, saying:
"The State of Maine's general obligation bonds are well secured with strength
especially in the low burden that debt places on resources and in the unusually
rapid rate of amortization. The economy is again growing and financial
operations have been very successful in the past two years. Institutionalization
of financial reforms, including accounting, the revenue estimation process and
debt control are of benefit, and the reserve level continues to increase."
STATE OF NEW HAMPSHIRE
Material in this section has been abstracted from the State of New Hampshire
Information Statement dated March 27, 1998 and the supplement thereto, dated
June 23, 1998, compiled by the Treasurer of the State of New Hampshire and
provided to prospective purchasers of debt securities offered by the State.
While information in the Information Statement is believed to be accurate, none
of that information has been independently verified. Also, it does not reflect
economic conditions or developments that may have occurred or trends that may
have materialized since the date of the Information Statement. Additionally,
economic and fiscal conditions in individual municipalities within the State may
vary from general economic and fiscal conditions.
New Hampshire is located in the New England Region and is bordered by the states
of Maine, Massachusetts, and Vermont and the Province of Quebec, Canada. New
Hampshire's geographic area is 9,304 square miles and its 1996 population was
1,163,000, representing a 1.3% increase from 1995 levels. New Hampshire's
population had increased by more than 25% in the 1980-1996 period.
New Hampshire's per capita personal income increased by 106.4% between 1980 and
1990. In 1991 it continued to grow faster than the New England region as a whole
and in 1992 and 1993 it grew at a slightly lower rate than the region, resuming
faster growth relative to the region in 1994 and 1995. New Hampshire's per
capita personal income in 1996 was 109% of the national level, ranking 8th in
the United States.
In 1997, New Hampshire's largest employment sector was the service sector (29%
of employment), followed by retail and wholesale trade (26% of employment).
Manufacturing was the third largest sector (18.8% of employment).
Non-agricultural employment levels have remained fairly stable. The unemployment
rate declined to 3.1% in 1997, less than the national average of 4.9%.
After a significant growth in residential building activity in the period
1980-86 (data based on residential building permits), New Hampshire's
residential building activity declined beginning in 1987, and declined below
1980 levels in 1990, 1991 and 1992. In 1993, residential building activity
surpassed 1980 levels and activity in 1994, 1995 and 1996 surpassed 1993.
New Hampshire finances the operations of state government through specialized
taxes, user charges and revenues received from the State liquor sales and
distribution system. There is no general tax on sales or earned income. The
18
<PAGE>
two highest revenue-producing taxes are the Meals and Rooms Tax and the Business
Profits Tax. In 1994, State and local taxes amounted to $97 per $1,000 of
personal income, which was the third lowest in the United States. However,
because local property taxes are the principal source of funding for municipal
operations and primary and secondary education, New Hampshire was highest among
all states in local property tax collections per $1,000 of personal income. See
the concluding paragraph of this section for a description of litigation
challenging the constitutionality of the State's statutory system of financing
operation of elementary and secondary public schools primarily through local
taxes.
New Hampshire State government's budget is enacted to cover a biennial period
through a series of legislative bills that establish appropriations and
estimated revenues for each sub-unit of State government, along with
supplemental and special legislation. By statute, the budget process is
initiated by the Governor, who is required to submit operating and capital
budget proposals to the Legislature by February 15 in each odd-numbered year.
While the Governor is required to state the means through which all expenditures
will be financed, there is no constitutional or statutory requirement that the
Governor propose or the Legislature adopt a budget without resorting to
borrowing. There is no line item veto.
State government funds include the General Fund, four special purpose funds and
three enterprise funds, as well as certain "fiduciary" funds. All obligations of
the State are paid from the State Treasury, and must be authorized by a warrant
signed by the Governor and approved by the Executive Council, except for
payments of debt obligations, which are paid by the State Treasurer under
statutory authority.
By statute, at the close of each fiscal year, 50% of any General Fund operating
surplus must be deposited in a Revenue Stabilization Reserve Account ("Rainy Day
Fund") which may contain up to 10% of General Fund unrestricted revenue. With
approval of the Legislative Fiscal Committee, the Governor and the Executive
Council, the Rainy Day Fund is available to defray operating deficits in ensuing
years if there is a shortfall in forecast revenue. By statute, the Rainy Day
Fund may not be used for any other purpose except by special appropriation
approved by two-thirds of each Legislative chamber and the Governor. As of June
30, 1997 there was a designated balance of $20 million in the Rainy Day Fund.
The Department of Administrative Services is responsible for maintenance of
State government's accounting system, annual reports and general budget
oversight. Expenditures are controlled against appropriations through an
integrated accounting system which compares the amount of an appropriation to
expenditures and encumbrances previously charged against that appropriation
before creating an expenditure. By law, with certain exceptions unexpended and
unencumbered balances of appropriations lapse to surplus in the applicable fund
at the end of each fiscal year, along with unappropriated revenues in excess of
legislative estimates. Legislative financial controls involve the Office of
Legislative Budget Assistant ("LBA") which acts under supervision of the
Legislative Fiscal Committee and Joint Legislative Capital Budget Overview
Committee. LBA conducts overall post-audit and review of the budgetary process.
State government financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") and are independently audited annually.
During the 1992-1993 biennium, State revenues began recovering from the decline
that had characterized the recession years of 1989, 1990 and 1991. The General
Fund undesignated fund balance at June 30, 1994, was $12.0 Million. For the
fiscal year ended June 30, 1995, the General Fund undesignated fund balance was
zero, after transferring $35.1 Million from the Healthcare Transition Fund to
offset a delay in receipt of federal funds from disproportionate share
expenditures under the Medicaid program. At June 30, 1996, the General Fund
undesignated fund balance was ($44.2 Million) after a net transfer to the
Healthcare Transition Fund of $21.9 Million, and was ($1.2 million) at June 30,
1997.
There is no constitutional limit on the State's power to issue obligations or
incur indebtedness, and no constitutional requirement for referendum to
authorize incurrence of indebtedness by the State. Authorization and issuance of
debt is governed entirely by statute. New Hampshire pursues a debt management
program designed to minimize use of short-term debt for operating purposes and
to coordinate issuance of tax-exempt securities by the State and its agencies.
19
<PAGE>
State-guaranteed bonded indebtedness is authorized not only for general purposes
of State government, but also for the New Hampshire Turnpike System, University
System of New Hampshire, water supply and pollution control, water resources
acquisition and construction, School Building Authority, Pease Development
Authority, Business Finance Authority, Municipal Bond Bank and cleanup of
municipal Super Fund sites and landfills. In addition, the Housing Finance
Authority and Higher Education and Health Facilities Authority are authorized to
issue bonds that do not constitute debts or obligations of the State.
Procedure for incurrence of bonded indebtedness by individual municipalities is
governed by State statutes, which prescribe actions that must be pursued by
municipalities in incurring bonded indebtedness and limitations on the amount of
such indebtedness. In general, incurrence of bonded indebtedness by a
municipality must be for a statutorily authorized purpose and requires a
two-thirds majority vote of the municipality's legislative body.
On December 17, 1997, the New Hampshire Supreme Court ruled that the State's
present system of financing public elementary and secondary schools primarily
through local property taxes violates the New Hampshire Constitution, because
(1) providing an adequate public education is a duty of State government; (2)
local school property taxes are levied to fulfill a State purpose; and (3) local
school property taxes, levied at different rates in different localities, are
not proportional and reasonable throughout the State. The court also indicated
that a State-funded, constitutionally adequate elementary and secondary
education is a fundamental constitutional right. However, the court stayed all
further proceedings in the case "until the end of the [1998] legislative session
and further order of this court to permit the legislature to address the issues
involved in this case." The court allowed the present funding mechanism to
remain in effect "during the 1998 tax year" i.e. through March 31, 1999. On June
23, 1998, responding to a request for an advisory opinion from the New Hampshire
Senate, the court advised that certain legislation passed by the New Hampshire
House of Representatives to address the court's December 1997 decision would
violate State constitutional requirements by failing to provide funding of
adequate public elementary and secondary education at a uniform tax rate
throughout the State. On June 30, 1998, the legislature recessed without
enacting legislation addressing the court's December 1997 decision. The 1998
legislative session may be reconvened at the call of the presiding officer of
each legislative chamber, until 12:01 a.m., December 1, 1998, when the current
legislature will be dissolved. The potential impact of the court's decisions on
the State's finances cannot presently be determined. However, in absence of
further order of the court, it appears that the present system of
locally-assessed school property taxes may become legally unenforceable as of
April 1, 1999.
5. PERFORMANCE DATA
The Funds may quote performance in various ways. All performance information
supplied by the Funds in advertising is historical and is not intended to
indicate future returns. The Funds' net asset value, yield and total return
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
Standardized SEC yield and total return information as of March 31, 1998 is set
forth in the following tables:
<TABLE>
<S> <C> <C> <C> <C> <C>
30 Day
30 Day Annualized Total Return
Annualized Tax Equivalent Total Return Total Return Since
Fund(a) Yield Yield 1 Year 5 Year Inception
----- ----- ------ ------ ---------
INVESTORS BOND FUND 5.88% N/A 6.79% 6.59% 8.67%
INVESTORS HIGH
GRADE BOND FUND N/A N/A N/A N/A (3.90)
20
<PAGE>
TAXSAVER BOND FUND
3.64 % 6.03% 3.70% 5.53% 6.94%
MAINE MUNICIPAL
BOND FUND
3.85% 6.97% 5.19% 5.45% 6.41%
NEW HAMPSHIRE BOND
FUND 3.90% 6.80% 6.16% 5.81 5.80%
</TABLE>
(a) Investors High Grade Bond Fund commenced operations on March 16, 1998,
Investors Bond Fund and TaxSaver Bond commenced operations on October 2, 1989,
Maine Municipal Bond Fund commenced operations on December 5, 1991, and New
Hampshire Bond Fund commenced operations on December 31, 1992.
Tax-equivalent yield for TaxSaver Bond Fund is based on a Federal income tax
rate of 39.6%. The tax equivalent yield for Maine Municipal Bond Fund is based
on a combined Federal and Maine state income tax rate of 48.1% (Federal 39.6%
and State of Maine 8.5%). The tax equivalent yield for New Hampshire Bond Fund
is based on a combined Federal and New Hampshire state income tax rate of 44.6%
(Federal 39.6% and State of New Hampshire 5.0%).
In performance advertising each Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). Each Fund may also compare any of its performance
information with the performance of recognized stock, bond and other indices,
including but not limited to the Municipal Bond Buyers Indices, the Salomon
Brothers Bond Index, the Shearson Lehman Bond Index, the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, U.S. Treasury
bonds, bills or notes and changes in the Consumer Price Index as published by
the U.S. Department of Commerce. The Funds may refer to general market
performances over past time periods such as those published by Ibbotson
Associates (for instance, its "Stocks, Bonds, Bills and Inflation Yearbook"). In
addition, the Funds may refer in such materials to mutual fund performance
rankings and other data published by Fund Tracking Companies. Performance
advertising may also refer to discussions of the Funds and comparative mutual
fund data and ratings reported in independent periodicals, such as newspapers
and financial magazines.
For example, the Funds may advertise the historical advantages, based on assumed
investments made on particular dates, in long term corporate bonds or in the S&P
500 Composite Stock Index against U.S. Treasury bills, as published by the
companies listed above.
YIELD CALCULATIONS
Yields for a Fund used in advertising are computed by dividing the Fund's
interest income for a given 30 days or one-month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced with
respect to bonds purchased at a premium over their par value by subtracting a
portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
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<PAGE>
The tax equivalent yield for TaxSaver Bond Fund is the rate an investor would
have to earn from a fully taxable investment in order to equal the Fund's yield
after taxes. Tax equivalent yields are calculated by dividing the Fund's yield
by one minus the stated Federal or combined Federal and state tax rate. If only
a portion of the Fund's yield is tax-exempt, only that portion is adjusted in
the calculation.
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that a Fund's yield for any given
period is not an indication or representation by the Fund of future yields or
rates of return on the Fund's shares. Also, Processing Organizations (as defined
in the Prospectuses) may charge their customers direct fees in connection with
an investment in a Fund, which will have the effect of reducing the Fund's net
yield to those shareholders. The yields of each Fund are not fixed or
guaranteed, and an investment in a Fund is not insured or guaranteed.
Accordingly, yield information may not necessarily be used to compare shares of
a Fund with investment alternatives which, like money market instruments or bank
accounts, may provide a fixed rate of interest. Also, it may not be appropriate
to compare a Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. While
average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the performance is not constant over
time but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over a given period
according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments and/or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gain and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns may be quoted with or without taking into consideration a
Fund's front-end sales charge; excluding sales charges from total return
calculations produces a higher return figure. Total returns, yields and other
performance information may be quoted numerically or in a table, graph or
similar illustration.
22
<PAGE>
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.
Investors who purchase and redeem shares of the Fund through a customer account
maintained at a Processing Organization may be charged one or more of the
following types of fees as agreed upon by the Processing Organization and the
investor, with respect to the customer services provided by the Processing
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
these assets). Such fees will have the effect of reducing the average annual
total return of the Fund for those investors.
OTHER ADVERTISING MATTERS
The Funds may also include various information in their advertisements
including, but not limited to: (1) portfolio holdings and portfolio allocation
as of certain dates, such as portfolio diversification by instrument type, by
instrument, by location of issuer or by maturity; (2) statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds that may be employed by an investor to meet specific financial
goals, such as funding retirement, paying for children's education and
financially supporting aging parents; (3) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of earning interest on principal plus interest that was earned earlier;
interest can be compounded at different intervals, such as annually, quarterly
or daily); (4) information relating to inflation and its effects on the dollar;
for example, after ten years the purchasing power of $25,000 would shrink to
$16,621, $14,968, $13,465 and $12,100, respectively, if the annual rates of
inflation were 4%, 5%, 6% and 7%, respectively; (5) information regarding the
effects of automatic investment and systematic withdrawal plans, including the
principal of dollar cost averaging; (6) background information regarding the
Funds' Adviser and biographical descriptions of the management staff of the
Adviser; (7) summaries of the views of the Adviser with respect to the financial
markets; (8) background information regarding the Trust; (9) the results of a
hypothetical investment in a fund over a given number of years, including the
amount that the investment would be at the end of the period; (10) the effects
of investing in a tax-deferred account, such as an individual retirement account
or Section 401(k) pension plan; and (11) the net asset value, net assets or
number of shareholders of the Funds as of one or more dates.
6. MANAGEMENT
TRUSTEES AND OFFICERS
THE TRUST
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Trustee, Chairman and President (age 56)
President, Forum Financial Group, LLC (mutual fund services company
holding company)). Mr. Keffer is a director and/or officer of various
registered investment companies for which the various Forum Financial
Group of Companies provides services. His address is Two Portland
Square, Portland, Maine 04101.
23
<PAGE>
Costas Azariadis, Trustee (age 55)
Professor of Economics, University of California, Los Angeles, since
July 1992. Prior thereto, Dr. Azariadis was Professor of Economics at
the University of Pennsylvania. His address is Department of
Economics, University of California, Los Angeles, 405 Hilgard Avenue,
Los Angeles, California 90024.
James C. Cheng, Trustee (age 56)
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 54)
Partner at the law firm of Reid and Priest, LLP, since 1995. From 1989
to 1995. he was a partner at the law firm of Winthrop, Stimson, Putnam
& Roberts. Prior thereto, he was a partner at LeBoeuf, Lamb, Leiby &
MacRae, a law firm of which he was a member from 1974 to 1989. His
address is 40 West 57th Street, New York, New York 10019.
Mark D. Kaplan, Vice President (age 42)
Director, Investments, Forum Financial Group, LLC (mutual fund
services company holding company), with which he has been associated
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.
Stacey Hong, Treasurer
Director, Fund Accounting, Forum Financial Group, LLC, with which he
has been associated since April 1992. Prior thereto, Mr. Hong was a
Senior Accountant with Ernst & Young, LLP. His address is Two Portland
Square, Portland, Maine 04101.
Max Berueffy, Secretary (age 46)
Senior Counsel, Forum Financial Group, LLC (mutual fund services
company holding company), ., 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 also
serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. His address is Two Portland Square, Portland, Maine 04101.
Leslie K. Klenk, Assistant Secretary (age 33)
Assistant Counsel, Forum Financial Group, LLC (mutual fund services
company holding company), with which she has been associated since
April 1998. Prior thereto, Ms. Klenk was Vice President and Associate
General Counsel of Smith Barney Inc. Ms. Klenk also serves as an
officer of other registered investment companies for which the various
Forum Financial Group of Companies provides services. Her address is
Two Portland Square, Portland, Maine 04101.
Pamela Stutch, Assistant Secretary (age 31)
Fund Administrator, Forum Financial Group, LLC (mutual fund services
company holding company), with which she has been associated since May
1998. Prior thereto, Ms. Stutch attended Temple University
24
<PAGE>
School and graduated in 1997. Ms. Stutch was also a legal intern for
the Maine Department of the Attorney General, Ms. Stutch also serves
as an officer of other registered investment companies for which the
various Forum Financial Group of Companies provides services. Her
address is Two Portland Square, Portland, Maine 04101.
TRUSTEE COMPENSATION
Each Trustee of the Trust (other than John Y. Keffer, who is an interested
person of the Trust) is paid $1,000 for each Board meeting attended (whether in
person or by electronic communication) and is paid $1,000 for each committee
meeting attended on a date when a Board meeting is not held. As of March 31,
1997, in addition to $1,000 for each Board meeting attended, each Trustee
receives $100 per active portfolio of the Trust. To the extent a meeting relates
to only certain portfolios of the Trust, Trustees are paid the $100 fee only
with respect to those portfolios. Trustees are also reimbursed for travel and
related expenses incurred in attending meetings of the Board. No officer of the
Trust is compensated by the Trust.
The following table provides the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
<TABLE>
<S> <C> <C> <C> <C>
ACCRUED ANNUAL
AGGREGATE PENSION BENEFITS UPON TOTAL
TRUSTEE COMPENSATION BENEFITS RETIREMENT COMPENSATION
------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $9,718.64 None None $9,718.64
Mr. Cheng $9,718.64 None None $9,718.64
Mr. Parish $9,718.64 None None $9,718.64
</TABLE>
TRUSTEE COMPENSATION FOR CORE TRUST (DELAWARE)
Each of the Trustees of the Trust is also a Trustee of Core Trust (Delaware), a
registered, open-end management investment company ("Core Trust"). Each Trustee
of Core Trust (other than John Y. Keffer, who is an interested person of Core
Trust) is paid $1,000 for each Core Trust Board meeting attended (whether in
person or by electronic communication) plus $100 per active portfolio of Core
Trust and is paid $1,000 for each committee meeting attended on a date when a
Core Trust Board meeting is not held. To the extent a meeting relates to only
certain portfolios of Core Trust, trustees are paid the $100 fee only with
respect to those portfolios. Core Trust trustees are also reimbursed for travel
and related expenses incurred in attending meetings of the Core Trust Board.
THE INVESTMENT ADVISER
Pursuant to an Investment Advisory Agreement with the Trust , Forum Investment
Advisors, Inc. (the "Adviser") furnishes, at its own expense all services,
facilities and personnel necessary in connection with managing each Fund's
investments and effecting portfolio transactions for the respective Fund.
Subject to the general supervision of the Board, the Adviser is responsible for
among other things, developing a continuing investment program for the Funds in
accordance with their investment objectives and reviewing the investments,
investment strategies and policies of the Funds. In this regard, it is the
responsibility of the Adviser to make decisions relating to the Funds'
investments and to place purchase and sale orders regarding such investments
with brokers and dealers selected by it in its discretion. The Adviser also
furnishes to the Board, which has overall responsibility for the business and
affairs of the Trust, periodic reports on the investment performance of the
Fund.
The Investment Advisory Agreement provides, with respect to each Fund, for an
initial term of two years from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or by majority vote of the
shareholders of a Fund, and in either case by a majority of the Trustees who are
not parties to the Investment Advisory Agreement or interested persons of any
such party.
25
<PAGE>
The Investment Advisory Agreement may be terminated, with respect to a Fund,
without penalty by vote of the Board or by majority vote of the shareholders of
a Fund on 30 days' written notice to the Adviser or by the Adviser on not more
than 90 days' written notice to the Trust, and will automatically terminate in
the event of its assignment. The Investment Advisory Agreement also provides
that, with respect to the Fund(s), the Adviser shall not be liable for any error
of judgment or mistake of law or for any act or omission in the performance of
its duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of the Adviser's duties or by reason of reckless
disregard of its obligations and duties under the Investment Advisory Agreement.
The Investment Advisory Agreement provides that the Adviser may render services
to others.
For services under the Investment Advisory Agreement, the Adviser received with
respect to each Fund a fee at an annual rate of 0.40% of the Fund's average
daily net assets. The following table shows the dollar amount of fees payable to
the Adviser for services rendered to the Funds under the Investment Advisory
Agreement, the amount of fees that was waived by the Adviser, if any, and the
actual fees received by the Adviser. The data is for the past three fiscal
years.
<TABLE>
INVESTORS HIGH GRADE BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $5,970 $0 $5,970
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $171,777 $0 $171,777
1997 $100,163 $0 $100,163
1996 $107,061 $48,250 $58,811
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $102,003 $0 $102,003
1997 $70,634 $0 $70,634
1996 $69,544 $0 $69,544
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $107,471 $0 $107,471
1997 $101,549 $0 $101,549
1996 $105,104 $0 105,104
</TABLE>
26
<PAGE>
<TABLE>
NEW HAMPSHIRE BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $43,782 $0 $43,782
1997 $31,774 $0 $31,774
1996 $23,870 $0 $23,870
</TABLE>
In addition to receiving its advisory fee from the Funds, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in the Funds. In some instances the Adviser may elect
to credit against any investment management fee received from a client who is
also a shareholder in the Fund an amount equal to all or a portion of the fees
received by the Adviser or any affiliate of the Adviser from the Fund with
respect to the client's assets invested in the Fund.
The Adviser has agreed to reimburse the Trust for certain of each Fund's
operating expenses (exclusive of interest, taxes, brokerage, fees and
organization expenses, all to the extent permitted by applicable state law or
regulation) which in any year exceed the limits prescribed by any state in which
a Fund's shares are qualified for sale. The Trust may elect not to qualify its
shares for sale in every state. The manager and distributor believe that
currently the most restrictive expense ratio limitation imposed by any state is
2-1/2% of the first $30 million of each Fund's average net assets, 2% of the
next $70 million of its average net assets and 1-1/2% of its average net assets
in excess of $100 million. For the purpose of this obligation to reimburse
expenses, the Fund's annual expenses are estimated and accrued daily, and any
appropriate estimated payments will be made by the Adviser or the manager and
distributor monthly.
THE ADMINISTRATOR
Pursuant to an Administration Agreement approved by the Board of Trustees on
June 19, 1997 , FAdS acts as administrator to the Trust on behalf of the Funds.
As Administrator, FAdS provides management and administrative services necessary
to the operation of the Trust (which include, among other responsibilities,
negotiation of contracts and fees with, and monitoring of performance and
billing of, the transfer agent and custodian and arranging for maintenance of
books and records of the Trust) and provides the Trust with general office
facilities. At the request of the Board, FAdS provides persons satisfactory to
the Board to serve as officers of the Trust, Those officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of FAdS, the Adviser or their affiliates. Prior to June 19, 1997,
Forum Financial Services, LLC, an affiliate of FAdS provided administration
services to the Trust pursuant to a Management Agreement.
The Administration Agreement will remain in effect, with respect to a Fund, for
a period of twelve months and will continue in effect thereafter only if it is
specifically approved at least annually (1) by the Board or by majority vote of
the shareholders of a Fund and (2) by a majority of the Trustees who are not
parties to the agreement or interested persons of any such party (other than as
Trustees of the Trust). The Administration Agreement may be terminated without
penalty by the Board or FAdS upon 60 days' written notice. The Administration
Agreement also provides that FAdS shall not be liable for any error of judgment
or mistake of law or for any act or omission in the administration or management
of the Trust, except for willful misfeasance, bad faith or gross negligence in
the performance of FAdS's duties or by reason of reckless disregard of its
obligations and duties under the Administration Agreement
For their services under the Administration Agreement, FAdS receives 0.20% of
the average daily net assets of each Fund. Under the Management Agreement, FFSI
received an annual rate of 0.30% of the average daily net assets of each Fund.
The following table shows the dollar amount of fees payable, the amount of the
fee that was waived, and the net fee received under the Administration and
Management Agreements. The data is for the Funds' prior three fiscal years,
27
<PAGE>
<TABLE>
INVESTORS HIGH GRADE BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
-------- --------- ---------- -------
1998 $2,985 $2,985 $0
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
-------- --------- ---------- -------
1998 $108,198 $108,198 $0
1997 $75,122 $75,122 $0
1996 $80,296 $80,296 $0
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
-------- --------- ---------- -------
1998 $66,898 $66,898 $0
1997 $52,975 $52,975 $0
1996 $52,158 $52,158 $0
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
-------- --------- ---------- -------
1998 $73,724 $73,724 $0
1997 $76,162 $76,162 $0
1996 $78,828 $78,828 $0
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
-------- --------- ---------- -------
1998 $29.727 $29,727 $0
1997 $23,831 $23,831 $0
1996 $17,902 $17,902 $0
</TABLE>
THE DISTRIBUTOR
Pursuant to a Distribution Agreement, FFSI is the distributor and acts as the
agent of the Trust in connection with the offering of shares of the Funds
pursuant to a Distribution Agreement with the Trust (the "Distribution
Agreement"). The Distributor is under no obligation to sell any specific amount
of each Fund's shares. All subscription of shares obtained by FFSI are directed
to the Trust for acceptance and are not binding on the Trust until accepted.
The Distribution Agreement provides, with respect to a Fund, for an initial term
of twelve months from the date of its effectiveness and will continue thereafter
only if its continuance is specifically approved at least annually (1) by the
Board or by a majority vote of the shareholders of a Fund and (2) by a majority
of the Trustees who are not
28
<PAGE>
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 each Fund by the Board or by a vote
of the majority of a Fund's shareholders on 60 days' written notice to the
Adviser or by the Adviser on 90 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 performances of
its services to the Trust, except for willful misfeasance, bad faith or gross
negligence in the performance of FFSI's duties or by reason of reckless
disregard of its obligations and duties under the Distribution Agreement.
Pursuant to the Distribution Agreement, FFSI receives, and may reallow to
certain financial institutions, the sales charge paid by the purchasers of each
Fund's shares. The aggregate sales charges payable to FFSI with respect to each
Fund are outlined in the following tables:
<TABLE>
INVESTORS HIGH GRADE BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- -------- ------------ --------------- ----------------
1998 $0 $0 $0
INVESTORS BOND FUND
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- -------- ------------ --------------- ----------------
1998 $0 $0 $0
1997 $1,951 $274 $1,677
1996 $6,252 $829 $5,423
TAXSAVER BOND FUND
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- -------- ------------ --------------- ----------------
1998 $162 $162 $0
1997 $16 $2 $14
1996 $13,336 $1,317 $12,019
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- -------- ------------ --------------- ----------------
1998 $16,890 $376 $16,514
1997 $117,032 $10,264 $106,768
1996 $106,683 $13,941 $92,742
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED AGGREGATE
MARCH 31 SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- -------- ------------ --------------- ----------------
1998 $4,041 $0 $4,041
1997 $54,094 $4,557 $49,537
1996 $24,865 $3,309 $21,556
</TABLE>
29
<PAGE>
THE TRANSFER AGENT
Pursuant to a Transfer Agency and Services Agreement dated May 19, 1998, Forum
Shareholder Services, LLC (the "FSS"") acts as transfer agent of the Trust., FSS
became the Trust's transfer agent effective January 1, 1998 when it succeeded to
the transfer agency business of Forum Financial Corp. (FSS and Forum Financial
Corp. ("FFC") are commonly controlled entities.)
The Transfer Agency and Services Agreement provides, with respect to a Fund, for
an initial term of two years from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided that the
agreement is specifically approved at least annually (1) by the Board or by a
majority vote of the shareholders of a Fund and (2)by a majority of the
directors of a Fund who are not parties to the Transfer Agency and Services
Agreement or interested persons of any such party. The Transfer Agency and
Services Agreement may also be terminated, without penalty, by the Board and/or
FSS on 60 days written notice.
Among the responsibilities of FSS as agent for the Trust are: (1) answering
customer inquiries regarding account status and history, the manner in which
purchases and redemptions of shares of the Funds may be effected and certain
other matters pertaining to the Funds; (2) assisting shareholders in initiating
and changing account designations and addresses; (3) providing necessary
personnel and facilities to establish and maintain shareholder accounts and
records, assisting in processing purchase and redemption transactions and
receiving wired funds; (4) transmitting and receiving funds in connection with
customer orders to purchase or redeem shares; (5) verifying shareholder
signatures in connection with changes in the registration of shareholder
accounts; (6) furnishing periodic statements and confirmations of purchases and
redemptions; (7) arranging for the transmission of proxy statements, annual
reports, prospectuses and other communications from the Trust to its
shareholders; (8) arranging for the receipt, tabulation and transmission to the
Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
FSS or any sub-transfer agent or processing agent may also act and receive
compensation as custodian, investment manager, nominee, agent or fiduciary for
its customers or clients who are shareholders of the Funds with respect to
assets invested in the Funds. FSS 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 FSS with
respect to assets of those customers or clients invested in the Fund. FSS, FAdS
or sub-transfer agents or processing agents retained by the FSS may be
Processing Organizations (as defined in the Prospectus) and, in the case of
sub-transfer agents or processing agents, may also be affiliated persons of the
FSS. or For its services, FSS receives, with respect to each Fund, 0.25% per
year of the average daily net assets, $12,000, and shareholder account fees of
$18.00 per shareholder account. FFC served as the transfer agent for the Trust
pursuant to similar terms and compensation as FSS. The following table shows the
dollar amount of fees payable under the Transfer Agency Agreement, the amount of
the fee that was waived, and the actual fee received under the Transfer Agency
Agreement. The data is for the Funds' prior three fiscal years.
INVESTORS HIGH GRADE BOND FUND
<TABLE>
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $4,248 $3,731 $517
30
<PAGE>
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $120,533 $102,298 $18,235
1997 $76,562 $58,271 $18,291
1996 $80,320 $60,882 $19,438
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $76,553 $59,098 $17,455
1997 $57,010 $40,248 $16,762
1996 $56,344 $38,888 $17,456
31
<PAGE>
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $86,179 $43,753 $42,426
1997 $82,456 $39,581 $42,875
1996 $84,962 $41,754 $43,208
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $40,793 $11,618 $29,175
1997 $33,317 $6,539 $26,778
1996 $28,488 $645 $27,843
</TABLE>
THE FUND ACCOUNTANT
Pursuant to a Fund Accounting Agreement with the Trust dated June 19, 1997,
Forum Accounting Services, LLC ("FAcS") performs portfolio accounting services
for the Funds. Under the Fund Accounting Agreement, FAcS prepares and maintains
books and records of the Funds on behalf of the Trust as required under the 1940
Act, calculates the net asset value per share of the Funds, dividends, and
capital gains distributions and prepares periodic reports to shareholders and
the Securities and Exchange Commission. Prior to June 19, 1997, accounting
services were provided to the Trust by FFC.
The Fund Accounting Agreement provides, with respect to a Fund, for an initial
period of twelve months from the date of its effectiveness and will continue in
effect if such continuance is specifically approved at least annually (1) by the
Board or by majority vote of the shareholders of a Fund and (2) by vote of a
majority of the Trustees who are not parties to the Fund Accounting Agreement or
interested persons of any such party. The Fund Accounting Agreement may also be
terminated on 60 days written notice by either the Board or FAcS. The Fund
Accounting Agreement also provides that FAcS shall not be liable for any action
or inaction taken expect for willful misfeasance, bad faith or gross negligence
in the performance of its duties under the Fund Accounting Agreement.
For their services, FFC received and FAcS receives from the Trust with respect
to each Fund a fee of $36,000 plus additional surcharges dependent upon the
number and type of portfolio transactions and positions. The following table
shows the dollar amount of accounting fees payable to FAcS and/or FFC for
services rendered under the Fund Accounting Agreement. The data is for the
Funds' past three fiscal years.
INVESTORS HIGH GRADE BOND FUND
<TABLE>
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $3,548 $3,548 $0
32
<PAGE>
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $41,000 $0 $41,000
1997 $41,000 $0 $41,000
1996 $38,000 $0 $38,000
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $41,000 $0 $41,000
1997 $36,000 $0 $36,000
1996 $39,000 $0 $39,000
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $48,000 $0 $48,000
1997 $48,000 $0 $48,000
1996 $48,000 $0 $48,000
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $36,000 $0 $36,000
1997 $37,000 $0 $37,000
1996 $37,000 $0 $37,000
</TABLE>
7. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Funds as of 4:00 p.m.,
Eastern Time, on each Fund Business Day as defined in the Prospectuses by
dividing the value of each Fund's net asset (i.e. the value of its portfolio
securities and other assets less its liabilities) by the number of that Fund's
shares outstanding at the time the determination is made. Purchases and sales
are effected at the time of the next determination of net asset value following
the receipt of any purchase or redemption order.
Securities owned by the Fund listed on the recognized stock exchanges are valued
at the last reported trade price, prior to the time when the assets are valued,
on the exchange on which the securities are principally traded. Listed
securities traded on recognized stock exchanges where last trade prices are not
available are valued at mid-market prices. Securities traded in over-the-counter
markets, or listed securities for which no trade is reported on the valuation
date, are valued at the most recent reported mid-market price. Other securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith using methods approved by the Board.
33
<PAGE>
8. PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities for the Funds usually are principal
transactions. Portfolio securities for these Funds are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. There usually are no brokerage commissions paid for such purchases.
Purchases from underwriters of portfolio securities include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers include the spread between the bid and asked prices.
The Funds may effect purchases and sales through brokers who charge commissions.
Allocations of transactions to brokers and dealers and the frequency of
transactions are determined by the Adviser in its best judgment and in a manner
deemed to be in the best interest of shareholders of the Funds rather than by
any formula. The primary consideration is prompt execution of orders in an
effective manner and at the most favorable price available to the Funds. For the
fiscal years ended March 31, 1998, 1997, 1996, Investors Bond Fund, TaxSaver
Bond Fund, Maine Municipal Bond Fund, and New Hampshire Bond Fund did not pay
any brokerage commissions. Similarly, for the fiscal year ended March 31, 1998,
the Investors High Grade Bond Fund did not pay any brokerage commissions.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with Fund transactions, the Adviser 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 a Fund (i) to the Fund or (ii) to
other persons on behalf of the Fund for services provided to it for which it
would be obligated to pay.
In addition, the Adviser may give consideration to research and investment
analysis services furnished by brokers or dealers to the Adviser for its use and
may cause a Fund to pay these brokers a higher amount of commission than may be
charged by other brokers. Such research and analysis is of the types described
in Section 28(e)(3) of the Securities Exchange Act of 1934, as amended, and is
designed to augment the Adviser's own internal research and investment strategy
capabilities. The Adviser may use the research and analysis in connection with
services to clients other than a Fund, and the Adviser's fee is not reduced by
reason of the Adviser's receipt of the research services.
Investment decisions for each Fund will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. If, however, a Fund and other investment
companies or accounts managed by the Adviser are contemporaneously engaged in
the purchase or sale of the same security, the transactions may be averaged as
to price and allocated equitably to each account. In some cases, this policy
might adversely affect the price paid or received by a Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for a Fund and for other investment companies and accounts managed
by the Adviser occur contemporaneously, the purchase or sale orders may be
aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
No portfolio transactions are executed with the Adviser, the Manager or any of
their affiliates.
9. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor.
Set forth below is an example of the method of computing the offering price of
each Fund's shares. The example assumes a purchase of shares of beneficial
interest aggregating less than $100,000 subject to the schedule of sales charges
set forth in the Prospectuses at a price based on the net asset value per share
of each Fund on March 31, 1998.
34
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Maine
Investors Municipal New
High Grade Investors TaxSaver Bond Fund Hampshire
Bond Fund Bond Fund Bond Fund Bond Fund
Net Asset Value Per Share $9.96 $10.57 $10.75 $11.05 $10.73
Shares Charge, 3.75% of
offering price (3.90% of net
asset value per share) $0.39 $0.41 $0.42 N/A N/A
Sales Charge, 2.50% of
offering price (2.56% of
net asset value per share) N/A N/A N/A $0.28 $0.27
Offering to Public $10.35 $10.48 $11.17 $11.33 $11.00
</TABLE>
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse a portfolio for any loss sustained by reason of the failure
of a shareholder to make full payment for shares purchased by the shareholder or
to collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to the Fund's shares as provided in the
Prospectus.
The Trust has filed an election with the Securities and Exchange Commission
pursuant to which a Fund will only effect a redemption in portfolio securities
if a shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
The Funds may wire proceeds of redemptions to shareholders that have elected
wire redemption privileges only if the wired amount is greater than $5,000. In
addition, the Funds will only wire redemption proceeds to financial institutions
located in the United States.
By use of telephone redemption and exchange privileges, the shareholder
authorizes the Transfer Agent to act upon the instruction of any person
representing himself either to be, or to have the authority to act on behalf of,
the investor and believed by the Transfer Agent to be genuine. The records of
the Transfer Agent of such instructions are binding. Proceeds of an exchange
transaction may be invested in another Participating Fund (as defined below) in
the name of the shareholder.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of any other fund of the Trust or shares of certain other
portfolios of investment companies which retain FAdS or its affiliates as
investment adviser or distributor and which participate in the Trust's exchange
privilege program ("Participating Fund"). For Federal income tax purposes,
exchange transactions are treated as sales on which a purchaser will realize a
capital gain or loss depending on whether the value of the shares redeemed is
more or less than his basis in such shares at the time of the transaction.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares are being acquired. Shares of any
Participating Fund may be redeemed and the proceeds used to purchase, without a
sales charge, shares of any other Participating Fund that are offered without a
sales charge. Shares of any Participating Fund purchased with a sales charge may
be redeemed and the proceeds used to purchase, without a sales charge, shares of
any other Participating Fund otherwise sold with a lesser or the same sales
charge. If the Participating Fund purchased in the exchange transaction imposes
a higher sales charge than was paid originally on the exchanged shares, the
shareholder will be responsible for the difference between the two sales
charges. Shares acquired through the reinvestment of dividends and distributions
are deemed to have been acquired with a sales charge rate equal to that paid on
the shares on which the dividend or distribution was paid.
35
<PAGE>
The terms of the exchange privilege are subject to change, and the privilege may
be terminated by any of the Participating Funds or the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
Investors Bond Fund and Investors High Grade Bond Fund offer individual
retirement plans (the "IRA") for individuals who wish to use shares of the Funds
as a medium for funding individual retirement savings. Under the IRA,
distributions of net investment income and capital gain will be automatically
reinvested in the IRA established for the investor. The Fund's custodian
furnishes custodial services to the IRAs for a service fee. Shareholders wishing
to establish an IRA to invest in the Fund should contact the Transfer Agent for
further details and information.
10. TAX MATTERS
Qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended, does not involve governmental supervision of management or
investment practices or policies. Investors should consult their own counsel for
a complete understanding of the requirements the Funds must meet to qualify for
such treatment. The information set forth in the Prospectus and the following
discussion relate solely to Federal income taxes on dividends and distributions
by a Fund and assume that each Fund qualifies as a regulated investment company.
Investors should consult their own counsel for further details and for the
application of state and local tax laws to the investor's particular situation.
The Funds expect to derive substantially all of their gross income (exclusive of
capital gain) from sources other than dividends. Accordingly, it is expected
that most of the Funds' dividends or distributions will not qualify for the
dividends-received deduction for corporations.
Certain listed options and regulated futures contracts are considered "section
1256 contracts" for Federal income tax purposes. Section 1256 contracts held by
a Fund at the end of each taxable year will be "marked to market" and treated
for Federal income tax purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a Fund on section
1256 contracts generally will be considered 60% long-term and 40% short-term
capital gain or loss. A Fund can elect to exempt its section 1256 contracts
which are part of a "mixed straddle" from the application of section 1256.
For federal income and excise tax purposes, dividends declared and payable to
shareholders of record as of a date in October, November or December of a given
year but actually paid during the immediately following January will be treated
as if paid by the Fund on December 31 of that calendar year, and will be taxable
to these shareholders for the year declared ad not for the year in which the
shareholders actually receive the dividend.
With respect to equity or over-the-counter put and call options, gain or loss
realized by a Fund upon the lapse or sale of such options held by the Fund will
be either long-term or short-term capital gain or loss depending upon the
respective Fund's holding period with respect to such option. However, gain or
loss realized upon the lapse or closing out of such options that are written by
a Fund will be treated as short-term capital gain or loss. In general, if a Fund
exercises an option, or if an option that a Fund has written is exercised, gain
or loss on the option will not be separately recognized but the premium received
or paid will be included in the calculation of gain or loss upon disposition of
the property underlying the option.
Under current federal tax law, if a Fund invests in bonds issued with "original
issue discount", the Fund generally will be required to include in income as
interest each year, in addition to stated interest received on such bonds, a
portion of the excess of the face value of the bonds over their issue price,
even though the Fund does not receive payment with respect to such discount
during the year. With respect to "market discount bonds" (i.e., bonds purchased
by a Fund at a price less than their issue price plus the portion of "original
issue discount" previously accrued thereon), the Fund may likewise elect to
accrue and include in income each year a portion of the market
36
<PAGE>
discount with respect to such bonds. As a result, in order to make the
distributions necessary for a Fund not to be subject to federal income or excise
taxes, the Fund may be required to pay out as an income distribution each year
an amount greater than the total amount of cash which the Fund has actually
received as interest during the year.
11. OTHER INFORMATION
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, 1200 G Street,
N.W., Washington, D.C. 20005
CUSTODIAN
Pursuant to a Custodian Agreement, BankBoston, N.A. (formerly The First National
Bank of Boston), 100 Federal Street, Boston, Massachusetts 02106, acts as the
custodian of each Fund's assets. The custodian's responsibilities include
safeguarding and controlling the Funds' cash and securities, determining income
and collecting interest on Fund investments.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, independent
auditors, act as auditors for the Trust.
FINANCIAL STATEMENTS
The financial statements of each Fund for the year ended March 31, 1998 (which
include a statement of assets and liabilities, a statement of operations, a
statement of changes in net assets, notes to financial statements, financial
highlights, a statement of investments and the auditors' report thereon) are
included in the Annual Report to Shareholders delivered along with this SAI and
are incorporated herein by reference.
37
<PAGE>
APPENDIX A
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 1, 1998, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned more than 5% of each Fund. Shareholders owning
25% or more of the shares of a Fund or of the Trust as a whole may be deemed to
be controlling persons. By reason of their substantial holdings of shares, these
persons may be able to require the Trust to hold a shareholder meeting to vote
on certain issues and may be able to determine the outcome of any shareholder
vote. As noted, certain of these shareholders are known to the Trust to hold
their shares of record only and have no beneficial interest, including the right
to vote, in the shares.
<TABLE>
<S> <C> <C
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
OAK HALL SMALL CAP CONTRARIAN FUND ------------ -------------
- ----------------------------------
Maryann Wolf 13.30% 40,946.955
55 Central Park West Apt 12-13
New York NY 10023
Simeon Gold & Heide Gold, Jt. Ten. 9.05% 27,856.149
136 East 76th Street Apt. 10F
New York NY 10021
Jane Levy 5.73% 17,622.969
320 West 87th Street Apt. 3W
New York NY 10024
Bank of Boston, IRA Custodian 5.70% 17,553.097
FBO Maryann Wolf
55 Central Park West Apt. 12-13
New York NY 10023
WR Family Associates 401K Plan Option 5.48% 16,870.661
Attn: Olga M. Dimmini
122 East 42nd Street, Suite 2400 New York, NY 10168-002
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS GOVERNMENT FUND ------------ -------------
INSTITUTIONAL SHARES
- ---------------------
H M Payson & Co. Custody Account 56.56% 18,033,015.150
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland ME 04112
H M Payson & Co. Trust Account 43.44% 13,850,465.390
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS GOVERNMENT FUND
INSTITUTIONAL SERVICE SHARES
Bank of Boston, IRA Rollover Custodian 16.52% 826,387.330
FBO Merne E. Young Rollover
18751 San Rufino
Irvine, CA 92612
Casa Colina Centers for Rehabilitation 15.90% 795,276.550
Foundation Smith Family Care Fund
Attn: Kristy Hurley
2850 N. Garey Avenue
P.O. Box 6001
Pomona, CA 91769-6001 15.90% 795,276.550
Lansdowne Parking Associates LP 9.99% 499,939.120
c/o Meredith Management
29 Crafts Street #300
Newton, MA 02158
DAILY ASSETS GOVERNMENT FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.920
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS CASH FUND
INSTITUTIONAL SHARES
- --------------------
Allagash & Co. 46.30% 12,236,932.890
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS CASH FUND ------------ -------------
INSTITUTIONAL SHARES CON'T
- --------------------------
H M Payson & Co. Custody Account 34.44% 9.101,914.440
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
H M Payson & Co. Trust Account 19.27% 5,092,100.590
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS CASH FUND
INSTITUTIONAL SERVICE SHARES
Cutler Approved List Equity Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Cutler Equity Income Fund 18.12% 951,550.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM All Cap Value Fund 9.45% 496,164.720
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Mid Cap Value Fund 5.70% 299,263.830
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS CASH FUND ------------ ------------
INVESTORS SHARES
Forum Administrative Services, Inc. 100% 101.200
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SHARES
- --------------------
Allagash & Co. 72.89% 11,915,149.240
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Babb & Co. #02-6004105 26.73% 4,368,592.160
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SERVICE SHARES
Dirigo Drywall Assoc. 22.89% 682,716.350
225 Riverside Street
Portland, ME 04103
Cutler Approved List Equity Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 19.58% 583,950,000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
</TABLE>
A-4
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND ------------ ------------
INSTITUTIONAL SERVICE SHARES-CON'T
Cutler Equity Income Fund 9.05% 269,894.440
C/O Forum Financial Services, Inc.
Two Portland Square
CRM All Cap Value Fund 6.23% 185,729.030
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.900
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SHARES
- --------------------
Babb & Co. #02-6004105 46.72% 9,494,221.860
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 25.38% 5,157,680.310
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Imperial Securities Corp. 23.96% 4,868,005.220
Attn: Jack Singer
9920 South La Cieniega Blvd 14th Fl
Inglewood, CA 90301
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SERVICE SHARES
Forum Financing 100% 5.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
</TABLE>
A-5
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS MUNICIPAL FUND ------------ ------------
INVESTOR SHARES
Forum Administrative Services, LLC 100% 100.060
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SHARES
- --------------------
Babb & Co. #02-6004105 65.16% 62,106,021.450
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
Allagash & Co. 34.84% 33,201,966.980
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SERVICE
Allagash & Co. 99.10% 1,657,595.720
c/o Bank of New Hampshire
P.O. Box 477
CONCORD, NH 03302-0477
INVESTORS BOND FUND
- -------------------
Firstrust Co. 72.38% 5,714,958.415
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 11.10% 876,782.753
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
</TABLE>
A-6
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
FORUM TAXSAVER BOND FUND
- ------------------------
First Trust Co. 49.33% 1,717,000.264
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 21.80% 758,668.285
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
Leonore Zusman Ttee 6.03% 209,963.557
Leonore Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Ct.
Englewood OH 45322
Lawrence L. Zusman Ttee 5.41% 188,185.433
Lawrence L. Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Court
Englewood OH 45322
HIGH GRADE BOND FUND
Babb & Co. #02-6004105 99.76% 3.451,019.518
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
NEW HAMPSHIRE BOND FUND
Independence Trust 45.62% 565,735.702
Attn: Linda Feliciano
200 Bedford Street 5th
Manchester, NH 03101
</TABLE>
A-7
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
PAYSON BALANCED FUND
- --------------------
ALA & Co. 15.49% 258,329.088
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
Payse & Co. 14.98% 249,788.506
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
PAYSON VALUE FUND
- -----------------
Payse & Co. 21.90% 208,621.301
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
ALA & Co. 18.09% 172,271.808
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
INVESTORS EQUITY FUND
- ---------------------
Babb & Co. #02-6004105 94.40% 2,383,117.225
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 5.18% 130,658.987
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
</TABLE>
A-8
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
INTERNATIONAL EQUITY FUND
- -------------------------
Forum Financing 67.80% 500.000
Forum Financial Group
Two Portland Square
Portland ME 04101
Donaldson, Lufkin & Jenrette Sec Corp. 32.20% 237.417
Mutual Funds Dept. - 5th Floor
PO Box 2052
Jersey City NJ 07303
INVESTORS GROWTH FUND
- ---------------------
Firstrust Co. 99.95% 3,013,520.631
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
EQUITY INDEX FUND
- -----------------
Allagash & Co. 99.27% 440,772.554
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
SMALL COMPANY OPPORTUNITIES FUND
Forum Administrative Services, LLC 100% 500.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
EMERGING MARKETS FUND
Forum Financing 65.52% 500.00
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
Donald, Lufkin & Jenrette Securities Corp. 34.48% 263.158
Mutual Funds Dept.-5th Floor
P.O. Box 2052
Jersey City, NJ 07303
</TABLE>
A-9
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
QUADRA VALUE EQUITY FUND
- ------------------------
Holly Melosi & Arturo R. Melosi TTEE 80.77% 406,724.176
FBO Atrgur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
HMK Enterprises, Inc. 8.41%% 42,337.003
800 South Street
Suite 355
Waltham MA 02154
QUADRA GROWTH FUND
- ------------------
Holly Melosi & Arturo R. Melosi TTEE 77.64% 454,757.022
FBO Arthur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
John E. Rosenthal 12.52 73,322.092
1212 West Street
Carlisle, MA 01741-1428
POLARIS GLOBAL VALUE FUND
- -------------------------
David Solomont 11.39% 271,791.712
c/o Utopia Inc.
200 Fifth Avenue
Waltham, MA 02154
DCGT TR 5.35% 127,724.287
FBO Audrey Lewis-REG IRA
10 Rogers Street
Cambridge, MA 02142
</TABLE>
A-10
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE AND MUNICIPAL BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
B-1
<PAGE>
STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated C typically are subordinated to senior debt which as assigned an
actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
B-2
<PAGE>
FITCH IBCA, INC.. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
B-3
<PAGE>
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
B-4
<PAGE>
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
3. SHORT TERM MUNICIPAL LOANS
MOODY'S INVESTORS SERVICE, INC.
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the MIG-1/VMIG-1 group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and, although not
distinctly or predominantly speculative, there is specific risk.
STANDARD AND POOR'S CORPORATION
SP-1. Very strong or strong capacity to pay principal and interest. Those issues
which are determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
SP-3. Speculative capacity to pay principal and interest.
4. OTHER MUNICIPAL SECURITIES AND COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
-- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
B-6
<PAGE>
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH IBCA, INC..
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 rating.
F-3. Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
5. SHORT-TERM AND LONG-TERM DEBT RATINGS BY THOMSON BANKWATCH
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
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"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
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APPENDIX C
DESCRIPTION OF MUNICIPAL SECURITIES
1. MUNICIPAL BONDS
Municipal Bonds which meet longer term capital needs and generally have
maturities of more than one year when issued, have three principal
classifications:
GENERAL OBLIGATION BONDS are issued by such entities as states, counties,
cities, towns, and regional districts. The proceeds of these obligations are
used to fund a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer systems. The
basic security behind General Obligation Bonds is the issuer's pledge of its
full faith and credit and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to the rate or amount of special assessments.
REVENUE BONDS in recent years have come to include an increasingly wide variety
of types of municipal obligations. As with other kinds of municipal obligations,
the issuers of revenue bonds may consist of virtually any form of state or local
governmental entity, including states, state agencies, cities, counties,
authorities of various kinds, such as public housing or redevelopment
authorities, and special districts, such as water, sewer or sanitary districts.
Generally, revenue bonds are secured by the revenues or net revenues derived
from a particular facility, group of facilities, or, in some cases, the proceeds
of a special excise or other specific revenue source. Revenue bonds are issued
to finance a wide variety of capital projects including electric, gas, water and
sewer systems; highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Many of these bonds provide additional
security in the form of a debt service reserve fund to be used to make principal
and interest payments. Various forms of credit enhancement, such as a bank
letter of credit or municipal bond insurance, may also be employed in revenue
bond issues. Housing authorities have a wide range of security, including
partially or fully insured mortgages, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public projects. Some
authorities provide further security in the form of a state's ability (without
obligation) to make up deficiencies in the debt service reserve fund.
In recent years, revenue bonds have been issued in large volumes for projects
that are privately owned and operated as described below.
PRIVATE ACTIVITY BONDS are considered municipal bonds if the interest paid
thereon is exempt from Federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing and health. These bonds are
also used to finance public facilities such as airports, mass transit systems
and ports. The payment of the principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of real and personal property as security for such
payment.
While, at one time, the pertinent provisions of the Internal Revenue Code (the
"Code") permitted private activity bonds to bear tax-exempt interest in
connection with virtually any type of commercial or industrial project (subject
to various restrictions as to authorized costs, size limitations, state per
capita volume restrictions, and other matters), the types of qualifying projects
under the Code have become increasingly limited, particularly since the
enactment of the Tax Reform Act of 1986. Under current provisions of the Code,
tax-exempt financing remains available, under prescribed conditions, for
owner-occupied housing, certain privately owned and operated rental multi-family
housing facilities, nonprofit hospital and nursing home projects, certain
manufacturing or industrial projects, and solid waste disposal projects, among
others, and for the refunding (that is, the tax-exempt refinancing) of various
kinds of other private commercial projects originally financed with tax-exempt
bonds. In future years, the types of projects qualifying under the Code for
tax-exempt financing are expected to become increasingly limited.
Because of terminology formerly used in the Code, virtually any form of private
activity bond may still be referred to as an "industrial development bond," but
more and more frequently revenue bonds have become classified
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according to the particular type of facility being financed, such as hospital
revenue bonds, nursing home revenue bonds, multifamily housing revenues bonds,
single family housing revenue bonds, industrial development revenue bonds and
solid waste resource recovery revenue bonds.
Tax-exempt bonds are also categorized according to whether the interest is or is
not includible in the calculation of alternative minimum taxes imposed on
individuals, according to whether the costs of acquiring or carrying the bonds
are or are not deductible in part by banks and other financial institutions, and
according to other criteria relevant for Federal income tax purposes. Due to the
increasing complexity of Code and related requirements governing the issuance of
tax-exempt bonds, industry practice has uniformly required, as a condition to
the issuance of such bonds, but particularly for revenue bonds, an opinion of
nationally recognized bond counsel as to the tax-exempt status of interest on
the bonds.
2. MUNICIPAL NOTES
Municipal Notes generally are used to provide for short-term capital needs and
usually have maturities of one year or less. They include the following:
TAX ANTICIPATION NOTES are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of various seasonal
tax revenues, such as income, sales, use and business taxes, and are payable
from these specific future taxes.
REVENUE ANTICIPATION NOTES are issued in expectation of receipt of other types
of revenues, such as Federal revenues available under the Federal Revenue
Sharing Programs.
BOND ANTICIPATION NOTES are issued to provide interim financing until long-term
financing can be arranged. In most cases, the long-term bonds then provide the
money for the repayment of the Notes.
CONSTRUCTION LOAN NOTES are sold to provide construction financing. After
successful completion and acceptance, many projects receive permanent financing
through the Federal Housing Administration under the Federal National Mortgage
Association or the Government National Mortgage Association.
TAX-EXEMPT COMMERCIAL PAPER is a short-term obligation with a stated maturity of
365 days or less. It is issued by agencies of state and local governments to
finance seasonal working capital needs or as short-term financing in
anticipation of longer term financing.
3. MUNICIPAL LEASES
Municipal Leases, which may take the form of a lease or an installment purchase
or conditional sale contract, are issued by state and local governments and
authorities to acquire a wide variety of equipment and facilities such as fire
and sanitation vehicles, telecommunications equipment and other capital assets.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the government issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations of many state constitutions and statutes are deemed to
be inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce this risk, the Fund will only purchase municipal
leases subject to a non-appropriation clause when the payment of principal and
accrued interest is backed by an unconditional irrevocable letter of credit or
guarantee of a bank or other entity that meets the criteria described in the
Prospectus.
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APPENDIX D
HEDGING STRATEGIES
A. INVESTORS BOND FUND
TAXSAVER BOND FUND
As discussed in the Prospectus, the Adviser to each Fund may engage in certain
options and futures strategies to attempt to hedge a Fund's portfolio. The
instruments in which the Fund may invest include (i) options on securities and
stock indexes, (ii) stock index and interest rate futures contracts ("futures
contracts"), and (iii) options on futures contracts. Use of these instruments is
subject to regulation by the Securities and Exchange Commission ("SEC"), the
several options and futures exchanges upon which options and futures are traded,
and the Commodity Futures Trading Commission ("CFTC").
The various hedging and income strategies referred to herein and in each Fund's
Prospectus are intended to illustrate the type of strategies that are available
to, and may be used by, the Adviser in managing a Fund's portfolio. Depending on
prevailing market conditions, use of these strategies may enable the Adviser to
reduce investment risks to which a Fund may be subject. No assurance can be
given, however, that any strategies will succeed.
The Funds will not use leverage in their hedging strategies. In the case of
transactions entered into as a hedge, a Fund will hold securities or other
options or futures positions whose values are expected to offset ("cover") its
obligations thereunder. A Fund will not enter into a hedging strategy that
exposes the Fund to an obligation to another party unless it owns either (1) an
offsetting ("covered") position or (2) cash, U.S. government securities or other
liquid assets with a value sufficient at all times to cover its potential
obligations. Each Fund will comply with guidelines established by the SEC with
respect to coverage and, if the guidelines so require, will set aside cash, U.S.
government securities or other liquid assets in a segregated account with its
custodian in the prescribed amount. Securities, options or futures positions
used for cover and assets held in a segregated account cannot be sold or closed
out while the hedging strategy is outstanding, unless they are replaced with
similar assets. As a result, there is a possibility that the use of cover or
segregation involving a large percentage of a Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
OPTIONS STRATEGIES. The Funds may purchase put and call options written by
others and write (sell) put and call options covering specified securities or
stock index-related amounts. A put option (sometimes called a "standby
commitment") gives the buyer of such option, upon payment of a premium, the
right to deliver a specified amount of a security or specified amount of cash
(on stock-index options) to the writer of the option on or before a fixed date
at a predetermined price. A call option (sometimes called a "reverse standby
commitment") gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified amount of a security or
specified amount of cash (on stock-index options) or before a fixed date, at a
predetermined price. The predetermined prices may be higher or lower than the
market value of the underlying currency or security. A Fund may buy or sell both
exchange-traded and over-the-counter ("OTC") options. A Fund will purchase or
write an option only if that option is traded on a recognized U.S. options
exchange or if the Adviser believes that a liquid secondary market for the
option exists. When a Fund purchases an OTC option, it relies on the dealer from
which it has purchased the OTC option to make or take delivery of the securities
or currency underlying the option. Failure by the dealer to do so would result
in the loss of the premium paid by the Fund as well as the loss of the expected
benefit of the transaction. OTC options and the securities underlying these
options are currently treated as illiquid securities.
A Fund may purchase call options on equity securities that the Adviser intends
to include in the Fund's portfolio in order to fix the cost of a future
purchase. Call options may also be purchased as a means of participating in an
anticipated price increase of a security on a more limited risk basis than would
be possible if the security itself were purchased. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; conversely, if the
market price of the underlying security
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increases above the exercise price and the Fund either sells or exercises the
option, any profit eventually realized will be reduced by the premium paid. The
Funds may similarly purchase put options in order to hedge against a decline in
market value of securities held in its portfolio. The put enables a Fund to sell
the underlying security at the predetermined exercise price; thus the potential
for loss to the Fund is limited to the option premium paid. If the market price
of the underlying security is higher than the exercise price of the put, any
profit the Fund realizes on the sale of the security would be reduced by the
premium paid for the put option less any amount for which the put may be sold.
A Fund may write covered call options when the Adviser believes that the market
value of the underlying security will not rise to a value greater than the
exercise price plus the premium received. Call options may also be written to
provide limited protection against a decrease in the market price of a security,
in an amount equal to the call premium received less any transaction costs. The
Fund may write covered put options only to effect closing transactions.
A Fund may purchase and write put and call options on stock indices in much the
same manner as the equity and debt security options discussed above, except that
stock index options may serve as a hedge against overall fluctuations in the
securities markets (or market sectors) or as a means of participating in an
anticipated price increase in those markets. The effectiveness of hedging
techniques using stock index options will depend on the extent to which price
movements in the stock index selected correlate with price movements of the
securities which are being hedged. Stock index options are settled exclusively
in cash.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. The Funds may effectively
terminate their right or obligation under an option contract by entering into a
closing transaction. For instance, if a Fund wished to terminate its potential
obligation to sell securities under a call option it had written, a call option
of the same series (an identical call option) would be purchased by the Fund.
Closing transactions essentially permit the Funds to realize profits or limit
losses on its options positions prior to the exercise or expiration of the
option. In addition:
(1) The successful use of options as a hedging strategy depends upon the
Adviser's ability to forecast the direction of price fluctuations in the
underlying securities markets, or in the case of a stock index option,
fluctuations in the market sector represented by the index.
(2) Options normally have expiration dates of up to nine months. Options that
expire unexercised have no value. Unless an option purchased by a Fund is
exercised or unless a closing transaction is effected with respect to that
position, a loss will be realized in the amount of the premium paid.
(3) A position in an exchange listed option may be closed out only on an
exchange which provides a market for identical options. Most exchange listed
options relate to equity securities. Exchange markets for options on debt
securities are relatively new and the ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Closing transactions may be effected with respect to options traded in
the over-the-counter markets (currently the primary markets for options on debt
securities) only by negotiating directly with the other party to the option
contract or in a secondary market for the option if such market exists. There is
no assurance that a liquid secondary market will exist for any particular option
at any specific time. If it is not possible to effect a closing transaction, a
Fund would have to exercise the option which it purchased in order to realize
any profit. The inability to effect a closing transaction on an option written
by a Fund may result in material losses to that Fund.
(4) The Funds' activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
FUTURES STRATEGIES. Several interest rate futures contracts currently are
traded; these include various futures contracts on Treasury bonds, notes and
bills on the Chicago Board of Trade as well as a 30 Interest Rate contract also
traded on the Chicago Board of Trade. Futures contracts on a municipal bond
index are traded on the Chicago Board of Trade. This index assigns relative
values, which fluctuate in accordance with current market conditions, to the
municipal bonds comprising the index. Options on various of these futures
contracts are also traded.
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A futures contract is a bilateral agreement wherein one party agrees to accept,
and the other party agrees to make, delivery of cash or securities as called for
in the contract at a specified future date and at a specified price. For stock
index futures contracts, delivery is of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the time of
the contract and the close of trading of the contract. For interest rate futures
contracts, delivery is of the underlying debt securities.
A Fund may use interest rate futures contracts and options thereon to hedge its
portfolio against changes in the general level of interest rates. A Fund may
purchase an interest rate futures contract when it intends to purchase debt
securities but has not yet done so. This strategy may minimize the effect of all
or part of an increase in the market price of the debt security which the Fund
intended to purchase in the future. A Fund may sell an interest rate futures
contract in order to continue to receive the income from a debt security, while
endeavoring to avoid part or all of the decline in market value of that security
which would accompany an increase in interest rates.
A Fund may purchase a call option on an interest rate futures contract to hedge
against a market advance in debt securities which the Fund planned to acquire at
a future date. The purchase of a call option on an interest rate futures
contracts is analogous to the purchase of a call option on an individual debt
security which can be used as a temporary substitute for a position in the
security itself. A Fund may also write covered call options on interest rate
futures contracts as a partial hedge against a decline in the price of debt
securities held in the Fund's portfolio or purchase put options on interest rate
futures contracts in order to hedge against a decline in the value of debt
securities held in the Fund's portfolio.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING. The
following relate to each Fund's use of futures contracts and options on futures
contracts and, to the extent in the future they were to be permitted, foreign
currency and other options traded on a commodities exchange (collectively,
"futures contracts and related options").
No price is paid upon entering into futures contracts. Instead, upon entering
into a futures contract, a Fund would be required to deposit with its custodian
in a segregated account in the name of the futures broker an amount of cash or
U.S. government securities generally equal to 5% or less of the contract value.
This amount is known as "initial margin." Subsequent payments, called "variation
margin," to and from the broker, would be made on a daily basis as the value of
the futures position varies, a process known as "marking to the market." When
writing a call option on a futures contract, variation margin must be deposited
in accordance with applicable exchange rules. The initial margin in futures
transactions is in the nature of a performance bond or good-faith deposit on the
contract that is returned to the Fund upon termination of the contract, assuming
all contractual obligations have been satisfied.
Holders and writers of futures and related options can enter into offsetting
closing transactions, similar to closing transactions on options, by selling or
purchasing, respectively, a futures contract or related option with the same
terms as the position held or written. Positions in futures contracts may be
closed only on an exchange providing a secondary market for the futures
contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Futures or options contract prices could move to the daily
limit for several consecutive trading days with little or no trading and thereby
prevent prompt liquidation of positions. In such event, it may not be possible
for a Fund to close a position, and in the event of adverse price movements, a
Fund would have to make daily cash payments of variation margin (except in the
case of purchased options). In addition:
(1) Successful use by a Fund of futures contracts and related options will
depend upon the Adviser's ability to predict accurately movements in the
direction of the overall securities and interest rate markets, which requires
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the current
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level of the underlying instrument but to the anticipated levels at some point
in the future; thus, for example, trading of index futures may not reflect the
trading of the securities which are used to formulate an index or even actual
fluctuations in the relevant index itself.
(2) The price of futures contracts may not correlate perfectly with movement in
the price of the hedged securities due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities which cause this situation to occur. As a result, a correct forecast
of general market trends may still not result in successful hedging through the
use of futures contracts over the short term. Activities of large traders in
both the futures and securities markets involving arbitrage and other investment
strategies may result in temporary price distortions.
(3) Although the Funds intend to purchase or sell futures only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a liquid secondary market will exist for any particular
contract at any particular time. In such event, it may not be possible to close
a futures position, and in the event of adverse price movements, the Funds would
continue to be required to make daily cash payments of variation margin.
(4) Like other options, options on futures contracts have a limited life. The
Funds will not trade options on futures contracts unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risks in connection with options are not greater than the risks in
connection with futures transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at the time
of purchase. This amount and the transaction costs is all that is at risk.
Sellers of options on futures contracts, however, must post an initial margin
and are subject to additional margin calls which could be substantial in the
event of adverse price movements.
(6) Each Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of added
brokerage commissions.
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B. MAINE MUNICIPAL BOND FUND
1. BOND INDEX FUTURES
Futures contracts on a municipal bond index (the "Index") are traded on the
Chicago Board of Trade. Maine Municipal Bond Fund may seek to hedge itself
against changes in interest rates by purchasing and selling futures contracts on
the Index or any municipal bond index hereafter approved for trading by the
Commodity Futures Trading Commission. The Index assigns numerical values to the
municipal securities comprising the Index and, based on those values, fluctuates
in accordance with market movements of the municipal bonds comprising the Index.
The purchaser or seller of a futures contract on the Index agrees to take or
make delivery of an amount of cash equal to the difference between a specified
dollar multiple of the value of the Index on the expiration date of the
contract, "current contract value," and the price at which the contract was
originally purchased or sold.
No physical delivery of the municipal bonds underlying the Index is made.
BOND INDEX FUTURES CHARACTERISTICS. Unlike the purchase or sale of a specific
security by the Fund, no price is paid or received by the Fund upon the purchase
or sale of an index futures contract. Initially, the Fund will be required to
deposit with the broker through which such transaction is effected or in a
segregated account with the Fund's custodian an amount of cash or U.S. Treasury
bills equal to a specified dollar amount per contract as of the date thereof.
This amount is known as initial margin. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds to finance
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker will be made on a daily basis as the price of the underlying index
fluctuates, a process known as "marking to the market." For example, when the
Fund has purchased an index futures contract and the price of the futures
contract has risen in response to a rise in the Index, that position will have
increased in value and the Fund will receive from the broker a variation margin
payment equal to that increase in value. Conversely, where the Fund has
purchased an index futures contract and the price of the futures contract has
declined in response to a decrease in the Index, the position would be less
valuable and the Fund would be required to make a variation margin payment to
the broker. At any time prior to expiration of the futures contract, the Adviser
may elect to close the position by taking an opposite position which will
operate to terminate the Fund's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Fund, and the Fund realizes a loss or gain.
RISKS OF TRANSACTIONS IN INDEX FUTURES. There are several risks in connection
with the use of index futures by the Fund as a hedging device. One risk arises
because of the imperfect correlation between movements in the price of the index
futures and the hedge. The price of the index futures may move more than or less
than the price of the securities being hedged. If the price of the index futures
moves less than the price of the securities which are the subject of the hedge,
the hedge will not be fully effective but, if the price of the securities being
hedged has moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the securities being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the index future. If the price of the future moves more
than the price of the underlying securities, the Fund will experience either a
loss or gain on the future which will not be completely offset by movements in
the price of the securities which are the subject of the hedge. To compensate
for the imperfect correlation of movements in the price of securities being
hedged and movements in the price of the index futures, the Fund may buy or sell
index futures of a greater contract value than the dollar amount of securities
being hedged if the volatility over a particular time period of the prices of
such securities has been greater than the volatility over such time period of
the Index, or if otherwise deemed to be appropriate by the Adviser. Conversely,
the Fund may buy or sell fewer index futures if the volatility over a particular
time period of the prices of the securities being hedged is less than the
volatility over such time period of the Index, or it is otherwise deemed to be
appropriate by the Adviser. It is also possible that, where the Fund has sold
index futures to hedge its portfolio against a decline in the market, the market
may advance and the value of securities held in the Fund may decline. If this
occurred, the Fund would lose money on the future and also experience a decline
in the value of its portfolio securities. However, over time the value of a
diversified portfolio should tend to move in the same direction as the Index,
although there may be deviations arising from differences between the
composition of the Fund's portfolios and the securities comprising the Index.
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When index futures are purchased to hedge against possible increases in the
price of municipal bonds before the Fund is able to invest its cash (or cash
equivalents) in municipal bonds in an orderly fashion, it is possible that the
market may decline instead. If the Fund then determines not to invest in
municipal bonds at that time because of concern as to possible further market
decline or for other reasons, the Fund will realize a loss on the index futures
that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the index futures and the portion of
the portfolio being hedged, the price of index futures may not correlate
perfectly with movement in the Index due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the Index and the index futures markets. Secondly, from the
point of view of speculators, deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the index futures market may also
cause temporary price distortions. Due to the possibility of price distortion in
the index futures market, and because of the imperfect correlation between the
movements in the Index and movements in the price of index futures, a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction over a short time frame.
Positions in futures on the Index may be closed out only on the Chicago Board of
Trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell index futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close an index futures investment position, and in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event index futures have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the index futures. However, as described above, there is no guarantee that the
price of the securities will in fact correlate with the price movements in the
futures markets and thus provide an offset on index futures.
Successful use of index futures by the Fund is also subject to the Adviser's
ability to predict correctly movements in the direction of the municipal bond
markets. For example, if the Fund has hedged against the possibility of a
decline in the municipal bond market and bond prices increase instead, the Fund
will lose part or all of the benefit of the increased value of the portfolio
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market. The Fund may have to sell
portfolio securities at a time when it may be disadvantageous to do so.
2. OTHER FUTURES CONTRACTS AND OPTIONS ON FUTURES
The Fund may invest in certain other financial futures contracts ("futures
contracts") and options thereon. The Fund may sell a futures contract or a call
option thereon or purchase a futures contract or a put option thereon as a hedge
against a decrease in the value of the Fund's securities. A futures contract
sale creates an obligation by the Fund, as seller, to deliver the specific type
of instrument called for in the contract at a specified future time for a
specified price. A futures contract purchase creates an obligation by the Fund,
as purchaser, to take delivery of the specific type of financial instrument at a
specified future time at a specified price. The Fund is required to maintain
margin deposits with brokerage firms through which it effects futures contracts
as described under "Bond Index Futures Characteristics."
Although the terms of futures contracts specify actual delivery or receipt of
securities, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the securities. Closing out of
a futures contract is effected by entering into an offsetting purchase or sale
transaction. An offsetting transaction for a futures contract sale is effected
by entering into a futures contract purchase for the same aggregate amount of
the specific type of financial instrument and same delivery date. If the price
in the sale exceeds the price
D-7
<PAGE>
in the offsetting purchase, the Fund is immediately paid the difference and thus
realizes a gain. If the purchase price of the offsetting transaction exceeds the
sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the offsetting sale price is less than
the purchase price, the Fund realizes a loss.
Unlike a futures contract, which requires the parties to buy and sell a security
on a set date, an option on a futures contract entitles its holder to decide on
or before a future date whether to enter into such a contract. If the holder
decides not to enter into the contract, the premium paid for the option is lost.
Since the value of the option is fixed at the point of sale, the holder is not
required to make daily payments of cash to reflect the change in the value of
the underlying contract as would be the case for a purchaser or seller of a
futures contract. The value of the option does change and is reflected in the
net asset value of the Fund.
Currently, futures contracts can be purchased on certain debt securities issued
by the U.S. Treasury, certificates of the Government National Mortgage
Association and bank certificates of deposit. The Fund may invest in futures
contracts covering these types of financial instruments as well as in new types
of such contracts that become available in the future.
Financial futures contracts are traded in an auction environment on the floors
of several exchanges --principally, the Chicago Board of Trade, the Chicago
Mercantile Exchange and the New York Futures Exchange. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership which is also
responsible for handling daily account of deposit or withdrawals of margin.
Investing in futures contracts involves the risks of imperfect correlations,
secondary market illiquidity and the Adviser's incorrect predictions of market
movements, as described under "Bond Index Futures Characteristics."
Put and call options on financial futures have characteristics similar to those
of other options. For a further description of options, see "Put and Call
Options" below.
In addition to the risks associated with investing in options on securities,
there are particular risks associated with investing in options on futures. In
particular, the ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop.
The Fund may not enter into futures contracts or related options thereon if
immediately thereafter (i) the amount committed to margin plus the amount paid
for option premiums exceeds 5% of the value of the Fund's total assets or (ii)
the sum of the current contract values of open futures contracts purchased and
sold by the Fund would exceed 30% of the value of the Fund's total assets. In
instances involving the purchase of futures contracts by the Fund, an amount
equal to the market value of the futures contract will be deposited in a
segregated account of cash and cash equivalents to collateralize the position
and thereby insure that the use of such futures contract is unleveraged.
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3. PUT AND CALL OPTIONS
The Fund may purchase put and call options written by others and write put and
call options covering the types of securities in which the Fund may invest. A
put option (sometimes called a "standby commitment") gives the buyer of such
option, upon payment of a premium, the right to deliver a specified amount of a
security to the writer of the option on or before a fixed date at a
predetermined price. A call option (sometimes called a "reverse standby
commitment") gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified amount of a security on or
before a fixed date, at a predetermined price. The Fund will not purchase any
option if, immediately thereafter, the aggregate cost of all outstanding options
purchased by the Fund would exceed 5% of the value of its total assets; a Fund
will not write any option (other than options on futures contracts) if,
immediately thereafter, the aggregate value of its portfolio securities subject
to outstanding options would exceed 30% of its total assets.
When the Fund writes a put option it maintains in a segregated account cash or
U.S. Government securities in an amount adequate to purchase the underlying
security should the put be exercised. When the Fund writes a call option it must
own at all times during the option period either the underlying securities or an
offsetting call option on the same securities. If a put option written by the
Fund were exercised, the Fund would be obligated to purchase the underlying
security at the exercise price. If a call option written by the Fund were
exercised, the Fund would be obligated to sell the underlying security at the
exercise price.
The risk involved in writing a put option is that there could be a decrease in
the market value of the underlying security caused by rising interest rates or
other factors. If this occurred, the option could be exercised and the
underlying security would then be sold to the Fund at a higher price than its
current market value. The risk involved in writing a call option is that there
could be an increase in the market value of the underlying security caused by
declining interest rates or other factors. If this occurred, the option could be
exercised and the underlying security would then be sold by the Fund at a lower
price than its current market value. These risks could be reduced by entering
into a closing transaction as described below. The Fund retains the premium
received from writing a put or call option whether or not the option is
exercised.
The Fund may dispose of an option which it has purchased by entering into a
"closing sale transaction" with the writer of the option. A closing sale
transaction terminates the obligation of the writer of the option and does not
result in the ownership of an option. The Fund realizes a profit or loss from a
closing sale transaction if the premium received from the transaction is more
than or less than the cost of the option.
The Fund may terminate its obligation to the holder of an option written by the
Fund through a "closing purchase transaction." The Fund may not, however, effect
a closing purchase transaction with respect to such an option after it has been
notified of the exercise of such option. The Fund realizes a profit or loss from
a closing purchase transaction if the cost of the transaction is more or less
than the premium received by the Fund from writing the option.
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APPENDIX E
ADDITIONAL ADVERTISING MATERIALS
TEXT OF FORUM BROCHURE
In connection with its advertisements, a Fund may provide a description of the
Fund's investment adviser and its affiliates, which are service providers to the
Fund. Text which is currently in use is set forth below.
"FORUM FINANCIAL GROUP OF COMPANIES
Forum Financial Group of Companies represent more than a decade of diversified
experience with every aspect of mutual funds. The Forum Family of Funds has
benefited from the informed, sharply focused perspective on mutual funds that
experience makes possible.
The Forum Family of Funds has been created and managed by affiliated companies
of Portland-based Forum Financial Group, among the nation's largest mutual fund
administrators providing clients with a full line of services for every type of
mutual fund.
The Forum Family of Funds is designed to give investment representatives and
investors a broad choice of carefully structured and diversified portfolios,
portfolios that can satisfy a wide variety of immediate as well as long-term
investment goals.
Forum Financial Group has developed its "brand name" family of mutual funds and
has made them available to the investment public and to institutions on both the
national and regional levels.
For more than a decade Forum has had direct experience with mutual funds from a
different perspective, a perspective made possible by Forum's position as a
leading designer and full-service administrator and manager of mutual funds of
all types.
Today Forum Financial Group administers and provides services for over 120
mutual funds for 17 different fund managers, with more than $30 billion in
client assets. Forum has its headquarters in Portland, Maine, and has offices in
Seattle, Bermuda, and Warsaw, Poland. In a joint venture with Bank Handlowy, the
largest and oldest commercial bank in Poland, Forum operates the only
independent transfer agent and mutual fund accounting business in Poland. Forum
directs an off-shore and hedge fund administration business through its Bermuda
office. It employs more than 230 professionals worldwide.
From the beginning, Forum developed a plan of action that was effective with
both start- up funds, and funds that needed restructuring and improved services
in order to live up to their potential. The success of its innovative approach
is evident in Forum's growth rate over the years, a growth rate that has
consistently outstripped that of the mutual fund industry as a whole, as well as
that of the fund service outsource industry.
Forum has worked with both domestic and international mutual fund sponsors,
designing unique mutual fund structures, positioning new funds within the
sponsors' own corporate planning and targeted markets.
Forum's staff of experienced lawyers, many of whom have been associated with the
Securities and Exchange Commission, have been available to work with fund
sponsors to customize fund components and to evaluate the potential of various
fund structures.
Forum has introduced fund sponsors to its unique proprietary Core and Gateway(R)
partnership, helping them to take advantage of this full-service master/feeder
structure.
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Fund sponsors understand that even the most efficiently and creatively designed
fund can disappoint shareholders if it is inadequately serviced. That is the
reason why fund sponsors have relied on Forum to meet all of a fund's complex
compliance, regulatory, and filing needs.
Forum's full service commitment includes providing state-of- the-art accounting
support (Forum has 8 CPAs on staff, as well as senior accountants who have been
associated with Big 6 accounting firms). Forum's proprietary accounting system
is continually upgraded and can provide custom-built modules to satisfy a fund's
specific requirements. This service is joined with transfer agency and
shareholder service groups that draw their strength both from the high caliber
of the people staffing each unit and from Forum's advanced technology support
system.
More than a decade of experience with mutual funds has given Forum practical
hands-on experience and knowledge of how mutual funds function "from the inside
out."
Forum has put that experience to work by creating the Forum Family of Funds, a
family where each member is designed and positioned for your best investment
advantage, and where each fund is serviced with the utmost attention to the
delivery of timely, accurate, and comprehensive shareholder information.
INVESTMENT ADVISERS
Forum Investment Advisors, LLC offers the services of portfolio managers with
the highest qualifications--because without such direction, a comprehensive and
goal-oriented investment program and ongoing investment strategy are not
possible. Serving as portfolio managers for the Forum Family of Funds are
individuals with decades of experience with some of the country's major
financial institutions.
Individual funds in the Forum Family of Funds invest in portfolios that have as
their investment adviser nationally recognized institutions, including Schroder
Capital Management International, Inc., a major figure in worldwide mutual funds
that, with its affiliates, managed over $175 billion as of September 30, 1997.
Forum Funds are also managed by the portfolio managers of H.M. Payson & Co.,
founded in Portland, Maine in 1854 and one of the oldest investment firms in the
country. Payson has approximately $1 billion in assets under management, with
clients that include pension plans, endowment funds, and institutional and
individual accounts.
FORUM INVESTMENT ADVISORS, LLC
Forum Investment Advisors, LLC is the largest Maine based investment adviser
with approximately $1.4 billion in assets under management. The portfolio
managers have decades of combined experience in a cross section of the country's
financial markets. The managers have specific, day-to-day experience in the
asset class portfolios they manage, bringing critical focus to meeting each
fund's explicit investment objectives. The portfolio managers have been involved
in investing the assets of large insurance companies, banks, pension plans,
individuals, and of course mutual funds. Forum Investment Advisors, LLC has a
staff of analysts and investment administrators to meet the demands of serving
shareholders in our funds.
FORUM FAMILY OF FUNDS
It has been said that mutual fund investment offerings--of which there are
nearly 10,000, with assets spread across stock, bond, and money market funds
worth more than $4 trillion--come in a rainbow of varieties. A better
description would be a "spectrum" of varieties, the spectrum graded from green
through amber and on to red. In simpler terms, from low risk investments,
through moderate to high risk. The lower the risk, the lower the possible reward
- -- the higher the risk, the higher the potential reward.
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<PAGE>
The Forum Family of Funds provides conservative investment opportunities that
reduce the risk of loss of capital, using underlying money market investments
U.S. Government securities (although the shares of the Forum Funds are neither
insured nor guaranteed by the U.S. Government or its agencies), thus cushioning
the investment against market volatility. These funds offer regular income,
ready access to your money, and flexibility to buy or sell at any time.
In the less conservative but still not aggressive category are funds in the
Forum Family that seek to provide steady income and, in certain cases, tax-free
earnings. Such investments provide important diversification to an investment
portfolio.
Growth funds in the Forum Family more aggressively pursue a high return at the
risk of market volatility. These funds include domestic and international stock
mutual funds."
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TEXT OF PEOPLES HERITAGE NEWS RELEASE
Peoples Heritage Financial Group, Inc. (NASDAQ:PHBK) announced today that it has
formed an alliance with a major mutual fund provider and an investment advisory
firm to expand its mutual fund offerings. The alliance with Forum Financial
Group and H.M. Payson & Company will result in 18 funds, including the unique
Maine Municipal Bond Fund and New Hampshire Bond Fund, being offered through the
branches of Peoples' affiliate banks in Maine, New Hampshire and northern
Massachusetts and the Company's trust and investment subsidiaries
'There is no secret to where financial services are moving, under one roof,"
said William J. Ryan, Chairman, President and Chief Executive Officer of Peoples
Heritage. "One only has to watch the virtually daily announcements of
consolidations in the financial sector to understand that customers are
demanding and receiving 'one-stop' financial services.
"We think we are adding the additional competitive advantage of funds that are
managed and administered
close to home."
Eighteen Forum funds will be offered including two Payson funds. The tax-free
Maine and New Hampshire state bond funds are the only two such funds available
and usually invest 80% of total assets in municipal securities. Other funds
being provided by the alliance include money market, fixed income and equity
funds.
Forum Financial, based in Portland, Maine since 1987, administers 146 funds with
more than $36 billion in assets. Forum manages mutual funds for independent
investment advisers such as Payson and for banks. Forum Investment Advisors, LLC
an affiliate, is the largest Maine-based investment adviser with approximately
$1.7 billion in fund assets under management.
"We are providing a great product set to the customers served by Peoples' nearly
200 branches in northern New England," said John Y. Keffer, Forum Financial
president, "The key today is to link a wide variety of investment options with
convergent, easy access for customers. I believe this alliance does just that."
H.M. Payson & Co., founded in 1854, is one of the nation's oldest investment
firms with nearly $1 billion in assets under management and $300 million in
non-managed custodial accounts. The Payson value Fund and Payson Balanced Fund
are among the 18 offerings.
"I believe we have all the ingredients of a tremendous alliance," said John
Walker, Payson president and managing director. "We have the region's premier
community banking company, a community-based investment adviser, and a local
mutual fund company that operates nationally and specializes in working with
banks. We are poised to provide solid investment performance and service."
Peoples Heritage Financial Group is a $10 billion multi-state bank and financial
services holding company headquartered in Portland, Maine. Its Maine banking
affiliate, Peoples Heritage Bank, has the state's leading deposit market share.
Its New Hampshire banking affiliate, Bank of New Hampshire, has the state's
leading deposit market share. Family Bank, the Company's Massachusetts banking
subsidiary, has the state's tenth largest deposit market share and the leading
market share in many of the northern Massachusetts communities it serves.
Peoples affiliate banks also operate subsidiaries in leasing, trust and
investment services and insurance.
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FORUM FINANCIAL GROUP:
- ---------------------
Headquarters: Two Portland Square, Portland, Maine 04101
President: John Y. Keffer
Offices: Portland, Seattle, Warsaw, Bermuda
*Established in 1986 to administer mutual funds for independent investment
advisers and banks
*Among the nation's largest third-party fund administrators
*Uses proprietary in-house systems and custom programming capabilities
*ADMINISTRATION AND DISTRIBUTION SERVICES: Regulatory, compliance,
expense accounting, budgeting for all funds
*FUND ACCOUNTING SERVICES: Portfolio valuation, accounting, dividend
declaration, and tax advice
*SHAREHOLDER SERVICES: Preparation of statements, distribution support,
inquiries and processing of trades
*CLIENT ASSETS UNDER ADMINISTRATION AND DISTRIBUTION: $36.9 billion
*CLIENT ASSETS PROCESSED BY FUND ACCOUNTING: $47.6 billion
*CLIENT FUNDS UNDER ADMINISTRATION AND DISTRIBUTION: 146 mutual funds with 219
share classes
*INTERNATIONAL VENTURES:
Joint venture with Bank Handlowy in Warsaw, Poland, using Forum's
proprietary transfer agency and distribution systems Off-shore
investment fund administration, using Bermuda as Forum's center of
operations
*FORUM EMPLOYEES: United States -198, Poland - 61, Bermuda - 3
FORUM CONTACTS:
Mark Kaplan, Managing Director and Portfolio Manager, Forum Investment
Advisers, LLC,
(207) 879-1900 X 6123
Tony Santaniello, Director of Marketing, (207) 879-1900 X 6175
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H.M. PAYSON & CO.:
- -----------------
Headquarters: One Portland Square, Portland, Maine
President and Managing Director: John Walker
Quality investment services and conservative wealth management since 1854
*Assets under Management: $1.15 Billion
*Non-managed Custody Assets: $388 Million
*Client Base: 85% individuals; 15% institutional
*Owned by 12 shareholders; 12 managing directors
*Payson Balanced Fund and Payson Value Fund (administrative and shareholder
services provided by Forum Financial Group)
*Employees: 45
H.M. PAYSON & CO. CONTACT:
Joel Harris, Marketing Coordinator, (207) 772-3761
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PAYSON VALUE FUND
PAYSON BALANCED FUND
- --------------------------------------------------------------------------------
Investment Adviser: Account Information and
H.M. Payson & Co. Shareholder Servicing:
One Portland Square Forum Shareholder Services, LLC.
P.O. Box 31 P.O. Box 446
Portland, Maine 04112 Portland, Maine 04112
207-772-3761 207-879-0009
800-456-6710 800-805-8258
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998,
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus dated August 1,
1998 offering shares of Payson Value Fund and Payson Balanced Fund (collectively
the "Funds" and individually a "Fund") and should be read only in conjunction
with the Prospectus, a copy of which may be obtained without charge by
contacting the Trust's Distributor, Forum Financial Services, Inc., Two Portland
Square, Portland, Maine 04101.
TABLE OF CONTENTS
Page
----
1. General...................................................... 2
2. Investment Policies.......................................... 3
3. Additional Investment Policies............................... 7
4. Performance Data............................................. 8
5. Management...................................................11
6. Determination of Net Asset Value.............................19
7. Portfolio Transactions.......................................19
8. Additional Purchase and
Redemption Information.......................................20
9. Tax Matters..................................................22
10. Other Information............................................22
Appendix A - Control Persons and Principal Holders of Securities...... A-1
Appendix B - Description of Securities Ratings........................ B-1
Appendix C - Additional Advertising Materials......................... C-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
<PAGE>
1. GENERAL
THE TRUST. The Trust is registered with the SEC as an open-end, management
investment company and was organized as a business trust under the laws of the
State of Delaware on August 29, 1995. On January 5, 1996 the Trust succeeded to
the assets and liabilities of Forum Funds, Inc. Forum Funds, Inc. was
incorporated on March 24, 1980 and assumed the name of Forum Funds, Inc. on
March 16, 1987. The Board of Trustees ("Board"), without shareholder approval,
has the authority to issue an unlimited number of shares of beneficial interest
of separate series with no par value per share and to create separate classes of
shares within each series (such as Investor and Institutional). The Trust
currently offers shares of 23 series. The series of the Trust are as follows:
Investors Bond Fund Oak Hall Small Cap Contrarian Fund
TaxSaver Bond Fund Austin Global Equity Fund
High Grade Bond Fund Quadra Value Equity Fund
Maine Municipal Bond Fund Quadra Growth Fund
New Hampshire Bond Fund Polaris Global Value Fund
Daily Assets Government Fund Investors Equity Fund
Daily Assets Treasury Obligations Fund Equity Index Fund
Daily Assets Cash Fund Small Company Opportunities Fund
Daily Assets Government Obligations Fund International Equities Fund
Daily Assets Municipal Fund Emerging Markets Fund
Payson Value Fund Investors Growth Fund
Payson Balanced Fund
Each share of each Fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when required by Federal or state law. Shareholders (and Trustees)
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders. A shareholder in a portfolio is entitled to the
shareholder's pro rata share of all dividends and distributions arising from
that portfolio's assets and, upon redeeming shares, will receive the portion of
the portfolio's net assets represented by the redeemed shares.
As of July 1, 1998, the officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of each Fund. Also as of that date,
Appendix A identifies all shareholders who own of record 5% or more of the
outstanding shares of any of the Registrant's series.
2
<PAGE>
DEFINITIONS. As used in this Statement of Additional Information, the following
terms shall have the meanings listed:
"Board" means the Board of Trustees of Forum Funds.
"FAdS" means Forum Administrative Services, LLC.
"FAcS" means Forum Accounting Services, LLC.
"FFC" means Forum Financial Corp.
"FFSI" means Forum Financial Services, Inc.
"Adviser" " means H.M. Payson & Co.
"Funds" means Payson Value Fund and Payson Balanced Fund
"Fund Business Day" has the meaning ascribed thereto in the current Prospectus
of the Fund.
"NRSRO" means a nationally recognized statistical rating organization.
"SAI" means this Statement of Additional Information.
"SEC" means the U.S. Securities and Exchange Commission.
"Trust" means Forum Funds, a Delaware business trust.
"U.S. Government Securities" has the meaning ascribed thereto by the current
Prospectus of the Funds.
"1940 Act" means the Investment Company Act of 1940, as amended.
2. INVESTMENT POLICIES
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") and other nationally recognized statistical rating organizations
("NRSROs") are private services that provide ratings of the credit quality of
debt obligations, including convertible securities. A description of the range
of ratings assigned to bonds and other securities by several NRSROs is included
in Appendix B to this Statement of Additional Information. The Funds may use
these ratings to determine whether to purchase, sell or hold a security.
However, ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices. If an issue of securities ceases to be rated or if
its rating is reduced after it has been purchased by a Fund, H.M. Payson & Co.
(the "Adviser"), the Funds' investment adviser, will determine whether the Fund
should continue to hold the obligation. Credit ratings attempt to evaluate the
safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit ratings. An issuer's current financial condition may be better
or worse than a rating indicates.
Each Fund may retain securities whose rating has been lowered below the lowest
permissible rating category (or that are unrated and determined by the Adviser
to be of comparable quality) if the Adviser determines that retaining such
security is in the best interests of the Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
3
<PAGE>
Each Fund may purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but settlements delayed beyond two
months may be negotiated. During the period between a commitment and settlement,
no payment is made for the securities purchased by the purchaser and, thus, no
dividends or interest accrues to the purchaser from the transaction. At the time
a Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, the Fund will record the transaction as a purchase and
thereafter reflect the value each day of such securities in determining its net
asset value.
The use of when-issued transactions and forward commitments enables the Funds to
hedge against anticipated changes in interest rates and prices. For instance, in
periods of rising interest rates and falling bond prices, a Fund might sell
securities that it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, a
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Adviser were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward commitment transactions at prices
inferior to the current market values.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Funds enter into when-issued and forward commitment
transactions only with the intention of actually receiving or delivering the
securities, as the case may be. If a Fund chooses to dispose of the right to
acquire a when-issued security prior to its acquisition or to dispose of its
right to deliver or receive against a forward commitment, it can incur a gain or
loss. When-issued securities may include bonds purchased on a "when, as and if
issued" basis under which the issuance of the securities depends upon the
occurrence of a subsequent event. Any significant commitment of a Fund's assets
to the purchase of securities on a "when, as and if issued" basis may increase
the volatility of its net asset value.
Each Fund will establish and maintain with its custodian a separate account with
cash, U.S. Government Securities (as defined in the Prospectus) and other liquid
assets in an amount at least equal to its commitments to purchase securities on
a when-issued or forward commitment basis.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Trust's Board has the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Board has delegated the function
of making day-to-day determinations of liquidity to the Adviser, pursuant to
guidelines approved by the Board. The Adviser takes into account a number of
factors in reaching liquidity decisions, including but not limited to: (1) the
frequency of trades and quotations for the security; (2) the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; (3) the willingness of dealers to undertake to make a market in the
security; and (4) the nature of the marketplace trades, including the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer. The Adviser monitors the liquidity of the securities
in each Fund's portfolio and reports periodically on such decisions to the
Board.
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<PAGE>
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Although no securities investment is without some risk, investment
in convertible securities generally entails less risk than in the issuer's
common stock. However, the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed income security. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stocks since they have
fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by a Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
TEMPORARY DEFENSIVE POSITION.
When a Fund assumes a temporary defensive position it may invest without limit
in (i) short-term U.S. Government Securities, (ii) certificates of deposit,
bankers' acceptances and interest-bearing savings deposits of commercial banks
doing business in the United States that have, at the time of investment, total
assets in excess of one billion dollars and that are insured by the Federal
Deposit Insurance Corporation, (iii) commercial paper of prime quality rated
Prime-2 or higher by Moody's or A-2 or higher by S&P or, if not rated,
determined by the Adviser to be of comparable quality, (iv) repurchase
agreements covering any of the securities in which the Fund may invest directly
and (v) money market mutual funds.
5
<PAGE>
SECURITIES OF INVESTMENT COMPANIES
The Funds may invest in the securities of other investment companies within the
limits proscribed by the 1940 Act. Under normal circumstances, each Fund intends
to invest less than 5% of the value of its net assets in the securities of other
investment companies. In addition to the Fund's expenses (including the various
fees), as a shareholder in another investment company, a Fund would bear its pro
rata portion of the other investment company's expenses (including fees).
FUTURES CONTRACTS AND OPTIONS
Each Fund may in the future seek to hedge against a decline in the value of
securities it owns or an increase in the price of securities which it plans to
purchase through the writing and purchase of exchange-traded and
over-the-counter options and the purchase and sale of futures contracts and
options on those futures contracts. Payson Value Fund may buy or sell stock
index futures contracts, such as contracts on the S&P 500 stock index, and
Payson Balanced Fund may buy and sell bond index futures contracts. In addition,
both Funds may buy or sell futures contracts on Treasury bills, Treasury bonds
and other financial instruments. The Funds may write covered options and buy
options on the futures contracts in which they may invest.
In addition, the Funds may write (sell) covered put and call options and may buy
put and call options on debt securities and bond indices. An option is covered
if, so long as the Fund is obligated under the option, it owns an offsetting
position in the underlying security, currency or futures contract or maintains
cash, U.S. Government Securities or other liquid, assets in a segregated account
with a value at all times sufficient to cover the Fund's obligation under the
option.
The Funds' use of options and futures contracts would subject the Funds to
certain investment risks and transaction costs to which they might not otherwise
be subject. These risks include: (1) dependence on the Adviser's ability to
predict movements in the prices of individual securities and fluctuations in the
general securities markets; (2) imperfect correlation between movements in the
prices of options, futures contracts or related options and movements in the
price of the securities hedged or used for cover; (3) the fact that skills and
techniques needed to trade these instruments are different from those needed to
select the other securities in which the Funds invest; (4) lack of assurance
that a liquid secondary market will exist for any particular instrument at any
particular time; and (5) the possible need to defer closing out of certain
options, futures contracts and related options to avoid adverse tax
consequences. Other risks include the inability of the Fund, as the writer of
covered call options, to benefit from the appreciation of the underlying
securities above the exercise price and the possible loss of the entire premium
paid for options purchased by the Fund.
Neither Fund will hedge more than 30% of its total assets by selling futures
contracts, buying put options and writing call options. In addition, neither
Fund will buy futures contracts or write put options whose underlying value
exceeds 10% of the Fund's total assets and will not purchase call options if the
value of purchased call options would exceed 5% of the Fund's total assets. A
Fund will not enter into futures contracts and options thereon if immediately
thereafter more than 5% of the value of the Fund's total assets would be
invested in these options or committed to margin on futures contracts.
A Fund will only invest in futures and options contracts after providing notice
to its shareholders and filing a notice of eligibility (if required) and
otherwise complying with the requirements of the Commodity Futures Trading
Commission ("CFTC"). The CFTC's rules provide that the Funds are permitted to
purchase such futures or options contracts only (1) for bona fide hedging
purposes within the meaning of the rules of the CFTC; provided, however, that in
the alternative with respect to each long position in a futures or options
contract entered into by a Fund, the underlying commodity value of such contract
at all times does not exceed the sum of cash, short-term United States debt
obligations or other United States dollar denominated short-term money market
instruments set aside for this purpose by the Fund, accrued profit on the
contract held with a futures commission merchant and cash proceeds from existing
Fund investments due in 30 days; and (2) subject to certain other limitations.
6
<PAGE>
3. ADDITIONAL INVESTMENT POLICIES
The investment objective and the investment policies of a Fund that are
designated as fundamental policies may not be changed without approval of the
holders of a majority of that Fund's outstanding voting securities. A majority
of a Fund's outstanding voting securities means the lesser of (1) 67% of the
shares of that Fund present or represented at a shareholders meeting at which
the holders of more than 50% of the shares are present or represented, or (2)
more than 50% of the outstanding shares of the Fund. Except as otherwise
indicated, investment policies of the Funds are not fundamental and may be
changed by the Board without shareholder approval. A further description of the
Funds' investment policies is contained in the SAI.
The Funds have adopted the following fundamental investment limitations which
are in addition to those contained in the Funds' Prospectus and which may not be
changed without shareholder approval. Neither Fund may:
(1) Borrow money, except for temporary or emergency purposes
(including the meeting of redemption requests) and except for
entering into reverse repurchase agreements, and provided that
borrowings do not exceed 33 1/3% of the Fund's total assets
(computed immediately after the borrowing).
(2) Purchase securities, other than U.S. Government Securities,
if, immediately after each purchase, more than 25% of the
Fund's total assets taken at market value would be invested in
securities of issuers conducting their principal business
activity in the same industry.
(3) With respect to 75% of its assets, purchase securities, other
than U.S. Government Securities, of any one issuer, if (a)
more than 5% of the Fund's total assets taken at market value
would at the time of purchase be invested in the securities of
that issuer, or (b) such purchase would at the time of
purchase cause the Fund to hold more than 10% of the
outstanding voting securities of that issuer.
(4) Act as an underwriter of securities of other issuers, except
to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(5) Make loans to other persons except for loans of portfolio
securities and except through the use of repurchase agreements
and through the purchase of commercial paper or debt
securities which are otherwise permissible investments.
(6) Purchase or sell real estate or any interest therein, except
that the Fund may invest in securities issued or guaranteed by
corporate or governmental entities secured by real estate or
interests therein, such as mortgage pass-throughs and
collateralized mortgage obligations, or issued by companies
that invest in real estate or interests therein.
(7) Purchase or sell physical commodities or contracts relating to
physical commodities, provided that currencies and
currency-related contracts will not be deemed to be physical
commodities.
(8) Issue senior securities except pursuant to Section 18 of the
Investment Company Act of 1940 ("1940 Act") and except that
the Fund may borrow money subject to investment limitations
specified in the Fund's Prospectus.
(9) Invest in interests in oil or gas or interests in other
mineral exploration or development programs.
Each Fund has adopted the following nonfundamental investment limitations that
may be changed by the Board without shareholder approval. Neither Fund may:
7
<PAGE>
(a) Pledge, mortgage or hypothecate its assets, except to secure
permitted indebtedness. The deposit in escrow of securities in
connection with the writing of put and call options,
collateralized loans of securities and collateral arrangements
with respect to margin for futures contracts are not deemed to
be pledges or hypothecations for this purpose.
(b) Invest in securities of another registered investment company,
except in connection with a merger, consolidation, acquisition
or reorganization; and except that the Fund may invest in
money market funds and privately-issued mortgage related
securities to the extent permitted by the 1940 Act.
(c) Purchase securities on margin, or make short sales of
securities, except for the use of short-term credit necessary
for the clearance of purchases and sales of portfolio
securities, but the Fund may make margin deposits in
connection with permitted transactions in options, futures
contracts and options on futures contracts.
(d) Purchase securities for investment while any borrowing
equaling 10% or more of the Fund's total assets is outstanding
or borrow for purposes other than meeting redemptions in an
amount exceeding 10% of the value of the Fund's total assets.
(e) Acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15%
of the Fund's net assets (taken at current value) would be
invested in r epurchase agreements not entitling the holder
to payment of principal within seven days and in securities
which are not readily marketable, including securities that
are illiquid by virtue of restrictions on the sale of such
securities to the public without registration under the
Securities Act of 1933 ("Restricted Securities") or (ii) 10%
of the Fund's total assets would be invested in Restricted
Securities.
(f) Purchase or sell real property (including limited partnership
interests but excluding readily marketable interests in real
estate investment trusts or readily marketable securities of
companies which invest in real estate.)
g) Invest in warrants if (i) more than 5% of the value of the
Fund's net assets will be invested in warrants (valued at the
lower of cost or market) or (ii) more than 2% of the value of
the Fund's net assets would be invested in warrants which are
not listed on the New York Stock Exchange or the American
Stock Exchange. For purpose of this limitation, warrants
acquired by the Fund in units or attached to securities are
deemed to have no value.
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of the
Fund's assets or purchases and redemptions of shares will not be considered a
violation of the limitation.
4. PERFORMANCE DATA
The Funds may quote performance in various ways. All performance information
supplied by the Funds in advertising is historical and is not intended to
indicate future returns. A Fund's net asset value, yield and total return
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
Total return information for the Funds as of March 31,1998, is set forth in the
following table:
Total Return
Total Return 1 Total Return Since
Year 5 Year Inception
---- ------ ---------
39.48% 19.01% 18.78%
PAYSON VALUE FUND
8
<PAGE>
PAYSON BALANCED FUND 26.02% 13.72% 13.68%
*Payson Value Fund commenced operations on July 31, 1992. Payson Balanced Fund
commenced operations on November 25, 1991.
In advertising performance, the Funds may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDC/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). In addition, a Fund may compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Salomon Brothers Bond Index, the Shearson
Lehman Bond Index, the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. A Fund may refer in such materials
to mutual fund performance rankings and other data published by Fund Tracking
Companies. Performance advertising may also refer to discussions of a Fund and
comparative mutual fund data and ratings reported in independent periodicals,
such as newspapers and financial magazines.
YIELD CALCULATIONS
Yields for a Fund used in advertising are computed by dividing the Fund's
interest income for a given 30-day or one-month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced with
respect to bonds purchased at a premium over their par value by subtracting a
portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
Income calculated for the purpose of determining a Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that a Fund's yield for any given
period is not an indication or representation by the Fund of future yields or
rates of return on the Fund's shares. Also, Processing Organizations (as defined
in the Prospectus) may charge their customers direct fees in connection with an
investment in a Fund, which will have the effect of reducing the Fund's net
yield to those shareholders. The yields of each Fund are not fixed or
guaranteed, and an investment in a Fund is not insured or guaranteed.
Accordingly, yield information may not necessarily be used to compare shares of
a Fund with investment alternatives which, like money market instruments or bank
accounts, may provide a fixed rate of interest. Also, it may not be appropriate
to compare a Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. While
average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the performance is not constant over
time but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the Funds.
9
<PAGE>
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over a given period
according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments and/or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gain and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns may be quoted with or without taking into consideration a
Fund's front-end sales charge; excluding sales charges from a total return
calculation produces a higher return figure. 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.
Investors who purchase and redeem shares of a Fund through a customer account
maintained at a Processing Organization may be charged one or more of the
following types of fees as agreed upon by the Processing Organization and the
investor, with respect to the customer services provided by the Processing
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
these assets). As stated above, these fees will have the effect of reducing the
average annual total return of the Fund for those investors.
OTHER ADVERTISING MATTERS
The Funds may also include various information in their advertisements
including, but not limited to: (1) portfolio holdings and portfolio allocation
as of certain dates, such as portfolio diversification by instrument type, by
instrument, by location of issuer or by maturity; (2) statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds that may be employed by an investor to meet specific financial
goals, such as funding retirement, paying for children's education and
financially supporting aging parents; (3) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of earning interest on principal plus interest that was earned earlier;
interest can be compounded at different intervals,
10
<PAGE>
such as annually, quarterly or daily); (4) information relating to inflation and
its effects on the dollar; for example, after ten years the purchasing power of
$25,000 would shrink to $16,621, $14,968, $13,465 and $12,100, respectively, if
the annual rates of inflation were 4%, 5%, 6% and 7%, respectively; (5)
information regarding the effects of automatic investment and systematic
withdrawal plans, including the principal of dollar cost averaging; (6)
background information regarding the Funds' Adviser and biographical
descriptions of the management staff of the Adviser; (7) summaries of the views
of the Adviser with respect to the financial markets; (8) background information
regarding the Trust; (9) the results of a hypothetical investment in a fund over
a given number of years, including the amount that the investment would be at
the end of the period; (10) the effects of investing in a tax-deferred account,
such as an individual retirement account or Section 401(k) pension plan; and
(11) the net asset value, net assets or number of shareholders of the Funds as
of one or more dates.
5. MANAGEMENT
TRUSTEES AND OFFICERS
THE TRUST
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Trustee, Chairman and President (age 56)
President, Forum Financial Group, LLC (mutual fund services company
holding company). Mr. Keffer is a director and/or officer of various
registered investment companies for which the various Forum Financial
Group of Companies provides services. His address is Two Portland
Square, Portland, Maine 04101.
Costas Azariadis, Trustee (age 55)
Professor of Economics, University of California, Los Angeles, since
July 1992. Prior thereto, Dr. Azariadis was Professor of Economics at
the University of Pennsylvania. His address is Department of
Economics, University of California, Los Angeles, 405 Hilgard Avenue,
Los Angeles, California 90024.
James C. Cheng, Trustee (age 56)
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 54)
Partner at the law firm of Reid and Priest, LLP, since 1995. From 1989
to 1995, he was a partner at the law firm of Winthrop, Stimson, Putnam
& Roberts from 1989 to 1995. Prior thereto, he was a partner at
LeBoeuf, Lamb, Leiby & MacRae, a law firm of which he was a member
from 1974 to 1989. His address is 40 West 57th Street, New York, New
York 10019.
Mark D. Kaplan, Vice President (age 42)
Director, Investments, Forum Financial Group, LLC, with which he has
been associated 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.
Stacey Hong, Treasurer (age 32)
11
<PAGE>
Director, Fund Accounting, Forum Financial Group, LLC, with which he
has been associated since April 1992. Prior thereto, Mr. Hong was a
Senior Accountant with Ernst & Young, LLP. His address is Two Portland
Square, Portland Maine 04101.
Max Berueffy, Secretary (age 46)
Senior Counsel, Forum Financial Group, LLC, 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 also
serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. His address is Two Portland Square, Portland, Maine 04101.
Leslie K. Klenk, Assistant Secretary (age 33)
Assistant Counsel, Forum Financial Group, LLC, with which she has been
associated since April 1998. Prior thereto, Ms. Klenk was Vice
President and Associate General Counsel of Smith Barney Inc. Ms. Klenk
also serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. Her address is Two Portland Square, Portland, Maine 04101.
Pamela Stutch, Assistant Secretary (age 31)
Fund Administrator, Forum Financial Group, LLC, with which she has
been associated since May 1998. Prior thereto, Ms. Stutch attended
Temple University School of Law and graduated in 1997. Ms. Stutch was
also a legal intern for the Maine Department of the Attorney General.
Ms. Stutch also serves as an officer of other registered investment
companies for which the various Forum Financial Group of Companies
provides services. Her address is Two Portland Square, Portland, Maine
04101.
TRUSTEE COMPENSATION
Each Trustee of the Trust (other than John Y. Keffer, who is an interested
person of the Trust) is paid $1,000 for each Board meeting attended (whether in
person or by electronic communication) and is paid $1,000 for each committee
meeting attended on a date when a Board meeting is not held. As of March 31,
1997, in addition to $1,000 for each Board meeting attended, each Trustee
receives $100 per active portfolio of the Trust. To the extent a meeting relates
to only certain portfolios of the Trust, Trustees are paid the $100 fee only
with respect to those portfolios. Trustees are also reimbursed for travel and
related expenses incurred in attending meetings of the Board. No officer of the
Trust is compensated by the Trust.
The following table provides the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
<TABLE>
<S> <C> <C> <C> <C>
ACCRUED ANNUAL
AGGREGATE PENSION BENEFITS UPON TOTAL
TRUSTEE COMPENSATION BENEFITS RETIREMENT COMPENSATION
------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $9,718.64 None None $9,718.64
Mr. Cheng $9,718.64 None None $9,718.64
Mr. Parish $9,718.64 None None $9,718.64
</TABLE>
TRUSTEE COMPENSATION FOR CORE TRUST (DELAWARE)
Each of the Trustees of the Trust is also a Trustee of Core Trust (Delaware), a
registered, open-end management investment company ("Core Trust"). Each Trustee
of Core Trust (other than John Y. Keffer, who is an interested
12
<PAGE>
person of Core Trust) is paid $1,000 for each Core Trust Board meeting attended
(whether in person or by electronic communication) plus $100 per active
portfolio of Core Trust and is paid $1,000 for each committee meeting attended
on a date when a Core Trust Board meeting is not held. To the extent a meeting
relates to only certain portfolios of Core Trust, trustees are paid the $100 fee
only with respect to those portfolios. Core Trust trustees are also reimbursed
for travel and related expenses incurred in attending meetings of the Core
THE ADVISER
Pursuant to an Investment Advisory Agreement with the Trust, H.M. Payson & Co.,
(the Adviser) furnishes, at its own expense, all services, facilities and
personnel necessary in connection with managing each Fund's investments and
effecting portfolio transactions for each Fund. Subject to the general control
of the Board, the Adviser is responsible for among other things, developing a
continuing investment program for the Fund in accordance with its investment
objective and reviewing the investments, investment strategies and policies of
the Fund In this regard, it is the responsibility of the Adviser to make
decisions relating to the Fund's investments and to place purchase and sale
orders regarding such investments with brokers or dealers selected by it in its
discretion. The Adviser also furnishes to the Board, which has overall
responsibility for the business and affairs of the Trust, periodic reports on
the investment performance of the Fund. Under the terms of the investment
advisory agreement, the Adviser is required to manage the Fund's investment
portfolio in accordance with applicable laws and regulations.
The Investment Advisory Agreement provides, with respect to a Fund, for an
initial term of two years from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
approved annually (1) by majority vote of the shareholders of a Fund or by the
Board and (2) by majority vote of the Trustees who are not parties to such
agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Investment Advisory Agreement is terminable with respect to a Fund,
without penalty, by the Board or by majority vote of the shareholders of a Fund
on 60 days' written notice to the Adviser, or by the Adviser o on not more than
60 days' nor less than 30 days' written notice to the Board, and will
automatically terminate if assigned. The Investment Advisory Agreement also
provides that, with respect to each Fund, the Adviser shall not be liable for
any mistake of judgment or in any event with respect to a o Fund, except for
willful misfeasance, bad faith, gross negligence, or reckless disregard in the
performance of the Advisor's duties under the Investment Advisory Agreement. In
addition, if the Adviser ceases to act as a Fund's investment adviser, or in the
event the Adviser so requests in writing, the Trust will change a Fund's name so
as not to include the word "Payson." The Advisory Agreement provides that the
Adviser may render services to others.
For its services under the Investment Advisory Agreement, H.M. Payson & Co.
receives a fee at an annual rate of 0.80% and 0.60% of the average daily net
assets of Payson Value Fund and Payson Balanced Fund, respectively. The
following table shows the dollar amount of fees payable under the Investment
Advisory Agreement, the amount of fees waived by the Adviser, if any, and the
actual fees received by the Adviser. The data is for the past three fiscal
years.
PAYSON VALUE FUND
<TABLE>
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $131,769 $0 $131,769
1997 $92,360 $0 $92,360
1996 $71,662 $0 $71,662
13
<PAGE>
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $131,512 $0 $131.512
1997 $107,243 $0 $107,243
1996 $95,588 $0 $95,588
1995 $75,058 $0 $75,058
</TABLE>
In addition to receiving its advisory fee from the Funds, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets that are invested in a Fund. In some instances the Adviser may elect to
credit against any investment management fee received from a client who is also
a shareholder in a Fund an amount equal to all or a portion of the fees received
by the Adviser or any affiliate of the Adviser from a Fund with respect to the
client's assets invested in that Fund.
THE ADMINISTRATOR
Pursuant to an Administration Agreement approved by the Board on June 19, 1997,
Forum Administrative Services, LLC ("FAdS") acts as administrator to the Trust
on behalf of the Funds. As administrator, FAdS provides management and
administrative services necessary to the operation of the Trust (including,
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),
and provides the Trust with general office facilities. At the request of the
Board, FAdS provides persons satisfactory to the Board to serve as officers of
the Trust. Those officers, as well as certain other employees and Trustees of
the Trust, may be directors, officers or employees of FAdS, or its respective
affiliates. 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. Prior to June 19, 1997,
administrative services were provided to the Funds by Forum Financial Services,
Inc. ("FFSI") pursuant to a Management and Distribution Agreement between the
Trust and FFSI.
The Administration Agreement will remain in effect with respect to a fund 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 (1) by the Board or by majority vote of the shareholders of a Fund and
(2) by a majority of the Trustees who are not parties to the agreement or
interested persons of any such party (other than as Trustees of the Trust). The
Administration Agreement may be terminated with respect to any Fund, without
payment of a penalty, by the Board or FAdS on 60 days' written notice. The
Administration Agreement provides that FAdS shall not be liable for any action
or inaction in the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard in the performance of its duties under the Administration
Agreement.
For its services under the Administration Agreement, FAdS receives t an annual
rate of 0.20% of the average daily net assets of each Fund. Under the former
Management and Distribution Agreement, FFSI received 0.20% of the average daily
net assets of each Fund. The following table shows the dollar amount of fees
payable, the amount of fees waived, and the net fees received under the
Administration Agreement and/or the Management and Distribution Agreement for
the Funds' prior three fiscal years.
PAYSON VALUE FUND
<TABLE>
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $32,942 $28,750 $4,192
1997 $23,090 $23,090 $0
1996 $17,916 $17,916 $0
14
<PAGE>
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $43,837 $38,278 $5,559
1997 $35,748 $35,748 $0
1996 $31,863 $31,863 $0
</TABLE>
THE DISTRIBUTOR
Pursuant to a Distribution Agreement, Forum Financial Services, Inc., FFSI is
the Trust's distributor and acts as the agent of the Trust in connection with
the offering of the shares of the Fund. The Distributor is under no obligation
to sell a specific amount of Fund shares. All subscriptions of shares obtained
by FFSI are directed to the Trust for acceptance and are not binding on the
Trust until accepted by it.
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 (1) by the Board
or by a majority vote of the shareholders, (2) 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
and with respect to any class for which the Trust has adopted a distribution
plan,have no direct or indirect financial interest in the operation of that
distribution plan or the Distribution Agreement. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without penalty
by the Board or by a vote of a majority of the outstanding voting securities of
the Fund on 60 days' written notice to the FFSI or by FFSI on 60 days' written
notice to the Board. The Distribution Agreement 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.
FFSI may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of the Funds. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Funds are sold without sales charges or
distribution fees. These financial institutions may otherwise act as processing
agents, and will be responsible for promptly transmitting purchase, redemption
and other requests to the Funds.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition to, or
different from, those listed herein. Information concerning any charges or
services will be provided to customers by the financial institution. Investors
purchasing shares of the Fund in this manner should acquaint themselves with
their institution's procedures and should read this Prospectus in conjunction
with any materials and information provided by their institution. The financial
institution and not its customers will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
Pursuant to the Distribution Agreement, FFSI receives, and may reallow to
certain financial institutions, the sales charge paid by the purchasers of each
Fund's shares. The aggregate sales charges payable to FFSI with respect to each
Fund are outlined in the following table:
15
<PAGE>
PAYSON VALUE FUND
<TABLE>
<S> <C> <C> <C>
Fiscal Year Ended
March 31 Aggregate Sales Charge Amount Retained Amount Reallowed
1998 $3,715 $462 $3,253
PAYSON BALANCED FUND
Fiscal Year Ended
March 31 Aggregate Sales Charge Amount Retained Amount Reallowed
1998 $186 $186 $0
</TABLE>
DISTRIBUTION PLAN
In accordance with Rule 12b-1 under the 1940 Act, the Trust adopted a
distribution plan (the "Plan") which provides that all written agreements
relating to the Plan must be in a form satisfactory to the Board. In addition,
the Plan requires the Trust, the Adviser and FFSI to prepare, at least
quarterly, written reports setting forth all amounts expended for distribution
purposes by the Trust, the Adviser and FFSI pursuant to the Plan and identifying
the distribution activities for which those expenditures were made.
The Plan provides that it will remain in effect for one year from the date of
its adoption and thereafter shall continue in effect provided it is approved at
least annually by the shareholders or by the Board, including a majority of
directors who are not interested persons of the Trust and who have no direct or
indirect interest in the operation of the Plan or in any agreement related to
the Plan. The Plan further provides that it may not be amended to increase
materially the costs which may be borne by the Trust for distribution pursuant
to the Plan without shareholder approval and that other material amendments of
the Plan must be approved by the Trustees in the manner described in the
preceding sentence. The Plan may be terminated at any time by a vote of the
Board or, with respect to either Fund, by the Fund's shareholders.
During the fiscal year ended March 31, 1998, neither Fund paid any distribution
related expenses pursuant to the Distribution Plan.
THE TRANSFER AGENT
Pursuant to a Transfer Agency and Services Agreement with the Trust dated May
19, 1998, Forum Shareholder Services, LLC ("FSS") acts as transfer agent of the
Trust. FSS became the transfer agent effective January 1, 1998 when it succeeded
to the transfer agency business of Forum Financial Corp.
(FSS and Forum Financial Corp. ("FFC") are commonly controlled entities).
The Transfer Agency and Services Agreement provides, with respect to each Fund,
for an initial term of one year from its effective date and for its continuance
in effect for successive twelve-month periods thereafter, provided that the
agreement is specifically approved at least annually (1) by the Board or, with
respect to either Fund, by a majority vote of the shareholders of that Fund and
(2) by a majority of the Trustees who are not parties to the Transfer Agency and
Services Agreement or interested persons of any such party. The Transfer Agency
Agreement may also be terminated on 60 days written notice by either the Board
or FSS. The Transfer Agency Agreement also provides that FSS shall not be liable
for any action, failure, or omission except for willful misfeasance, bad faith,
and gross negligence in the performance of its duties under the Transfer Agency
and Services Agreement.
Among the responsibilities of FSS agent for the Trust are: (1) answering
customer inquiries regarding account status and history, the manner in which
purchases and redemptions of shares of the Funds may be effected and certain
other matters pertaining to the Funds; (2) assisting shareholders in initiating
and changing account designations and addresses; (3) providing necessary
personnel and facilities to establish and maintain shareholder accounts and
records, assisting in processing purchase and redemption transactions and
receiving wired funds; (4) transmitting and receiving funds in connection with
customer orders to purchase or redeem shares; (5) verifying shareholder
signatures in connection with changes in the registration of shareholder
accounts; (6) furnishing
16
<PAGE>
periodic statements and confirmations of purchases and redemptions; (7)
arranging for the transmission of proxy statements, annual reports, prospectuses
and other communications from the Trust to its shareholders; (8) arranging for
the receipt, tabulation and transmission to the Trust of proxies executed by
shareholders with respect to meetings of shareholders of the Trust; and (9)
providing such other related services as the Trust or a shareholder may
reasonably request.
FSS or any sub-transfer agent or processing agent may also act and receive
compensation for acting as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Funds with
respect to assets invested in the Funds. FSS 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
FSS with respect to assets of those customers or clients invested in the Funds.
FSS, FAdS or sub-transfer agents or processing agents retained by FSS may be
Processing Organizations (as defined in the Prospectus) and, in the case of
sub-transfer agents or processing agents, may also be affiliated persons of FSS
or FAdS.
For its services, FSS receives with respect to each Fund .25% of the average
daily net assets, an annual fee of $12,000 plus $18 per shareholder account. FFC
served as the transfer agent for the Trust pursuant to similar terms and
compensation as FSS. The following table shows the dollar amount of fees
payable, the amount of fee that was waived, and the net fees received under the
Transfer Agency Agreement for the Funds' prior three fiscal years.
<TABLE>
PAYSON VALUE FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $58,869 $39,896 $18,973
1997 $45,916 $27,131 $18,785
1996 $38,519 $21,273 $17,246
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $73,628 $53,159 $20,469
1997 $63,723 $42,011 $21,712
1996 $58,767 $37,798 $20,969
</TABLE>
THE FUND ACCOUNTANT
Pursuant to a Fund Accounting Agreement with the Trust dated June 19, 1997,
Forum Accounting Services, LLC ("FAcS") provides the Funds with portfolio
accounting. Under the Fund Accounting Agreement, FAcS prepares and maintains
books and records of the Fund on behalf of the Trust as required under the 1940
Act, calculates the net asset value per share of each Fund and their dividends
and capital gain distributions and prepares periodic reports to shareholders and
the Securities and Exchange Commission. Prior to June 19, 1997, accounting
services were provided to the Trust by FFC.
The Fund Accounting Agreement will remain in effect with respect to a Fund for
one year and will continue in effect thereafter only if its continuance is
specifically approved at least annually (1) by the Board or by majority vote of
the shareholders of a Fund and (2) by a majority of the Trustees who are not
parties to the respective agreement or interested persons of any such party. The
Fund Accounting Agreement may also be terminated on 60 days written notice by
either the Board or FAcS, respectively. The Fund Accounting Agreement also
provides that
17
<PAGE>
FAcS shall not be liable for any action or inaction taken except for willful
misfeasance, bad faith or gross negligence in the performance of its duties
under the Fund Accounting Agreement.
For services provided under the Fund Accounting Agreement, FAcS receives and FSS
received an annual base fee of $36,000 plus certain surcharges depending upon
the amount and type of the Funds" portfolio transactions and positions. The
following table shows the dollar amount of fees payable, the amount of fee that
was waived, and the net fees received under the Fund Accounting Agreement for
the Funds' prior three fiscal years:
<TABLE>
PAYSON VALUE FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $36,000 $0 $36,000
1997 $36,000 $0 $36,000
1996 $37,000 $0 $37,000
18
<PAGE>
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1998 $37,000 $0 $37,000
1997 $37,000 $0 $37,000
1996 $38,000 $0 $38,000
</TABLE>
6. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Funds as of 4:00p.m.,
Eastern Time, on each Fund Business Day as defined in the Prospectus by dividing
the value of the Fund's net assets (I.E., the value of its portfolio securities
and other assets less its liabilities) by the number of that Fund's shares
outstanding at the time the determination is made. Securities owned by the Fund
listed on the recognized stock exchanges are valued at the last reported trade
price, prior to the time when the assets are valued, on the exchange on which
the securities are principally traded. Listed securities traded on recognized
stock exchanges where last trade prices are not available are valued at
mid-market prices. Securities traded in over-the-counter markets, or listed
securities for which no trade is reported on the valuation date, are valued at
the most recent reported mid-market price. Other securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith using methods approved by the Purchases and redemptions
are effected at the time of the next determination of net asset value following
the receipt of any purchase or redemption order.
7. PORTFOLIO TRANSACTIONS
Purchases and sales of debt securities for Payson Balanced Fund usually are
principal transactions. Debt securities for that Fund are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. There usually are no brokerage commissions paid for such purchases.
Purchases from underwriters of portfolio securities include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers include the spread between the bid and asked prices.
Payson Value Fund and Payson Balanced Fund (with respect to purchases of equity
securities) will effect purchases and sales through brokers who charge
commissions. Allocations of transactions to brokers and dealers and the
frequency of transactions are determined by the 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. For
the fiscal years ended March 31, 1998, 1997 and 1996, the aggregate brokerage
commissions paid by Payson Value Fund were $29,682, $17,303, and $27,008,
respectively. For the fiscal years ended March 31, 1998, 1997, and 1996, the
aggregate brokerage commissions paid by Payson Balanced Fund were $41,370,
$37,474, and $36,756, respectively. For the fiscal year ended March 31, 1998,
$0.00, or 0.0% of aggregate brokerage commissions paid, was paid to H.M. Payson
an affiliated broker and 0.0% of the total dollar amount of transactions
involving payment of commission was effected through an affiliated broker. As of
March 31, 1998, the Payson Balanced Fund owned approximately $152,000 in
corporate bonds/notes issued by Bear Stearns & Co., Inc. ("Bear Stearns"). Bear
Stearns is one of a number of brokers that the Payson Balance Fund utilizes to
affect transactions on its behalf. As of the same date, the Payson Value Fund
owned approximately $394,000 of stock issued by A.G. Edwards, Inc. ("A.G.
Edwards"). A.G. Edwards is one of a number of brokers that the Payson Value Fund
utilizes to affect transactions on its behalf.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with Fund transactions, the Adviser takes into account such factors
as size of the order, difficulty of execution, efficiency of the executing
broker's facilities (including the services described below) and any risk
assumed by the executing broker. The Adviser may also take
19
<PAGE>
into account payments made by brokers effecting transactions for a Fund (i) to
the Fund or (ii) to other persons on behalf of the Fund for services provided to
it for which it would be obligated to pay.
In addition, the Adviser may give consideration to research and investment
analysis services furnished by brokers or dealers to the Adviser for its use and
may cause the Fund to pay these brokers a higher amount of commission than may
be charged by other brokers. Such research and analysis is of the types
described in Section 28(e)(3) of the Securities Exchange Act of 1934, as
amended, and is designed to augment the Adviser's own internal research and
investment strategy capabilities. The Adviser may use the research and analysis
in connection with services to clients other than the Fund, and the Adviser's
fee is not reduced by reason of the Adviser's receipt of the research services.
Investment decisions for the Funds will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. If, however, a Fund and other investment
companies or accounts managed by the Adviser are contemporaneously engaged in
the purchase or sale of the same security, the transactions may be averaged as
to price and allocated equitably to each account. In some cases, this policy
might adversely affect the price paid or received by a Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for a Fund and for other investment companies and accounts managed
by the Adviser occur contemporaneously, the purchase or sale orders may be
aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
In the future the Funds, consistent with the policy of obtaining best net
results, may conduct brokerage transactions through the Adviser's affiliates,
affiliates of those persons or FFSI. If a Fund anticipates conducting brokerage
transactions through these persons, the Board will adopt procedures in
conformity with applicable rules under the 1940 Act to ensure that all brokerage
commissions paid to these persons are reasonable and fair.
8. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis by FFSI.
Set forth below is an example of the method of computing the offering price of
each Fund's shares. The example assumes a purchase of shares of beneficial
interest aggregating less than $100,000 subject to the schedule of sales charges
set forth in the Prospectuses at a price based on the net asset value per share
of each Fund on March 31, 1998.
Payson Payson
Value Balanced
Fund Fund
---- ----
Net Asset Value Per Share $21.670 $14.79
Sales Charge, 4.00% of offering
price (4.17% of net asset value
per share) $0.90 $0.62
Offering to Public $22.57 $15.41
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse a Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to a Fund's shares as provided in the
Prospectus.
20
<PAGE>
The Trust has filed an election with the SEC pursuant to which a Fund will only
effect a redemption in portfolio securities if a shareholder is redeeming more
than $250,000 or 1% of the Fund's total net assets, whichever is less, during
any 90-day period.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of any other fund of the Trust or shares of certain other
portfolios of investment companies which retain FAdS or FFSI or its affiliates
administrator or distributor and which participate in the Trust's exchange
privilege program ("Participating Fund"). For Federal income tax purposes,
exchange transactions are treated as sales on which a purchaser will realize a
capital gain or loss depending on whether the value of the shares redeemed is
more or less than his basis in such shares at the time of the transaction.
By use of the exchange privilege, the shareholder authorizes FSS 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 FSS to be genuine.
The records of FSS of such instructions are binding. Proceeds of an exchange
transaction may be invested in another Participating Fund in the name of the
shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares are being acquired. Shares of any
Participating Fund may be redeemed and the proceeds used to purchase, without a
sales charge, shares of any other Participating Fund that are offered without a
sales charge. Shares of any Participating Fund purchased with a sales charge may
be redeemed and the proceeds used to purchase, without a sales charge, shares of
any other Participating Fund otherwise sold with the same or a lesser sales
charge. If the Participating Fund purchased in the exchange transaction imposes
a higher sales charge than was paid originally on the exchanged shares, the
shareholder will be responsible for the difference between the two sales
charges. Shares acquired through the reinvestment of dividends and distributions
are deemed to have been acquired with a sales charge rate equal to that paid on
the shares on which the dividend or distribution was paid.
The terms of the exchange privilege are subject to change, and the privilege may
be terminated by any of the Participating Funds or the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
PAYROLL PURCHASE PROGRAM
Shares of the Funds may be purchased by employees of employers participating in
the Payroll Purchase Program ("PPP"). Employers wishing to participate must
arrange payroll deduction or other bulk transmission of investments to the
Funds. An employer may not participate unless, at all times, at least five of
the employer's employees are participating in this program.
Once an employer chooses to participate in PPP through a payroll deduction or
other bulk purchase plan, subsequent investments will be automatic and will
continue until such time as the investor notifies the applicable Fund and his
employer to discontinue further investments. Due to the varying procedures to
prepare, process and forward the transmission to the Fund, there may be a delay
between the time of the deduction and the time the money reaches the Fund. An
investment in the Fund will be made at the applicable offering price determined
on the day that both the check and the payroll deduction data are received in
required form by the Transfer Agent.
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
The Funds offer an individual retirement plan (an "IRA") for individuals who
wish to use shares of the Funds as a medium for funding individual retirement
savings. Under the IRA, distributions of net investment income and capital gain
will be automatically reinvested in the IRA established for the investor. The
Funds' custodian furnishes
21
<PAGE>
custodial services to the IRAs for a service fee. Shareholders wishing to invest
through an IRA should contact the Transfer Agent for further details and
information.
9. TAX MATTERS
Qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended, does not involve governmental supervision of management or
investment practices or policies. Investors should consult their own counsel for
a complete understanding of the requirements the Funds must meet to qualify for
such treatment. The information set forth in the Prospectus and the following
discussion relate solely to Federal income taxes on dividends and distributions
by a Fund and assume that each Fund qualifies as a regulated investment company.
Investors should consult their own counsel for further details and for the
application of state and local tax laws to the investor's particular situation.
For federal income and excise tax purposes, dividends declared and payable to
shareholders of record as of a date in October, November or December of a given
year but actually paid during the immediately following January will be treated
as if paid by a Fund on December 31 of that calendar year, and will be taxable
to these shareholders for the year declared, and not for the year in which the
shareholders actually received the dividend.
Payson Value Fund expects to derive a substantial amount of its gross income
(exclusive of capital gain) from dividends from domestic corporations.
Accordingly, that portion of that Fund's dividends so derived will qualify for
the dividends-received deduction for corporations. Payson Balanced Fund expects
to derive substantially all of its gross income (exclusive of capital gain) from
sources other than dividends. Accordingly, it is expected that most of that
Fund's dividends or distributions will not qualify for the dividends-received
deduction for corporations.
Certain listed options and regulated futures contracts are considered "section
1256 contracts" for Federal income tax purposes. Section 1256 contracts held by
a Fund at the end of each taxable year will be "marked to market" and treated
for Federal income tax purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a Fund on section
1256 contracts generally will be considered 60% long-term and 40% short-term
capital gain or loss. A Fund can elect to exempt its section 1256 contracts
which are part of a "mixed straddle" from the application of section 1256.
With respect to equity or over-the-counter put and call options, gain or loss
realized by a Fund upon the lapse or sale of such options held by the Fund will
be either long-term or short-term capital gain or loss depending upon the
respective Fund's holding period with respect to such option. However, gain or
loss realized upon the lapse or closing out of such options that are written by
a Fund will be treated as short-term capital gain or loss. In general, if a Fund
exercises an option, or if an option that a Fund has written is exercised, gain
or loss on the option will not be separately recognized but the premium received
or paid will be included in the calculation of gain or loss upon disposition of
the property underlying the option.
In addition, the use of certain hedging strategies such as writing and
purchasing options, futures contracts and options on futures contracts involves
complex rules that will determine for income tax purposes the character and
timing of recognition of income received in connection therewith.
10. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement, BankBoston, N.A. (formerly The First National
Bank of Boston), 100 Federal Street, Boston, MA 02106, acts as the custodian of
the Funds' assets. The custodian's responsibilities include safeguarding and
controlling the Funds' cash and securities, determining income and collecting
interest on Fund investments.
22
<PAGE>
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, 1200 G Street,
N.W., Washington, D.C. 20005
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, act as auditors for the Trust.
FINANCIAL STATEMENTS
The financial statements of Payson Balanced Fund for the year ended March 31,
1998, which are included in the Annual Report to Shareholders of the Trust and
delivered along with this Statement of Additional Information, are incorporated
herein by reference.
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<PAGE>
APPENDIX A
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 1, 1998, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned more than 5% of each Fund. Shareholders owning
25% or more of the shares of a Fund or of the Trust as a whole may be deemed to
be controlling persons. By reason of their substantial holdings of shares, these
persons may be able to require the Trust to hold a shareholder meeting to vote
on certain issues and may be able to determine the outcome of any shareholder
vote. As noted, certain of these shareholders are known to the Trust to hold
their shares of record only and have no beneficial interest, including the right
to vote, in the shares.
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
OAK HALL SMALL CAP CONTRARIAN FUND
- ----------------------------------
Maryann Wolf 13.30% 40,946.955
55 Central Park West Apt 12-13
New York NY 10023
Simeon Gold & Heide Gold, Jt. Ten. 9.05% 27,856.149
136 East 76th Street Apt. 10F
New York NY 10021
Jane Levy 5.73% 17,622.969
320 West 87th Street Apt. 3W
New York NY 10024
Bank of Boston, IRA Custodian 5.70% 17,553.097
FBO Maryann Wolf
55 Central Park West Apt. 12-13
New York NY 10023
WR Family Associates 401K Plan Option 5.48% 16,870.661
Attn: Olga M. Dimmini
122 East 42nd Street, Suite 2400 New York, NY 10168-002
A-1
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS GOVERNMENT FUND ------------ -------------
INSTITUTIONAL SHARES
- ---------------------
H M Payson & Co. Custody Account 56.56% 18,033,015.150
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland ME 04112
H M Payson & Co. Trust Account 43.44% 13,850,465.390
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS GOVERNMENT FUND
INSTITUTIONAL SERVICE SHARES
Bank of Boston, IRA Rollover Custodian 16.52% 826,387.330
FBO Merne E. Young Rollover
18751 San Rufino
Irvine, CA 92612
Casa Colina Centers for Rehabilitation 15.90% 795,276.550
Foundation Smith Family Care Fund
Attn: Kristy Hurley
2850 N. Garey Avenue
P.O. Box 6001
Pomona, CA 91769-6001 15.90% 795,276.550
Lansdowne Parking Associates LP 9.99% 499,939.120
c/o Meredith Management
29 Crafts Street #300
Newton, MA 02158
DAILY ASSETS GOVERNMENT FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.920
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS CASH FUND
INSTITUTIONAL SHARES
- --------------------
Allagash & Co. 46.30% 12,236,932.890
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
A-2
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS CASH FUND ------------ -------------
INSTITUTIONAL SHARES CON'T
H M Payson & Co. Custody Account 34.44% 9.101,914.440
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
H M Payson & Co. Trust Account 19.27% 5,092,100.590
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS CASH FUND
INSTITUTIONAL SERVICE SHARES
Cutler Approved List Equity Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Cutler Equity Income Fund 18.12% 951,550.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM All Cap Value Fund 9.45% 496,164.720
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Mid Cap Value Fund 5.70% 299,263.830
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
A-3
<PAGE>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
------------ ------------
DAILY ASSETS CASH FUND
INVESTORS SHARES
Forum Administrative Services, Inc. 100% 101.200
Two Portland Square
Portland, ME 04101
<PAGE>
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SHARES
Allagash & Co. 72.89% 11,915,149.240
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Babb & Co. #02-6004105 26.73% 4,368,592.160
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SERVICE SHARES
Dirigo Drywall Assoc. 22.89% 682,716.350
225 Riverside Street
Portland, ME 04103
Cutler Approved List Equity Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc./
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 19.58% 583,950,000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
A-4
<PAGE>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND ------------ ------------
INSTITUTIONAL SERVICE SHARES-CON'T
Cutler Equity Income Fund 9.05% 269,894.440
C/O Forum Financial Services, Inc.
Two Portland Square
CRM All Cap Value Fund 6.23% 185,729.030
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.900
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SHARES
- --------------------
Babb & Co. #02-6004105 46.72% 9,494,221.860
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 25.38% 5,157,680.310
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Imperial Securities Corp. 23.96% 4,868,005.220
Attn: Jack Singer
9920 South La Cieniega Blvd 14th Fl
Inglewood, CA 90301
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SERVICE SHARES
Forum Financing 100% 5.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
A-5
<PAGE>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS MUNICIPAL FUND ------------ ------------
INVESTOR SHARES
Forum Administrative Services, LLC 100% 100.060
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SHARES
- --------------------
Babb & Co. #02-6004105 65.16% 62,106,021.450
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
Allagash & Co. 34.84% 33,201,966.980
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SERVICE
Allagash & Co. 99.10% 1,657,595.720
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
INVESTORS BOND FUND
- -------------------
Firstrust Co. 72.38% 5,714,958.415
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 11.10% 876,782.753
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
A-6
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
FORUM TAXSAVER BOND FUND
- ------------------------
First Trust Co. 49.33% 1,717,000.264
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 21.80% 758,668.285
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
Leonore Zusman Ttee 6.03% 209,963.557
Leonore Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Ct.
Englewood OH 45322
Lawrence L. Zusman Ttee 5.41% 188,185.433
Lawrence L. Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Court
Englewood OH 45322
HIGH GRADE BOND FUND
Babb & Co. #02-6004105 99.76% 3.451,019.518
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
MAINE MUNICIPAL BOND FUND
Administrative Data Management Corp. 42.71% 1,110,715.231
Attn: Sue Needell
581 Main Street
Woodbridge, NJ 07095-1198
NEW HAMPSHIRE BOND FUND
Independence Trust 45.62% 565,735.702
Attn: Linda Feliciano
200 Bedford Street 5th
Manchester, NH 03101
A-7
<PAGE>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
PAYSON BALANCED FUND
- --------------------
ALA & Co. 15.49% 258,329.088
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
Payse & Co. 14.98% 249,788.506
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
PAYSON VALUE FUND
- -----------------
Payse & Co. 21.90% 208,621.301
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
ALA & Co. 18.09% 172,271.808
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
INVESTORS EQUITY FUND
- ---------------------
Babb & Co. #02-6004105 94.40% 2,383,117.225
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 5.18% 130,658.987
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
A-8
<PAGE>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
INTERNATIONAL EQUITY FUND
- -------------------------
Forum Financing 67.80% 500.000
Forum Financial Group
Two Portland Square
Portland ME 04101
Donaldson, Lufkin & Jenrette Sec Corp. 32.20% 237.417
Mutual Funds Dept. - 5th Floor
PO Box 2052
Jersey City NJ 07303
INVESTORS GROWTH FUND
- ----------------------
Firstrust Co. 99.95% 3,013,520.631
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
EQUITY INDEX FUND
- -----------------
Allagash & Co. 99.27% 440,772.554
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
SMALL COMPANY OPPORTUNITIES FUND
Forum Administrative Services, LLC 100% 500.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
EMERGING MARKETS FUND
Forum Financing 65.52% 500.00
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
Donald, Lufkin & Jenrette Securities Corp. 34.48% 263.158
Mutual Funds Dept.-5th Floor
P.O. Box 2052
Jersey City, NJ 07303
A-9
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
QUADRA VALUE EQUITY FUND
- ------------------------
Holly Melosi & Arturo R. Melosi TTEE 80.77% 406,724.176
FBO Atrgur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
HMK Enterprises, Inc. 8.41%% 42,337.003
800 South Street
Suite 355
Waltham MA 02154
QUADRA GROWTH FUND
- ------------------
Holly Melosi & Arturo R. Melosi TTEE 77.64% 454,757.022
FBO Arthur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
John E. Rosenthal 12.52 73,322.092
1212 West Street
Carlisle, MA 01741-1428
POLARIS GLOBAL VALUE FUND
- -------------------------
David Solomont 11.39% 271,791.712
c/o Utopia Inc.
200 Fifth Avenue
Waltham, MA 02154
DCGT TR 5.35% 127,724.287
FBO Audrey Lewis-REG IRA
10 Rogers Street
Cambridge, MA 02142
</TABLE>
A-10
<PAGE>
PAYSON VALUE FUND
PAYSON BALANCED FUND
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE BONDS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
B-1
<PAGE>
STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated CC typically are debt subordinated to senior debt which is assigned
an actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated D are in payment default or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
FITCH IBCA, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
B-2
<PAGE>
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rated F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
B-3
<PAGE>
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
B-4
<PAGE>
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
3. SHORT-TERM DEBT (COMMERCIAL PAPER)
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2, both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
-- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH IBCA, INC..
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
B-5
<PAGE>
F-3. Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
B-6
<PAGE>
APPENDIX C
ADDITIONAL ADVERTISING MATERIALS
TEXT OF FORUM BROCHURE
In connection with its advertisements, a Fund may provide a description of the
Fund's investment adviser and its affiliates, which are service providers to the
Fund. Text which is currently in use is set forth below.
"FORUM FINANCIAL GROUP OF COMPANIES
Forum Financial Group of Companies represent more than a decade of diversified
experience with every aspect of mutual funds. The Forum Family of Funds has
benefited from the informed, sharply focused perspective on mutual funds that
experience makes possible.
The Forum Family of Funds has been created and managed by affiliated companies
of Portland-based Forum Financial Group, among the nation's largest mutual fund
administrators providing clients with a full line of services for every type of
mutual fund.
The Forum Family of Funds is designed to give investment representatives and
investors a broad choice of carefully structured and diversified portfolios,
portfolios that can satisfy a wide variety of immediate as well as long-term
investment goals.
Forum Financial Group has developed its "brand name" family of mutual funds and
has made them available to the investment public and to institutions on both the
national and regional levels.
For more than a decade Forum has had direct experience with mutual funds from a
different perspective, a perspective made possible by Forum's position as a
leading designer and full-service administrator and manager of mutual funds of
all types.
Today Forum Financial Group administers and provides services for over 120
mutual funds for 17 different fund managers, with more than $30 billion in
client assets. Forum has its headquarters in Portland, Maine, and has offices in
Seattle, Bermuda, and Warsaw, Poland. In a joint venture with Bank Handlowy, the
largest and oldest commercial bank in Poland, Forum operates the only
independent transfer agent and mutual fund accounting business in Poland. Forum
directs an off-shore and hedge fund administration business through its Bermuda
office. It employs more than 230 professionals worldwide.
From the beginning, Forum developed a plan of action that was effective with
both start- up funds, and funds that needed restructuring and improved services
in order to live up to their potential. The success of its innovative approach
is evident in Forum's growth rate over the years, a growth rate that has
consistently outstripped that of the mutual fund industry as a whole, as well as
that of the fund service outsource industry.
Forum has worked with both domestic and international mutual fund sponsors,
designing unique mutual fund structures, positioning new funds within the
sponsors' own corporate planning and targeted markets.
Forum's staff of experienced lawyers, many of whom have been associated with the
Securities and Exchange Commission, have been available to work with fund
sponsors to customize fund components and to evaluate the potential of various
fund structures.
Forum has introduced fund sponsors to its unique proprietary Core and Gateway(R)
partnership, helping them to take advantage of this full-service master/feeder
structure.
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<PAGE>
Fund sponsors understand that even the most efficiently and creatively designed
fund can disappoint shareholders if it is inadequately serviced. That is the
reason why fund sponsors have relied on Forum to meet all of a fund's complex
compliance, regulatory, and filing needs.
Forum's full service commitment includes providing state-of- the-art accounting
support (Forum has 8 CPAs on staff, as well as senior accountants who have been
associated with Big 6 accounting firms). Forum's proprietary accounting system
is continually upgraded and can provide custom-built modules to satisfy a fund's
specific requirements. This service is joined with transfer agency and
shareholder service groups that draw their strength both from the high caliber
of the people staffing each unit and from Forum's advanced technology support
system.
More than a decade of experience with mutual funds has given Forum practical
hands-on experience and knowledge of how mutual funds function "from the inside
out."
Forum has put that experience to work by creating the Forum Family of Funds, a
family where each member is designed and positioned for your best investment
advantage, and where each fund is serviced with the utmost attention to the
delivery of timely, accurate, and comprehensive shareholder information.
INVESTMENT ADVISERS
Forum Investment Advisors, LLC offers the services of portfolio managers with
the highest qualifications--because without such direction, a comprehensive and
goal-oriented investment program and ongoing investment strategy are not
possible. Serving as portfolio managers for the Forum Family of Funds are
individuals with decades of experience with some of the country's major
financial institutions.
Individual funds in the Forum Family of Funds invest in portfolios that have as
their investment adviser nationally recognized institutions, including Schroder
Capital Management International, Inc., a major figure in worldwide mutual funds
that, with its affiliates, managed over $175 billion as of September 30, 1997.
Forum Funds are also managed by the portfolio managers of H.M. Payson & Co.,
founded in Portland, Maine in 1854 and one of the oldest investment firms in the
country. Payson has approximately $1 billion in assets under management, with
clients that include pension plans, endowment funds, and institutional and
individual accounts.
FORUM INVESTMENT ADVISORS, LLC
Forum Investment Advisors, LLC is the largest Maine based investment adviser
with approximately $1.4 billion in assets under management. The portfolio
managers have decades of combined experience in a cross section of the country's
financial markets. The managers have specific, day-to-day experience in the
asset class portfolios they manage, bringing critical focus to meeting each
fund's explicit investment objectives. The portfolio managers have been involved
in investing the assets of large insurance companies, banks, pension plans,
individuals, and of course mutual funds. Forum Investment Advisors, LLC has a
staff of analysts and investment administrators to meet the demands of serving
shareholders in our funds.
FORUM FAMILY OF FUNDS
It has been said that mutual fund investment offerings--of which there are
nearly 10,000, with assets spread across stock, bond, and money market funds
worth more than $4 trillion--come in a rainbow of varieties. A better
description would be a "spectrum" of varieties, the spectrum graded from green
through amber and on to red. In simpler terms, from low risk investments,
through moderate to high risk. The lower the risk, the lower the possible reward
- -- the higher the risk, the higher the potential reward.
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<PAGE>
The Forum Family of Funds provides conservative investment opportunities that
reduce the risk of loss of capital, using underlying money market investments
U.S. Government securities (although the shares of the Forum Funds are neither
insured nor guaranteed by the U.S. Government or its agencies), thus cushioning
the investment against market volatility. These funds offer regular income,
ready access to your money, and flexibility to buy or sell at any time.
In the less conservative but still not aggressive category are funds in the
Forum Family that seek to provide steady income and, in certain cases, tax-free
earnings. Such investments provide important diversification to an investment
portfolio.
Growth funds in the Forum Family more aggressively pursue a high return at the
risk of market volatility. These funds include domestic and international stock
mutual funds."
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<PAGE>
TEXT OF PEOPLES HERITAGE NEWS RELEASE
Peoples Heritage Financial Group, Inc. (NASDAQ:PHBK) announced today that it has
formed an alliance with a major mutual fund provider and an investment advisory
firm to expand its mutual fund offerings. The alliance with Forum Financial
Group and H.M. Payson & Company will result in 18 funds, including the unique
Maine Municipal Bond Fund and New Hampshire Bond Fund, being offered through the
branches of Peoples' affiliate banks in Maine, New Hampshire and northern
Massachusetts and the Company's trust and investment subsidiaries
'There is no secret to where financial services are moving, under one roof,"
said William J. Ryan, Chairman, President and Chief Executive Officer of Peoples
Heritage. "One only has to watch the virtually daily announcements of
consolidations in the financial sector to understand that customers are
demanding and receiving 'one-stop' financial services.
"We think we are adding the additional competitive advantage of funds that are
managed and administered close to home."
Eighteen Forum funds will be offered including two Payson funds. The tax-free
Maine and New Hampshire state bond funds are the only two such funds available
and usually invest 80% of total assets in municipal securities. Other funds
being provided by the alliance include money market, fixed income and equity
funds.
Forum Financial, based in Portland, Maine since 1987, administers 146 funds with
more than $36 billion in assets. Forum manages mutual funds for independent
investment advisers such as Payson and for banks. Forum Investment Advisors, LLC
an affiliate, is the largest Maine-based investment adviser with approximately
$1.7 billion in fund assets under management.
"We are providing a great product set to the customers served by Peoples' nearly
200 branches in northern New England," said John Y. Keffer, Forum Financial
president, "The key today is to link a wide variety of investment options with
convergent, easy access for customers. I believe this alliance does just that."
H.M. Payson & Co., founded in 1854, is one of the nation's oldest investment
firms with nearly $1 billion in assets under management and $300 million in
non-managed custodial accounts. The Payson Value
Fund and Payson Balanced Fund are among the 18 offerings.
"I believe we have all the ingredients of a tremendous alliance," said John
Walker, Payson president and managing director. "We have the region's premier
community banking company, a community-based investment adviser, and a local
mutual fund company that operates nationally and specializes in working with
banks. We are poised to provide solid investment performance and service."
Peoples Heritage Financial Group is a $10 billion multi-state bank and financial
services holding company headquartered in Portland, Maine. Its Maine banking
affiliate, Peoples Heritage Bank, has the state's leading deposit market share.
Its New Hampshire banking affiliate, Bank of New Hampshire, has the state's
leading deposit market share. Family Bank, the Company's Massachusetts banking
subsidiary, has the state's tenth largest deposit market share and the leading
market share in many of the northern Massachusetts communities it serves.
Peoples affiliate banks also operate subsidiaries in leasing, trust and
investment services and insurance.
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<PAGE>
FORUM FINANCIAL GROUP:
Headquarters: Two Portland Square, Portland, Maine 04101
President: John Y. Keffer
Offices: Portland, Seattle, Warsaw, Bermuda
*Established in 1986 to administer mutual funds for independent investment
advisers and banks
*Among the nation's largest third-party fund administrators
*Uses proprietary in-house systems and custom programming capabilities
*ADMINISTRATION AND DISTRIBUTION SERVICES: Regulatory, compliance,
expense accounting, budgeting for all funds
*FUND ACCOUNTING SERVICES: Portfolio valuation, accounting, dividend
declaration, and tax advice
*SHAREHOLDER SERVICES: Preparation of statements, distribution support,
inquiries and processing of trades
*CLIENT ASSETS UNDER ADMINISTRATION AND DISTRIBUTION: $36.9 billion
*CLIENT ASSETS PROCESSED BY FUND ACCOUNTING: $47.6 billion
*CLIENT FUNDS UNDER ADMINISTRATION AND DISTRIBUTION: 146 mutual funds with 219
share classes
*INTERNATIONAL VENTURES:
Joint venture with Bank Handlowy in Warsaw, Poland, using Forum's
proprietary transfer agency and distribution systems Off-shore
investment fund administration, using Bermuda as Forum's center of
operations
*FORUM EMPLOYEES: United States -198, Poland - 61, Bermuda - 3
FORUM CONTACTS:
Mark Kaplan, Managing Director and Portfolio Manager, Forum Investment
Advisors, LLC,
(207) 879-1900 X 6123
Tony Santaniello, Director of Marketing, (207) 879-1900 X 6175
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<PAGE>
H.M. PAYSON & CO.:
- -----------------
Headquarters: One Portland Square, Portland, Maine
President and Managing Director: John Walker
Quality investment services and conservative wealth management since 1854
*Assets under Management: $1.5 Billion
*Non-Managed Custody Assets: $388 Million
*Client Base: 85% individuals; 15% institutional
*Owned by 12 shareholders; 12 managing directors
*Payson Balanced Fund and Payson Value Fund (administrative and shareholder
services provided by Forum Financial Group)
*Employees: 45
H.M. PAYSON & CO. CONTACT:
Joel Harris, Marketing Coordinator, (207) 772-3761
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<PAGE>
AUSTIN GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------
Investment Advisor: Account Information and
Austin Investment Management, Inc. Shareholder Servicing:
375 Park Avenue, Suite 2102 Forum Shareholder Services, LLC
New York, New York 10152 Two Portland Square
(212) 888-9292 Portland, Maine 04101
207-879-0001
800-754-8759
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
Austin Global Equity Fund (the "Fund') is a series of Forum Funds (the "Trust"),
a registered open-end investment company. This Statement of Additional
Information ("SAI") supplements the Prospectus dated August 1, 1998 offering
shares of the Austin Global Equity Fund (the "Fund") and should be read only in
conjunction with the Prospectus, a copy of which may be obtained without charge
by contacting Forum Shareholder Services, LLC at the address listed above.
TABLE OF CONTENTS
Page
----
1. General...................................................... 2
2. Investment Policies.......................................... 3
3. Additional Investment Policies...............................13
4. Performance Data.............................................14
5. Management...................................................16
6. Determination of Net Asset Value.............................21
7. Portfolio Transactions.......................................22
8. Additional Purchase and
Redemption Information.....................................23
9. Tax Matters..................................................24
10. Other Matters................................................25
Appendix A - Control Persons and Principal Holders of Securities.....A-1
Appendix B - Description of Securities Ratings ......................B-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
<PAGE>
1. GENERAL
THE TRUST. The Trust is registered with the SEC as an open-end, management
investment company and was organized as a business trust under the laws of the
State of Delaware on August 29, 1995. On January 5, 1996 the Trust succeeded to
the assets and liabilities of Forum Funds, Inc. Forum Funds, Inc. was
incorporated on March 24, 1980 and assumed the name of Forum Funds, Inc. on
March 16, 1987. The Board of Directors ("Board"), without shareholder approval,
has the authority to issue an unlimited number of shares of beneficial interest
with no par value per share and create separate classes of shares with each
series (such as Investor and Institutional Shares). The Trust currently offers
shares of 23 series. The series of the Trust are as follows:
Investors Bond Fund Oak Hall Small Cap Contrarian Fund
TaxSaver Bond Fund Austin Global Equity Fund
Investors High Grade Bond Fund Quadra Value Equity Fund
Maine Municipal Bond Fund Quadra Growth Fund
New Hampshire Bond Fund Polaris Global Value Fund
Daily Assets Government Fund Investors Equity Fund
Daily Assets Treasury Obligations Fund Equity Index Fund
Daily Assets Cash Fund Small Company Opportunities Fund
Daily Assets Government Obligations Fund International Equities Fund
Daily Assets Municipal Fund Emerging Markets Fund
Payson Value Fund Investors Growth Fund
Payson Balanced Fund
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. A shareholder in a portfolio is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that portfolio's assets
and, upon redeeming shares, will receive the portion of the portfolio's net
assets represented by the redeemed shares.
As of July 1, 1998, the Officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of the Fund. Also as of that date,
Appendix A identifies all shareholders who own of record 5% or more of the
outstanding shares of any of the Registrant's series.
DEFINITIONS. As used in this Statement of Additional Information, the following
terms shall have the meanings listed:
"Board" means the Board of Trustees of Forum Funds.
"FAdS" means Forum Administrative Services, LLC.
"FAcS" means Forum Accounting Services, LLC.
"FFC" means Forum Financial Corp.
"FFSI" means Forum Financial Services, Inc.
2
<PAGE>
"Adviser" " means Austin Investment Management, Inc.
"Fund" means Austin Global Equity Fund
"Fund Business Day" has the meaning ascribed thereto in the current Prospectus
of the Fund.
"NRSRO" means a nationally recognized statistical rating organization.
"SAI" means this Statement of Additional Information.
"SEC" means the U.S. Securities and Exchange Commission.
"Trust" means Forum Funds, a Delaware business trust.
"U.S. Government Securities" has the meaning ascribed thereto by the current
Prospectus of the Fund.
"1940 Act" means the Investment Company Act of 1940, as amended.
2. INVESTMENT POLICIES
The Fund's investment adviser, Austin Investment Management, Inc. (the
"Adviser"), in determining the composition of the Fund's portfolio, seeks to
distribute investments among various countries, including the United States, and
various geographic regions. In making investment decisions, the Adviser
considers many factors, including: prospects for economic growth among the
various countries; relative amounts of capital invested in foreign countries;
expected levels of inflation; government policies influencing business
conditions; outlooks for relative currency exchange rates in the future; and the
range of investment opportunities available.
INVESTMENT IN FOREIGN SECURITIES
The Fund invests primarily in issuers based in the United States, Europe, Japan
and the Pacific Basin. The European and Pacific Basin countries in which issuers
will be based are primarily those of Western Europe, such as the United Kingdom,
Germany, France, Italy and the Scandinavian countries, and South Korea,
Australia and New Zealand.
Foreign securities are generally purchased in over-the-counter markets or on
stock exchanges located in the countries in which the respective principal
offices of the issuers of the various securities are located, if that is the
best available market. Foreign securities markets are generally not as developed
or efficient as those in the United States, and securities of foreign companies
may be less liquid and more volatile than securities of comparable United States
companies. Fixed commissions on foreign stock exchanges are generally higher
than negotiated commissions on United States exchanges, although the Fund will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
stock exchanges, brokers and listed companies than in the United States. Foreign
countries may place limitations on the removal of funds or other assets of the
Fund, and diplomatic developments could affect United States investments in
those countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States' economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, self-sufficiency of
natural resources and balance of payments position.
The dividends and interest payable on certain of the Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Fund's shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction for U.S.
federal income tax purposes for the shareholder's proportionate share of foreign
taxes paid by the Fund. (See "Tax Matters.")
3
<PAGE>
Although the Fund values its assets daily in terms of U.S. dollars, it will not
normally convert its holdings of foreign currencies into U.S. dollars on a daily
basis. It will do so from time to time, and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (commonly
known as the "spread") between the price at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Investors should understand that the expense ratio of the Fund can be expected
to be higher than that of other investment companies investing solely in
domestic securities due to, among other things, the greater cost of maintaining
the custody of foreign securities and higher transaction charges, such as stamp
duties and turnover taxes that may be associated with the purchase and sale of
portfolio securities.
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P") are private services that provide ratings of the credit quality of debt
obligations, including convertible securities. A description of the range of
ratings assigned to corporate bonds, including convertible securities by Moody's
and S&P is included in Appendix B to this Statement of Additional Information.
The Fund may use these ratings in determining whether to purchase, sell or hold
a security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, securities with the same
maturity, interest rate and rating may have different market prices. Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced. The Adviser will consider such an event in determining
whether the Fund should continue to hold the obligation. Credit ratings attempt
to evaluate the safety of principal and interest payments and do not evaluate
the risks of fluctuations in market value. Also, rating agencies may fail to
make timely changes in credit ratings in response to subsequent events, so that
an issuer's current financial condition may be better or worse than the rating
indicates.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers. Although no
securities investment is without some risk, investment in convertible securities
generally entails less risk than in the issuer's common stock. However, the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stocks since they have fixed income characteristics
and (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.
4
<PAGE>
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
WARRANTS
The Fund may invest in warrants, which are options to purchase an equity
security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time. To the extent
that the market value of the security that may be purchased upon exercise of the
warrant rises above the exercise price, the value of the warrant will tend to
rise. To the extent that the exercise price equals or exceeds the market value
of such security, the warrants will have little or no market value. If a warrant
is not exercised within the specified time period, it will become worthless and
the Fund will lose the purchase price paid for the warrant and the right to
purchase the underlying security.
5
<PAGE>
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve currencies of foreign
countries. In addition, the Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs. Accordingly,
the value of the assets of the Fund as measured in United States dollars may be
affected by changes in foreign currency exchange rates and exchange control
regulations, and the Fund may incur costs in connection with conversions between
various currencies. The Fund may conduct foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into foreign currency forward
contracts ("forward contracts") to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (usually less than one
year) from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers and involve the risk that the other party to the contract may
fail to deliver currency when due, which could result in losses to the Fund. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Foreign exchange dealers realize a profit based
on the difference between the price at which they buy and sell various
currencies.
The Fund may enter into forward contracts under two circumstances. First, with
respect to specific transactions, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
may be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, the Fund may enter into forward currency contracts in connection with
existing portfolio positions. For example, when the Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract to sell, for
a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Forward contracts involve the
risk of inaccurate predictions of currency price movements, which may cause the
Fund to incur losses on these contracts and transaction costs. The Adviser does
not intend to enter into forward contracts on a regular or continuous basis, and
will not do so if, as a result, the Fund will have more than 25% of the value of
its total assets committed to such contracts or the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency.
At or before the settlement of a forward currency contract, the Fund may either
make delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract. If the Fund
chooses to make delivery of the foreign currency, it may be required to obtain
the currency through the conversion of assets of the Fund into the currency. The
Fund may close out a forward contract obligating it to purchase a foreign
currency by selling an offsetting contract. If the Fund engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been a change in forward contract prices. Additionally, although forward
contracts may tend to minimize the risk of loss due to a decline in 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.
6
<PAGE>
Quotation information available is generally representative of very large
transactions in the interbank market. The interbank market in foreign currencies
is a global, around-the-clock market.
When required by applicable regulatory guidelines, the Fund will set aside cash,
U.S. Government Securities (as defined in the Prospectus) or other liquid assets
in a segregated account with its custodian in the prescribed amount.
HEDGING STRATEGIES
As discussed in the Prospectus, the Adviser may engage in certain options and
futures strategies to attempt to hedge the Fund's portfolio. The instruments in
which the Fund may invest include (i) options on securities, stock indexes and
foreign currencies, (ii) stock index and foreign currency futures contracts
("futures contracts"), and (iii) options on futures contracts. Use of these
instruments is subject to regulation by the Securities and Exchange Commission
(the "SEC"), the several options and futures exchanges upon which options and
futures are traded, and the Commodities Futures Trading Commission (the "CFTC").
The various strategies referred to herein and in the Fund's Prospectus are
intended to illustrate the type of strategies that are available to, and may be
used by, the Adviser in managing the Fund's portfolio. No assurance can be
given, however, that any strategies will succeed.
The Fund will not use leverage in its hedging strategies. In the case of
transactions entered into as a hedge, the Fund will hold securities, currencies
or other options or futures positions whose values are expected to offset
("cover") its obligations thereunder. The Fund will not enter into a hedging
strategy that exposes the Fund to an obligation to another party unless it owns
either (1) an offsetting ("covered") position or (2) cash, U.S. Government
Securities or other liquid assets with a value sufficient at all times to cover
its potential obligations. When required by applicable regulatory guidelines,
the Fund will set aside cash, U.S. Government Securities or other liquid assets
in a segregated account with its custodian in the prescribed amount. Any assets
used for cover or held in a segregated account cannot be sold or closed out
while the hedging strategy is outstanding, unless they are replaced with similar
assets. As a result, there is a possibility that the use of cover or segregation
involving a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
The Fund is subject to the following restrictions in its use of options and
futures contracts. The Fund will not (i) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged through the use of options or futures contracts,
(ii) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets, or (iii) purchase call
options if, as a result, the current value of options premiums for options
purchased would exceed 5% of the Fund's total assets.
OPTIONS STRATEGIES
The Fund may purchase put and call options written by others and write (sell)
put and call options covering specified securities, stock index-related amounts
or currencies. A put option (sometimes called a "standby commitment") gives the
buyer of the option, upon payment of a premium, the right to deliver a specified
amount of a security or currency to the writer of the option on or before a
fixed date at a predetermined price. A call option (sometimes called a "reverse
standby commitment") gives the purchaser of the option, upon payment of a
premium, the right to call upon the writer to deliver a specified amount of a
security or currency on or before a fixed date, at a predetermined price. The
predetermined prices may be higher or lower than the market value of the
underlying currency or security. The Fund may buy or sell both exchange-traded
and over-the-counter ("OTC") options. The Fund will purchase or write an option
only if that option is traded on a recognized U.S. options exchange or if the
Adviser believes that a liquid secondary market for the option exists. When the
Fund purchases an OTC option, it relies on the dealer from which it has
purchased the OTC option to make or take delivery of the securities or currency
underlying the option. Failure by the dealer to do so would result in the loss
of the premium paid by the Fund as well as the loss of the expected benefit of
the transaction. OTC options and the securities underlying these options
currently are treated as illiquid securities.
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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.
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:
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(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 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
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risk. The Fund may write call options on foreign currency futures contracts as a
partial hedge against the effects of declining foreign exchange rates on the
value of foreign securities.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING
No price is paid upon entering into futures contracts; rather, the Fund is
required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash or U.S. Government Securities generally
equal to 5% or less of the contract value. This amount is known as initial
margin. Subsequent payments, called variation margin, to and from the broker,
would be made on a daily basis as the value of the futures position varies. When
writing a call on a futures contract, variation margin must be deposited in
accordance with applicable exchange rules. The initial margin in futures
transactions is in the nature of a performance bond or good-faith deposit on the
contract that is returned to the Fund upon termination of the contract, assuming
all contractual obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts. For example, futures contracts on broad-based stock
indices can currently be entered into with respect to the Standard & Poor's 500
Stock Index on the Chicago Mercantile Exchange, the New York Stock Exchange
Composite Stock Index on the New York Futures Exchange, the Value Line Composite
Stock Index on the Kansas City Board of Trade and the Major Market Index of the
Chicago Board of Trade.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for the Fund to close a
position, and in the event of adverse price movements, the Fund would have to
make daily cash payments of variation margin. In addition:
(1) Successful use by the Fund of futures contracts and related options
will depend upon the Adviser's ability to predict movements in the direction of
the overall securities and currency markets, which requires different skills and
techniques than predicting changes in the prices of individual securities.
Moreover, futures contracts relate not to the current level of the underlying
instrument but to the anticipated levels at some point in the future; thus, for
example, trading of stock index futures may not reflect the trading of the
securities which are used to formulate an index or even actual fluctuations in
the relevant index itself.
(2) The price of futures contracts may not correlate perfectly with
movement in the price of the hedged securities or currencies due to price
distortions in the futures market or otherwise. 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
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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 Prospectus and above. The Fund
will only invest in futures contracts, options on futures contracts and other
options contracts that are subject to the jurisdiction of the CFTC after filing
a notice of eligibility and otherwise complying with the requirements of Section
4.5 of the rules of the CFTC. Under that section the Fund would be permitted to
purchase such futures or options contracts only for bona fide hedging purposes
within the meaning of the rules of the CFTC; provided, however, that in
addition, with respect to positions in commodity futures and option contracts
not for bona fide hedging purposes, the Fund represents that the aggregate
initial margin and premiums required to establish these positions (subject to
certain exclusions) will not exceed 5% of the liquidation value of the Fund's
assets after taking into account unrealized profits and losses on any such
contract the Fund has entered into.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand agreements,
there is no agreed upon repurchase date and interest payments are calculated
daily, often based upon the prevailing overnight repurchase rate. A counterparty
to a reverse repurchase agreement must be a primary dealer that reports to the
Federal Reserve Bank of New York ("primary dealers") or one of the largest 100
commercial banks in the United States.
Generally, a reverse repurchase agreement enables the Fund to recover for the
term of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by a Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase or sell portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased by a Fund with payment and delivery to take place in
the future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time it enters into the transaction. In those cases,
the purchase price and the interest rate payable on the securities are fixed on
the transaction date and delivery and payment may take place a month or more
after the date of the transaction. When the Fund enters into a delayed delivery
transaction, it becomes obligated to purchase securities and it has all
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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.
To the extent the Fund engages in when-issued or delayed delivery transactions,
it will do so for the purpose of acquiring securities consistent with the Fund's
investment objectives and policies and not for the purpose of investment
leverage or to speculate in interest rate changes. The Fund will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but the Fund reserves
the right to dispose of the right to acquire these securities before the
settlement date if deemed advisable.
The use of when-issued transactions and forward commitments enables the Fund to
hedge against anticipated changes in interest rates and prices. For instance, in
periods of rising interest rates and falling bond prices, the Fund might sell
securities which it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, the
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Adviser were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward transactions at prices inferior to the
current market values.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Fund enters into when-issued and forward commitments
only with the intention of actually receiving or delivering the securities, as
the case may be. If the Fund, however, chooses to dispose of the right to
acquire a when-issued security prior to its acquisition or to dispose of its
right to deliver or receive against a forward commitment, it can incur a gain or
loss. The Fund will establish and maintain with its custodian a separate account
with cash, U.S. Government Securities or other liquid assets in an amount at
least equal to such commitments. No when-issued or forward commitments will be
made by the Fund if, as a result, more than 10% of the value of the Fund's total
assets would be committed to such transactions.
INVESTMENT COMPANY SECURITIES
In connection with managing its cash positions, the Fund may invest in the
securities of other investment companies that are money market funds within the
limits proscribed by the Investment Company Act of 1940 ("1940 Act"). The Fund
may invest up to 10% of the value of its net assets in the securities of money
market funds. In addition to the Fund's expenses (including the various fees),
as a shareholder in another investment company, a Fund would bear its pro rata
portion of the other investment company's expenses (including fees).
TEMPORARY DEFENSIVE POSITION
The cash or cash equivalents in which the Fund may invest include (i) short-term
U.S. Government Securities, (ii) certificates of deposit, bankers' acceptances
and interest-bearing savings deposits of commercial banks doing business in the
United States that are members of the Federal Deposit Insurance Corporation and
whose short term ratings are rated in one of the two highest rating categories
by S&P or Moody's or, if not rated by those agencies, determined by the Adviser
to be of comparable quality, (iii) commercial paper of prime quality rated A-2
or higher
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by S&P or Prime-2 or higher by Moody's or, if not rated by those agencies,
determined by the Adviser to be of comparable quality, and (iv) repurchase
agreements covering any of the securities in which the Fund may invest directly.
3. ADDITIONAL INVESTMENT POLICIES
The Investment objective and all investment policies of the Fund that are
designed as fundamental may be changed only with the approval of the holders a
majority of the outstanding voting securities of the Fund. A majority of
outstanding voting securities means the lesser of (1) 67% of the shares
presented or represented at a shareholder meeting at which the holders of more
than 50% of the outstanding shares are present or represented, or (2) more than
50% of outstanding shares. Unless otherwise indicated, all investment policies
are not fundamental and may be changed by the Trust's Board without approval by
the shareholders of the Fund.
In addition to the fundamental policies identified in the Prospectus, the Fund
has adopted the following fundamental investment limitations, which may not be
changed without shareholder approval. The Fund may not:
(1) Borrow money, except that the Fund may enter into commitments to
purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets.
(2) Purchase securities, other than U.S. Government Securities, if,
immediately after each purchase, more than 25% of the Fund's total assets taken
at market value would be invested in securities of issuers conducting their
principal business activity in the same industry.
(3) With respect to 75% of the value of its total assets, purchase
securities, other than U.S. Government Securities, of any one issuer, if (a)
more than 5% of the Fund's total assets taken at market value would at the time
of purchase be invested in the securities of that issuer, or (b) such purchase
would at the time of purchase cause the Fund to hold more than 10% of the
outstanding voting securities of that issuer.
(4) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities, the
Fund may be deemed to be an underwriter for purposes of the Securities Act of
1933.
(5) Make loans to other persons except for loans of portfolio
securities and except through the use of repurchase agreements and through the
purchase of debt securities which are otherwise permissible investments.
(6) Purchase or sell real estate or any interest therein, except that
the Fund may invest in securities issued or guaranteed by corporate or
governmental entities secured by real estate or interests therein, such as
mortgage pass-throughs and collateralized mortgage obligations, or issued by
companies that invest in real estate or interests therein.
(7) Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent a
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
(8) Issue any senior security(as defined in the 1940 Act), except that
(a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
securities to the extent otherwise permitted by its investment policies, the
acquisition of which may result in the issuance of a senior security, to the
extent permitted under applicable regulations or interpretations of the 1940
Act; and (c) subject to the restrictions set forth above, the Fund may borrow
money as authorized by the 1940 Act.
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In addition to the nonfundamental policies identified in the Prospectus, the
Fund has also adopted the following nonfundamental investment limitations that
may be changed by the Trust's without shareholder approval. The Fund:
(a) May borrow money for temporary or emergency purposes in an amount
not exceeding 5% of the value of its total assets at the time when the loan is
made; provided that any such temporary or emergency borrowings representing more
than 5% of the Fund's total assets must be repaid before the Fund may make
additional investments.
(b) May not pledge, mortgage or hypothecate its assets, except to
secure permitted indebtedness. The deposit in escrow of securities in connection
with the writing of put and call options, collateralized loans of securities and
collateral arrangements with respect to margin for futures contracts are not
deemed to be pledges or hypothecations for this purpose.
(c) May not invest in securities of another registered investment
company, except in connection with a merger, consolidation, acquisition or
reorganization; and except that the Fund may invest in money market funds and
privately-issued mortgage related securities to the extent permitted by the 1940
Act.
(d) May not purchase securities on margin, or make short sales of
securities (except short sales against the box), except for the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities, but the Fund may make margin deposits in connection with
permitted transactions in options, futures contracts and options on futures
contracts.
(e) May not purchase securities for investment while any borrowing
equaling 5% or more of the Fund's total assets is outstanding or borrow money,
except for temporary or emergency purposes (including the meeting of redemption
requests), in an amount exceeding 5% of the value of the Fund's total assets.
(f) May not acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15% of the Fund's net
assets (taken at current value) would be invested in repurchase agreements not
entitling the holder to payment of principal within seven days and in securities
which are not readily marketable, including securities that are illiquid by
virtue of restrictions on the sale of such securities to the public without
registration under the Securities Act of 1933 ("Restricted Securities") or (ii)
10% of the Fund's total assets would be invested in Restricted Securities.
Except as required by the 1940 Act, whenever an amended or restated investment
policy or limitation states a maximum percentage of the Fund's assets that may
be invested, such percentage limitation will be determined immediately after and
as a result of the acquisition of such security or other asset. Any subsequent
change in values, assets or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
or limitations.
4. 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.
Total return information for the Fund as of March 31, 1998 is set forth in the
following table:
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Total Return
Total Return Since
1 Year Inception*
Austin Global Equity Fund 39.88% 17.26%
* Austin Global Equity Fund commenced operations on December 8, 1993.
In advertising performance, 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"). Each Fund may also compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Salomon Brothers Bond Index, the
Shearson Lehman Bond Index, U.S. Treasury bonds, bills or notes and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. The
Funds may refer to general market performances over past time periods such as
those published by Ibbotson Associates. In addition, the Funds may refer in such
materials to mutual fund performance rankings and other data published by Fund
Tracking Companies. Performance advertising may also refer to discussions of the
Funds and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
TOTAL RETURN CALCULATIONS
The Fund may advertise total return. Total returns quoted in advertising reflect
all aspects of the Fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the Fund's net asset value per
share over the period. Average annual returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in the Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of the Fund.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)n = ERV; where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, as series or investments, and/or a series of redemptions. Total
returns may be broken down into their components of income and capital
(including capital gains and changes in share price) in order to illustrate the
relationship of these factors and their contributions to total return. Total
returns, yields, and other performance information may be quoted numerically or
in a table, graph, or similar illustration.
Period total return is calculated according to the following formula:
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PT = (ERV/P-1); where:
PT = period total return;
The other definitions are the same as in average annual total
return above.
Investors who purchase and redeem shares of the Fund through a customer account
maintained at a Processing Organization may be charged one or more of the
following types of fees as agreed upon by the Processing Organization and the
investor, with respect to the customer services provided by the Processing
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
these assets). Such fees will have the effect of reducing the average annual
total return of the Fund for those investors.
OTHER ADVERTISING MATTERS
The Fund may also include various information in their advertisements including,
but not limited to: (1) portfolio holdings and portfolio allocation as of
certain dates, such as portfolio diversification by instrument type, by
instrument, by location of issuer or by maturity; (2) statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds that may be employed by an investor to meet specific financial
goals, such as funding retirement, paying for children's education and
financially supporting aging parents; (3) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of earning interest on principal plus interest that was earned earlier;
interest can be compounded at different intervals, such as annually, quarterly
or daily); (4) information relating to inflation and its effects on the dollar;
for example, after ten years the purchasing power of $25,000 would shrink to
$16,621, $14,968, $13,465 and $12,100, respectively, if the annual rates of
inflation were 4%, 5%, 6% and 7%, respectively; (5) information regarding the
effects of automatic investment and systematic withdrawal plans, including the
principal of dollar cost averaging; (6) background information regarding the
Fund's Adviser and biographical descriptions of the management staff of the
Adviser; (7) summaries of the views of the Adviser with respect to the financial
markets; (8) background information regarding the Trust; (9) the results of a
hypothetical investment in a fund over a given number of years, including the
amount that the investment would be at the end of the period; (10) the effects
of investing in a tax-deferred account, such as an individual retirement account
or Section 401(k) pension plan; and (11) the net asset value, net assets or
number of shareholders of the Fund as of one or more dates.
5 MANAGEMENT
TRUSTEES AND OFFICERS
THE TRUST
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Trustee, Chairman and President (age 54)
President , Forum Financial Group, LLC (mutual fund services company
holding company)., Mr. Keffer is a director and/or officer of various
registered investment companies for which the various Forum Financial
Group of Companies provides services. His address is Two Portland
Square, Portland, Maine 04101.
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Costas Azariadis, Trustee (age 55)
Professor of Economics, University of California, Los Angeles, since
July 1992. Prior thereto, Dr. Azariadis was Professor of Economics at
the University of Pennsylvania. His address is Department of
Economics, University of California, Los Angeles, 405 Hilgard Avenue,
Los Angeles, California 90024.
James C. Cheng, Trustee (age 56)
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 54)
Partner at the law firm of Reid & Priest L.L.P. since 1995. From 1989
to 1995, he was a partner at Winthrop, Stimson, Putnam & Roberts.
Prior thereto, he was a partner at LeBoeuf, Lamb, Leiby & MacRae, a
law firm of which he was a member from 1974 to 1989. His address is 40
West 57th Street, New York, New York 10019.
Mark D. Kaplan, Vice President (age 42)
Director, Investments, Forum Financial Group, LLC with which he has
been associated 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.
Stacey Hong, Treasurer (age 32)
Director, Fund Accounting, Forum Financial Group, LLC, with which he
has been associated since April 1992. Prior thereto, Mr. Hongwas a
Senior Accountant at Ernst & Young, LLP. His address is Two Portland
Square, Portland, Maine 04101.
Max Berueffy, Secretary (age 46)
Senior Counsel, Forum Financial Group, LLC, 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 also
serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provided
services. His address is Two Portland Square, Portland, Maine 04101.
Leslie K. Klenk, Assistant Secretary (age 33)
Assistant Counsel, Forum Financial Group, LLC, with which she has been
associated since April 1998. Prior thereto, Ms. Klenk was Vice
President and Associate General Counsel of Smith Barney Inc. Ms. Klenk
also serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. Her address is Two Portland Square, Portland, Maine 04101.
Pamela Stutch, Assistant Secretary (age 31).
Fund Administrator, Forum Financial Group, LLC, with which she has
been associated since May 1998. Ms. Stutch attended Temple University
School of Law and graduated in 1997. Ms. Stutch was also a legal
intern for the Maine Department of the Attorney General. Ms. Stutch
also serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. Her address is Two Portland Square, Portland, Maine 04101.
17
<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, 1998.
<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 $9,718.64 None None $9,718.64
Mr. Cheng $9,718.64 None None $9,718.64
Mr. Parish $9,718.64 None None $9,718.64
</TABLE>
TRUSTEE COMPENSATION FOR CORE TRUST (DELAWARE)
Each of the Trustees of the Trust is also a Trustee of Core Trust (Delaware), a
registered, open-end management investment company ("Core Trust"). Each Trustee
of Core Trust (other than John Y. Keffer, who is an interested person of Core
Trust) is paid $1,000 for each Core Trust Board meeting attended (whether in
person or by electronic communication) plus $100 per active portfolio of Core
Trust and is paid $1,000 for each committee meeting attended on a date when a
Core Trust Board meeting is not held. To the extent a meeting relates to only
certain portfolios of Core Trust, trustees are paid the $100 fee only with
respect to those portfolios. Core Trust trustees are also reimbursed for travel
and related expenses incurred in attending meetings of the Core Trust Board.
THE ADVISER
Pursuant to an Investment Advisory Agreement with the Trust , the Fund's
investment adviser, Austin Investment Management, Inc. (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. Subject to the general supervision of the Board, the Adviser is
responsible for, among other things, developing a continuing investment program
for the Fund in accordance with its investment objectives and reviewing the
investments, investment strategies, and policies of the Fund. In this regard, it
is the responsibility of the Adviser to make decisions relating to the Fund's
investments and to place purchase and sale orders regarding such investments
with brokers or dealers selected by it in its discretion. The Adviser also
furnishes to the Board, which has overall responsibility for the business and
affairs of the Trust, periodic reports on the investment performance of the
Fund.
The Investment 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 (1) by the
Board or by a majority vote of the shareholders and (2) by a majority of the
Trustees who are not parties to the Investment Advisory Agreement or interested
persons of any such party. The Investment Advisory Agreement is terminable
without penalty by the Trust or by majority vote of the shareholders on 60 days'
written notice to the Adviser or by the Adviser on 60 days' written notice to
the Trust and will automatically terminate in the event of its assignment. The
Investment Advisory Agreement also provides that, with respect to the Fund, the
Adviser shall not be liable for any mistake of judgment or in any event 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 Investment Advisory Agreement.
18
<PAGE>
The Investment Advisory Agreement provides that the Adviser may render services
to others. The Adviser may also act and be compensated as investment manager for
its clients with respect to assets which are invested in the Fund. In some
instances the Adviser may elect to credit against any investment management fee
received from a client who is also a shareholder in the Fund an amount equal to
all or a portion of the fees received by the Adviser or any affiliate of the
Adviser from the Fund with respect to the client's assets invested in the Fund.
The Adviser has agreed to reimburse the Trust for certain of the Fund's
operating expenses which in any year exceed the limits prescribed by any state
in which the Fund's shares are qualified for sale. The Trust may elect not to
qualify its shares for sale in every state. For the purpose of this obligation
to reimburse expenses, the Fund's annual expenses are estimated and accrued
daily, and any appropriate estimated payments will be made by the Adviser
monthly. Subject to the obligations of the Adviser to reimburse the Trust for
its excess expenses, the Trust has, under the Investment Advisory Agreement,
confirmed its obligation to pay all its other expenses. The Fund believes that
currently the most restrictive expense ratio limitation imposed by any state is
2-1/2% of the first $30 million of the Fund's average net asset, 2% of the next
$70 million of its average net assets and 1-1/2% of its average net assets in
excess of $100 million.
For its services under the Investment Advisory Agreement, the Adviser receives a
fee at an annual rate of 1.5% of the average net daily assets of the Fund. The
following table shows the dollar amount of fees payable under the Investment
Advisory Agreement between the Trust and Austin Investment Management, Inc., the
amount of fee that was waived by the Adviser, if any, and the actual fee
received by the Advisor. The data is for the past three years.
<TABLE>
<S> <C> <C> <C>
Advisory Fee Payable Advisory Fee Waived Advisory Fee Retained
Austin Global Value Fund
Year Ended March 31, 1998 $195,053 $24,463 $170,590
Year Ended March 31, 1997 $118,156 $69,562 $48,594
Year Ended June 30, 1996 $142,592 $71,022 $71,570
</TABLE>
THE ADMINISTRATOR
Pursuant to an Administration Agreement with the Trust,, Forum Administrative
Services, LLC ("FAdS") acts as the administrator to the Trust on behalf of the
Fund. As administrator, FAdS provides management and administrative services
necessary to the operation 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) and provides
the Trust with general office facilities.. FAdS also provides persons
satisfactory to the Board to serve as officers of the Trust. Those officers, as
well as certain other employees and Trustees of the Trust, may be directors,
officers or employees of FAdS, the Adviser or their respective affiliates. 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.
The Administration 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 (1) by the Board
or by majority vote of the shareholders and (2) by a majority of the Trustees
who are not parties to the agreement or interested persons of any such party
(other than as Trustees of the Trust). The Administration Agreement may be
terminated with respect to the Fund, without payment of a penalty, by the Board
or FAdS on 60 days' written notice. The Administration Agreement provides that
FAdS shall not be liable for any action or inaction taken in the administration
or management of the Trust, except for willful misfeasance, bad faith, gross
negligence, or reckless disregard in the performance of its duties under the
Administration Agreement.
Until May 31, 1994, Stone Bridge Trust Company ("SBTC"), as administrator, and
Forum Financial Services, Inc. ("FFSI"), as sub-administrator, supervised the
overall management of the Fund, which was then a series of The Stone Bridge
Funds, Inc., a registered management investment company (the "Company"),
including the administrative duties described above, pursuant to a
Co-Administration Agreement and a Distribution and
19
<PAGE>
Administration Agreement, respectively. Effective June 1, 1994, the Company
entered into an Administration and Distribution Agreement with FFSI under which
FFSI provided the administration and distribution services it has provided since
the Fund's inception and assumed the administrative responsibilities formerly
performed by SBTC. As of November 25, 1996, administrative services were
provided to the Fund pursuant to a Management and Distribution Agreement between
the Trust and FFSI. Effective June 19, 1997, administrative services are
provided by FAdS under the current Administration Agreement with the Trust.
For the fiscal years ending March 31, 1998 and 1997 and June 30, 1996, the total
administration fees paid were $32,509, $19,693, and $23,765, respectively.
THE DISTRIBUTOR
Pursuant to a Distribution Agreement with the Trust, FFSI acts as distributor of
the Fund's shares The Distributor is under no obligation to sell a specific
amount of Fund shares. All subscriptions of shares obtained by FFSI are directed
to the Trust for acceptance and are not binding on the Trust until accepted.
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 (1) by the Board
or by majority vote of shareholders and (2) 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 Fundby 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.
FFSI may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of the Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Fund are sold without sales charges or
distribution fees. These financial institutions may otherwise act as processing
agents, and will be responsible for promptly transmitting purchase, redemption
and other requests to the Fund.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition to, or
different from, those listed herein. Information concerning any charges or
services will be provided to customers by the financial institution. Investors
purchasing shares of the Fund in this manner should acquaint themselves with
their institution's procedures and should read this Prospectus in conjunction
with any materials and information provided by their institution. The financial
institution and not its customers will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
On May 19, 1998, the Board terminated a distribution plan previously adopted by
the Board in accordance with Rule 12b-1 under the 1940 Act ("Plan"). The Plan
required the Trust and FFSI to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by FFSI pursuant to
the Plan and identifying the distribution activities for which those
expenditures were made. For the fiscal year ended March 31, 1998, the Plan did
not incur any expenses.
THE TRANSFER AGENT
Pursuant to a Transfer Agency and Services Agreement with the Trust dated May
19, 1998, Forum Shareholder Services, LLC ("FSS") acts as transfer agent and
dividend disbursing agent of the Trust. FSS became the transfer
20
<PAGE>
agent effective January 1, 1998 when it succeeded to the transfer agency
business of Forum Financial Corp. (FSS and Forum Financial Corp. are commonly
controlled entities).
The Transfer Agency and Services Agreement will remain in effect for a period of
one year and will continue in effect thereafter only if its continuance is
specifically approved at least annually (1) by the Board or by majority vote of
the shareholders and (2) by a majority of the Trustees who are not parties to
the respective agreement or interested persons of any such party. The Transfer
Agency and Services Agreement may also be terminated on 60 days written notice
by either the Board or FSS. The Transfer Agency and Services Agreement also
provides that FSS shall not be liable for any action, failure, or omission
except for willful misfeasance, bad faith, and gross negligence in the
performance of its duties under the Transfer Agency and Services Agreement.
Among the responsibilities of FSS as agent for the Trust are: (1) answering
customer inquiries regarding account status and history, the manner in which
purchases and redemptions of shares of the Funds may be effected and certain
other matters pertaining to the Funds; (2) assisting shareholders in initiating
and changing account designations and addresses; (3) providing necessary
personnel and facilities to establish and maintain shareholder accounts and
records, assisting in processing purchase and redemption transactions and
receiving wired funds; (4) transmitting and receiving funds in connection with
customer orders to purchase or redeem shares; (5) verifying shareholder
signatures in connection with changes in the registration of shareholder
accounts; (6) furnishing periodic statements and confirmations of purchases and
redemptions; (7) arranging for the transmission of proxy statements, annual
reports, prospectuses and other communications from the Trust to its
shareholders; (8) arranging for the receipt, tabulation and transmission to the
Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
FSS or any sub-transfer agent or processing agent may also act and receive
compensation for acting as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Funds with
respect to assets invested in the Funds. FSS 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
FSS with respect to assets of those customers or clients invested in the Funds.
FSS, FAdS or sub-transfer agents or processing agents retained by FSS may be
Processing Organizations (as defined in the Prospectus) and, in the case of
sub-transfer agents or processing agents, may also be affiliated persons of FSS
or FAdS.
For its services, FSS receives with respect to the Fund an annual fee of $12,000
plus $25 per shareholder account. FFC served as the transfer agent for the Trust
pursuant to similar terms and compensation as FSS.
THE FUND ACCOUNTANT
Pursuant to a Fund Accounting Agreement with the Trust dated June 19, 1997,
Forum Accounting Services, LLC ("FAcS") provides the Fund with portfolio
accounting, including the calculation of the Fund's net asset value. Prior to
June 19, 1997, accounting services were provided to the Trust by FFC.
The Fund Accounting Agreement will remain in effect for a period of one year and
will continue in effect thereafter only if its continuance is specifically
approved at least annually (1) by the Board or by majority vote of the
shareholders and (2) by a majority of the Trustees who are not parties to the
respective agreement or interested persons of any such party. The Fund
Accounting Agreement may also be terminated on 60 days written notice by either
the Board or FAcS. The Fund Accounting Agreement also provides that FAcS shall
not be liable for any action or inaction taken except for willful misfeasance,
bad faith ,gross negligence, or reckless disregard in the performance of its
duties under the Fund Accounting Agreement. For services provided under the Fund
Accounting Agreement, FAcS receives and FFC received with respect to the Fund an
annual fee of $36,000 plus certain surcharges depending upon the amount and type
of the Fund's portfolio transactions and positions. For fiscal years ending
March 31, 1998 and 1997 and June 30, 1996, the accounting fees were $36,000,
$27,000, and $39,000, respectively.
4. DETERMINATION OF NET ASSET VALUE
21
<PAGE>
The Trust determines the net asset value per share of the Fund as of 4:00 P.M.,
Eastern time, on Fund Business Days (as defined in the Prospectus), by dividing
the value of the Fund's net assets (i.e., the value of its securities and other
assets less its liabilities, including expenses payable or accrued) by the
number of shares outstanding at the time the determination is made. The Trust
does not determine net asset value on the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Securities listed or traded on United States or foreign securities exchanges are
valued at the last quoted sales prices on such exchanges prior to the time when
assets are valued. Securities listed or traded on certain foreign exchanges
whose operations are similar to the United States over-the-counter market are
valued at the price within the limits of the latest available current bid and
asked prices deemed best to reflect market value. Listed securities that are not
traded on a particular day, and securities regularly traded in the
over-the-counter market, are valued at the price within the limits of the latest
available current bid and asked prices deemed best to reflect market value. In
instances where market quotations are not readily available, the security is
valued in a manner intended to reflect its fair value. All other securities and
assets are valued in a manner determined to reflect their fair value. For
purposes of determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
United States dollars at the mean of the bid and asked prices of such currencies
against the United States dollar last quoted by any major bank.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of each Fund Business Day in New York. In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not Fund Business Days in New York and on which the Fund's net asset
value is not calculated. Calculation of the net asset value per share of the
Fund does not take place contemporaneously with the determination of the prices
of the majority of the portfolio securities used in such calculation. Events
affecting the values of portfolio securities that occur between the time their
prices are determined and the close of the New York Stock Exchange, Inc. will
not be reflected in the Fund's calculation of net asset value unless it is
deemed that the particular event would materially affect net asset value, in
which case an adjustment will be made.
5. PORTFOLIO TRANSACTIONS
The Fund generally will effect purchases and sales through brokers who charge
commissions. Allocations of transactions to brokers and dealers and the
frequency of transactions are determined by the Adviser in its best judgment and
in a manner deemed to be in the best interest of shareholders of the Fund rather
than by any formula. The primary consideration is prompt execution of orders in
an effective manner and at the most favorable price available to the Fund.
Transactions on stock exchanges involve the payment of brokerage commissions. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on foreign stock exchanges these commissions are generally
fixed. In the case of securities traded in the foreign and domestic
over-the-counter markets, there is generally no stated commission, but the price
usually includes an undisclosed commission or markup. In underwritten offerings,
the price includes a disclosed fixed commission or discount. Where transactions
are executed in the over-the-counter market, the Fund will seek to deal with the
primary market makers; but when necessary in order to obtain best execution, it
will utilize the services of others. In all cases the Fund will attempt to
negotiate best execution.
The Fund may not always pay the lowest commission or spread available. Rather,
in determining the amount of commission, including certain dealer spreads, paid
in connection with Fund transactions, the Adviser takes into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below) and any
risk assumed by the executing broker. The Adviser may also take
22
<PAGE>
into account payments made by brokers effecting transactions for the Fund (i) to
the Fund or (ii) to other persons on behalf of the Fund for services provided to
it for which it would be obligated to pay.
In addition, the Adviser may give consideration to research services furnished
by brokers to the Adviser for its use and may cause the Fund to pay these
brokers a higher amount of commission than may be charged by other brokers. Such
research and analysis may be used by the Adviser in connection with services to
clients other than the Fund, and the Adviser's fee is not reduced by reason of
the Adviser's receipt of the research services.
Investment decisions for the Fund will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. If, however, the Fund and other investment
companies or accounts managed by the Adviser are contemporaneously engaged in
the purchase or sale of the same security, the transactions may be averaged as
to price and allocated equitably to each account. In some cases, this policy
might adversely affect the price paid or received by the Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for the Fund and for other investment companies and accounts
managed by the Adviser occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
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 has adopted procedures in
conformity with applicable rules under the Investment Company Act to ensure that
all brokerage commissions paid to these persons are reasonable and fair. For the
fiscal years ended March 31, 1998 and 1997 and June 30, 1996 , the aggregate
brokerage commissions incurred by the Fund were $19,974, $11,976, and $22,929,
of which 0% ($0.00) was paid in each year to American Securities Corporation, an
affiliate of the Adviser. During those periods, 0.0% of the total dollar amount
of transactions by the Fund involving the payment of commissions were effected
through American Securities Corporation.
6. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by FFSI at net asset value
without any sales charge. As of March 31, 1998, the Fund's net asset value per
share was $16.27%.
REDEMPTIONS IN KIND
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partly in portfolio securities if the Board determines economic
conditions exist which would make payment in cash detrimental to the best
interests of the Fund. If payment for shares redeemed is made wholly or partly
in portfolio securities, brokerage costs may be incurred by the shareholder in
converting the securities to cash. The Trust has filed an election with the SEC
to which the Fund may only effect a redemption in portfolio securities if the
particular shareholder is redeeming more than $250,000 or 1% of the Fund's total
net assets, whichever is less, during any 90-day period.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily to reimburse
the Fund for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to transactions effected for the benefit of a shareholder which
is applicable to the Fund's shares as provided in the Prospectus from time to
time.
Shareholders' rights of redemption may not be suspended, except (i) for any
period during which the New York Stock Exchange, Inc. is closed (other than
customary weekend and holiday closings) or during which the SEC determines that
trading thereon is restricted, (ii) for any period during which an emergency (as
determined by the SEC) exists as a result of which disposal by the Fund of its
securities is not reasonably practicable or as a result of
23
<PAGE>
which it is not reasonably practicable for the Fund fairly to determine the
value of its net assets, or (iii) for such other period as the SEC may by order
permit for the protection of the shareholders of the Fund.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Fund to exchange their shares
for Investor shares of the Daily Asset Government Fund, a money market fund of
the Trust (the "Daily Assets 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 FSS 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 FSS to be genuine.
The records of FSS of such instructions are binding. Proceeds of an exchange
transaction may be invested in the Daily Assets Fund in the name of the
shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction. Shares of the Fund may be
redeemed and the proceeds used to purchase, without a sales charge, shares of
the Daily Assets Fund. The terms of the exchange privilege are subject to
change, and the privilege may be terminated by the Daily Assets Fund or the
Trust. However, the privilege will not be terminated, and no material change
that restricts the availability of the privilege to shareholders will be
implemented, without 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 Trust" under the Internal Revenue Code of 1986, as amended
(the "Code"). Such qualification does not, of course, involve governmental
supervision of management or investment practices or policies. Investors should
consult their own counsel for a complete understanding of the requirements the
Fund must meet to qualify for such treatment.
Income received by the Fund from sources within various foreign countries may be
subject to foreign income tax. If more than 50% of the value of the Fund's total
assets at the close of its taxable year consists of the stock or securities of
foreign corporations, the Fund may elect to "pass through" to the Fund's
shareholders the amount of foreign income taxes paid by the Fund. Pursuant to
that election, shareholders would be required: (i) to include in gross income,
even though not actually received, their respective pro-rata share of foreign
taxes paid by the Fund; and (ii) either to deduct their pro-rata share of
foreign taxes in computing their taxable income, or, subject to certain
limitations, to use it as a foreign tax credit against federal income taxes (but
not both). No deduction for foreign taxes could be claimed by a shareholder who
does not itemize deductions.
The Fund may or may not meet the requirements of the Code to "pass through" to
its shareholders foreign income taxes paid. Each shareholder will be notified
after the close of each taxable year of the Fund whether the foreign taxes paid
by the Fund will "pass through" for that year, and, if so, the amount of each
shareholder's pro-rata share (by country) of (i) the foreign taxes paid, and
(ii) the Fund's gross income from foreign sources. Shareholders who
24
<PAGE>
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 (i) foreign currencies, (ii) debt securities
denominated in a foreign currency, or (iii) a forward contract denominated in a
foreign currency, which are attributable to fluctuations in the value of the
foreign currency between the date of acquisition of the assets and the date of
disposition also are treated as ordinary gain or loss.
The use of certain hedging strategies such as writing and purchasing options,
futures contracts and options on futures contracts and entering into foreign
currency forward contracts and other foreign instruments, involves complex rules
that will determine for income tax purposes the character and timing of
recognition of income received by the Fund in connection therewith.
Dividends out of net ordinary income and distributions of net short-term capital
gain are eligible, in the case of corporate shareholders, for the
dividends-received deduction, subject to proportionate reduction of the amount
eligible for deduction if the aggregate qualifying dividends received by the
Fund from domestic corporations in any year are less than 100% of its gross
income (excluding long-term capital gain from securities transactions). A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in the Fund more than 45 days. Furthermore, provisions
of the tax law disallow the dividends-received deduction to the extent a
corporation's investment in shares of the Fund is financed with indebtedness.
9. OTHER MATTERS
COUNSEL
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.
CUSTODIAN
Pursuant to a Custodian Agreement, BankBoston,N.A. (formerly The First National
Bank of Boston), 100 Federal Street, Boston, MA 02106, acts as the custodian of
the Fund's assets. The custodian's responsibilities include safeguarding and
controlling the Fund's cash and securities, determining income and collecting
interest on Fund investments.
INDEPENDENT AUDITORS
Deloitte & Touche, LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, have been selected as auditors for the Trust.
25
<PAGE>
APPENDIX A
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 1, 1998, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned more than 5% of each Fund. Shareholders owning
25% or more of the shares of a Fund or of the Trust as a whole may be deemed to
be controlling persons. By reason of their substantial holdings of shares, these
persons may be able to require the Trust to hold a shareholder meeting to vote
on certain issues and may be able to determine the outcome of any shareholder
vote. As noted, certain of these shareholders are known to the Trust to hold
their shares of record only and have no beneficial interest, including the right
to vote, in the shares.
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
OAK HALL SMALL CAP CONTRARIAN FUND
- ----------------------------------
Maryann Wolf 13.30% 40,946.955
55 Central Park West Apt 12-13
New York NY 10023
Simeon Gold & Heide Gold, Jt. Ten. 9.05% 27,856.149
136 East 76th Street Apt. 10F
New York NY 10021
Jane Levy 5.73% 17,622.969
320 West 87th Street Apt. 3W
New York NY 10024
Bank of Boston, IRA Custodian 5.70% 17,553.097
FBO Maryann Wolf
55 Central Park West Apt. 12-13
New York NY 10023
WR Family Associates 401K Plan Option 5.48% 16,870.661
Attn: Olga M. Dimmini
122 East 42nd Street, Suite 2400 New York, NY 10168-002
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS GOVERNMENT FUND ------------ -------------
INSTITUTIONAL SHARES
- ---------------------
H M Payson & Co. Custody Account 56.56% 18,033,015.150
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland ME 04112
H M Payson & Co. Trust Account 43.44% 13,850,465.390
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS GOVERNMENT FUND
INSTITUTIONAL SERVICE SHARES
Bank of Boston, IRA Rollover Custodian 16.52% 826,387.330
FBO Merne E. Young Rollover
18751 San Rufino
Irvine, CA 92612
Casa Colina Centers for Rehabilitation 15.90% 795,276.550
Foundation Smith Family Care Fund
Attn: Kristy Hurley
2850 N. Garey Avenue
P.O. Box 6001
Pomona, CA 91769-6001 15.90% 795,276.550
Lansdowne Parking Associates LP 9.99% 499,939.120
c/o Meredith Management
29 Crafts Street #300
Newton, MA 02158
DAILY ASSETS GOVERNMENT FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.920
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS CASH FUND
INSTITUTIONAL SHARES
- --------------------
Allagash & Co. 46.30% 12,236,932.890
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS CASH FUND ------------ -------------
INSTITUTIONAL SHARES CON'T
H M Payson & Co. Custody Account 34.44% 9.101,914.440
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
H M Payson & Co. Trust Account 19.27% 5,092,100.590
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS CASH FUND
INSTITUTIONAL SERVICE SHARES
Cutler Approved List Equity Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Cutler Equity Income Fund 18.12% 951,550.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM All Cap Value Fund 9.45% 496,164.720
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Mid Cap Value Fund 5.70% 299,263.830
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
------------ ------------
DAILY ASSETS CASH FUND
INVESTORS SHARES
Forum Administrative Services, Inc. 100% 101.200
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SHARES
- --------------------
Allagash & Co. 72.89% 11,915,149.240
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Babb & Co. #02-6004105 26.73% 4,368,592.160
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SERVICE SHARES
Dirigo Drywall Assoc. 22.89% 682,716.350
225 Riverside Street
Portland, ME 04103
Cutler Approved List Equity Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 19.58% 583,950,000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
</TABLE>
A-4
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND ------------ ------------
INSTITUTIONAL SERVICE SHARES-CON'T
Cutler Equity Income Fund 9.05% 269,894.440
C/O Forum Financial Services, Inc.
Two Portland Square
CRM All Cap Value Fund 6.23% 185,729.030
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.900
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SHARES
- --------------------
Babb & Co. #02-6004105 46.72% 9,494,221.860
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 25.38% 5,157,680.310
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Imperial Securities Corp. 23.96% 4,868,005.220
Attn: Jack Singer
9920 South La Cieniega Blvd 14th Fl
Inglewood, CA 90301
</TABLE>
A-5
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
------------ ------------
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SERVICE SHARES
Forum Financing 100% 5.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS MUNICIPAL FUND
INVESTOR SHARES
Forum Administrative Services, LLC 100% 100.060
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SHARES
- --------------------
Babb & Co. #02-6004105 65.16% 62,106,021.450
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
Allagash & Co. 34.84% 33,201,966.980
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SERVICE
Allagash & Co. 99.10% 1,657,595.720
c/o Bank of New Hampshire
P.O. Box 477
CONCORD, NH 03302-0477
INVESTORS BOND FUND
- -------------------
Firstrust Co. 72.38% 5,714,958.415
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 11.10% 876,782.753
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
</TABLE>
A-6
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
FORUM TAXSAVER BOND FUND
- ------------------------
First Trust Co. 49.33% 1,717,000.264
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 21.80% 758,668.285
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
Leonore Zusman Ttee 6.03% 209,963.557
Leonore Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Ct.
Englewood OH 45322
Lawrence L. Zusman Ttee 5.41% 188,185.433
Lawrence L. Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Court
Englewood OH 45322
HIGH GRADE BOND FUND
Babb & Co. #02-6004105 99.76% 3.451,019.518
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
NEW HAMPSHIRE BOND FUND
Independence Trust 45.62% 565,735.702
Attn: Linda Feliciano
200 Bedford Street 5th
Manchester, NH 03101
</TABLE>
A-7
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
PAYSON BALANCED FUND
- --------------------
ALA & Co. 15.49% 258,329.088
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
Payse & Co. 14.98% 249,788.506
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
PAYSON VALUE FUND
- -----------------
Payse & Co. 21.90% 208,621.301
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
ALA & Co. 18.09% 172,271.808
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
INVESTORS EQUITY FUND
- ---------------------
Babb & Co. #02-6004105 94.40% 2,383,117.225
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 5.18% 130,658.987
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
</TABLE>
A-8
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
INTERNATIONAL EQUITY FUND
- -------------------------
Forum Financing 67.80% 500.000
Forum Financial Group
Two Portland Square
Portland ME 04101
Donaldson, Lufkin & Jenrette Sec Corp. 32.20% 237.417
Mutual Funds Dept. - 5th Floor
PO Box 2052
Jersey City NJ 07303
INVESTORS GROWTH FUND
- ---------------------
Firstrust Co. 99.95% 3,013,520.631
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
EQUITY INDEX FUND
- -----------------
Allagash & Co. 99.27% 440,772.554
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
SMALL COMPANY OPPORTUNITIES FUND
Forum Administrative Services, LLC 100% 500.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
EMERGING MARKETS FUND
Forum Financing 65.52% 500.00
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
Donald, Lufkin & Jenrette Securities Corp. 34.48% 263.158
Mutual Funds Dept.-5th Floor
P.O. Box 2052
Jersey City, NJ 07303
</TABLE>
A-9
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
QUADRA VALUE EQUITY FUND
- ------------------------
Holly Melosi & Arturo R. Melosi TTEE 80.77% 406,724.176
FBO Atrgur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
HMK Enterprises, Inc. 8.41%% 42,337.003
800 South Street
Suite 355
Waltham MA 02154
QUADRA GROWTH FUND
- ------------------
Holly Melosi & Arturo R. Melosi TTEE 77.64% 454,757.022
FBO Arthur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
John E. Rosenthal 12.52 73,322.092
1212 West Street
Carlisle, MA 01741-1428
POLARIS GLOBAL VALUE FUND
- -------------------------
David Solomont 11.39% 271,791.712
c/o Utopia Inc.
200 Fifth Avenue
Waltham, MA 02154
DCGT TR 5.35% 127,724.287
FBO Audrey Lewis-REG IRA
10 Rogers Street
Cambridge, MA 02142
</TABLE>
A-10
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS
CORPORATE BONDS (INCLUDING CONVERTIBLE DEBT)
(A) MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues,
as follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
B-1
<PAGE>
(B) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as
follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas, they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated `BB' have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Bonds rated `B' have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated `CCC' have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
The `C' rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating `C' is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated `D' are in payment default. The `D' rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will made during such grace period. The `D' rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
PREFERRED STOCK
(A) MOODY'S
Moody's rates preferred stock issues as follows:
B-2
<PAGE>
An issue which is rated aaa is a top-quality preferred stock. This rating
indicates good asset protection and the least risk of dividend impairment among
preferred stock issues.
An issue which is rated "aa" is a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rated "a" is an upper-medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classification,
earnings and asset protection are, nevertheless, expected to be maintained at
adequate levels.
An issue which is rated "baa" is a medium-grade preferred stock, neither highly
protected nor poorly secured. Earnings and asset protection appear adequate at
present but may be questionable over any great length of time.
An issue which is rated "ba" has speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very moderate and
not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated "ca" is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated "c" can be regarded as having extremely poor prospects
of ever attaining any real investment standing. This is the lowest rated class
of preferred or preference stock.
(B) STANDARD & POOR'S
Standard & Poor's rates preferred stock issues as follows:
"AAA" is the highest rating that is assigned by S&P to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock
obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas if normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the "A" category.
Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on dividends
or sinking fund payments but that is currently paying.
B-3
<PAGE>
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.
B-4
<PAGE>
OAK HALL(R) SMALL CAP CONTRARIAN FUND
- --------------------------------------------------------------------------------
Investment Advisor: Account Information and
Oak Hall Capital Advisors, L.P. Shareholder Servicing:
122 East 42nd Street Forum Shareholder Services, LLC
New York, New York 10005 Two Portland Square
(212) 455-9600 Portland, Maine 04101
800-625-4255
207-879-0001
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1998
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information ("SAI") supplements the Prospectus dated
August 1, 1998 offering shares of Oak Hall Small Cap Contrarian Fund (the
"Fund") (formerly, Oak Hall Equity Fund) and should be read only in conjunction
with the Fund's Prospectus, a copy of which may be obtained without charge by
contacting Forum Shareholder Services, LLC at the address listed above.
TABLE OF CONTENTS
Page
----
1. General...................................................... 2
2. Investment Policies.......................................... 4
3. Additional Investment Policies...............................12
4. Performance Data.............................................14
5. Management...................................................15
6. Determination of Net Asset Value.............................21
7. Portfolio Transactions.......................................21
8. Additional Purchase and22
Redemption Information.....................................22
9. Tax Matters..................................................23
10. Other Matters................................................23
Appendix A - Control Persons and Principal Holders of Securities .....A-1
Appendix B - Description of Securities Ratings .......................B-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
<PAGE>
1. GENERAL
THE TRUST
The Trust is registered with the SEC as an open-end, management investment
company and was organized as a business trust under the laws of the State of
Delaware on August 29, 1995. On January 5, 1996 the Trust succeeded to the
assets and liabilities of Forum Funds, Inc. Forum Funds, Inc. was incorporated
on March 24, 1980 and assumed the name of Forum Funds, Inc. on March 16, 1987.
The Board of Directors ("Board") without shareholder approval, has the authority
to issue an unlimited number of shares of beneficial interest of separate series
with no par value per share and to create separate classes of shares within each
series. The Trust currently offers shares of 23 series. The series of the Trust
are as follows:
Investors Bond Fund Oak Hall Small Cap Contrarian Fund
TaxSaver Bond Fund Austin Global Equity Fund
High Grade Bond Fund Quadra Value Equity Fund
Maine Municipal Bond Fund Quadra Growth Fund
New Hampshire Bond Fund Polaris Global Value Fund
Daily Assets Government Fund Investors Equity Fund
Daily Assets Treasury Obligations Fund Equity Index Fund
Daily Assets Cash Fund Small Company Opportunities Fund
Daily Assets Government Obligations Fund International Equities Fund
Daily Assets Municipal Fund Emerging Markets Fund
Payson Value Fund Investors Growth Fund
Payson Balanced Fund
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. A shareholder in a portfolio is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that portfolio's assets
and, upon redeeming shares, will receive the portion of the portfolio's net
assets represented by the redeemed shares.
As of July 1, 1998, the Officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of the Fund. Also as of that date,
Appendix A identifies all shareholders who own of record 5% or more of the
outstanding shares of any of the Registrant's series.
DEFINITIONS
As used in this Statement of Additional Information, the following terms shall
have the meanings listed:
"Board" means the Board of Trustees of Forum Funds.
"FAdS" means Forum Administrative Services, LLC.
"FAcS" means Forum Accounting Services, LLC.
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"FFC" means Forum Financial Corp.
"FFSI" means Forum Financial Services, Inc.
"Adviser" " means Oak Hall Capital Advisors, L.P
"Fund" means Oak Hall(R) Small Cap Contrarian Fund
"Business Day" has the meaning ascribed thereto in the current Prospectus of the
Fund.
"NRSRO" means a nationally recognized statistical rating organization.
"SAI" means this Statement of Additional Information.
"SEC" means the U.S. Securities and Exchange Commission.
"Trust" means Forum Funds, a Delaware business trust.
"U.S. Government Securities" has the meaning ascribed thereto by the current
Prospectus of the Funds.
"1940 Act" means the Investment Company Act of 1940, as amended.
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2. INVESTMENT POLICIES
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P") are private services that provide ratings of the credit quality of debt
obligations, including convertible securities. A description of the range of
ratings assigned to corporate bonds, including convertible securities by Moody's
and S&P is included in Appendix B to this Statement of Additional Information.
The Fund may use these ratings in determining whether to purchase, sell or hold
a security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, securities with the same
maturity, interest rate and rating may have different market prices. Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced. Oak Hall Capital Advisors, L.P. (the "Adviser") will
consider such an event in determining whether the Fund should continue to hold
the obligation. Credit ratings attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates.
FOREIGN SECURITIES
The Fund may invest up to 30% of the value of its total assets in securities of
foreign issuers, in American Depositary Receipts ("ADRs") and in securities
denominated in foreign currencies (collectively, "Foreign Securities").
Investments in Foreign Securities involve certain risks, such as exchange rate
fluctuations, political or economic instability of the issuer or the country of
issue and the possible imposition of exchange controls, withholding taxes on
dividends or interest payments, confiscatory taxes or expropriation. Securities
registration, custody and settlements of Foreign Securities may in some
instances be subject to delays and legal and administrative uncertainties.
Foreign Securities may also be subject to greater fluctuations in price than
securities of domestic corporations denominated in U.S. dollars. Foreign
Securities and their markets may not be as liquid as domestic securities and
their markets, and foreign brokerage commissions and custody fees are generally
higher than those in the United States. In addition, less information may be
publicly available about a foreign company than about a domestic company, and
foreign companies may not be subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. With respect to its permitted investments in Foreign Securities,
currently the Fund limits the amount of its assets that may be invested in one
country or denominated in one currency (other than the U.S. dollar) to 25%. The
Fund may invest in sponsored and unsponsored ADRs, which are receipts issued by
an American bank or trust company evidencing ownership of underlying securities
issued by a foreign issuer. Unsponsored ADRs may be created without the
participation of the foreign issuer. Holders of these ADRs generally bear all
the costs of the ADR facility, whereas foreign issuers typically bear certain
costs in a sponsored ADR. The bank or trust company depository of an unsponsored
ADR may be under no obligation to distribute shareholder communications received
from the foreign issuer or to pass through voting rights.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure but
are usually subordinated to comparable nonconvertible securities. Although no
securities investment is without some risk, investment in convertible securities
generally entails less risk than in the issuer's common stock. However, the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher
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yields than common stocks, but lower yields than comparable non-convertible
securities, (2) are less subject to fluctuation in value than the underlying
stocks since they have fixed income characteristics and (3) provide the
potential for capital appreciation if the market price of the underlying common
stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
The Fund will invest only in convertible debt that is rated "B" or higher by
Moody's Investors Service, Inc. ("Moody's") or by Standard & Poor's Corporation
("S&P") and in preferred stock that is rated "b" or "B" or higher by Moody's and
S&P, respectively. The Fund may purchase unrated convertible securities if the
Adviser determines the security is comparable in credit quality to a rated
security that the Fund may purchase. Unrated securities may not be as actively
traded as rated securities. Securities in the lowest permissible rating
categories are characterized by Moody's as generally lacking characteristics of
a desirable investment and by S&P as being predominantly speculative. The Fund
may retain securities whose rating has been lowered below the lowest permissible
rating category (or that are unrated and determined by the Adviser to be of
comparable quality) if the Adviser determines that retaining such security is in
the best interests of the Fund. Convertible securities which are rated B by
Moody's and S&P generally lack characteristics of a desirable investment.
Preferred securities which are rated B by S&P 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.
WARRANTS
The Fund may invest in warrants, which are options to purchase an equity
security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time. To the extent
that the market value of the security that may be purchased upon exercise of the
warrant rises above the exercise price, the value of the warrant will tend to
rise. To the extent that the exercise price equals or exceeds the market value
of such security, the warrants will have little or no market value. If a warrant
is not exercised within the specified time period, it will become worthless and
the Fund will lose the purchase price paid for the warrant and the right to
purchase the underlying security. The Fund may not invest more than 2% of its
net assets in warrants not traded on the American or New York Stock Exchange.
TEMPORARY DEFENSIVE POSITION
When the Adviser believes that business or financial conditions warrant, the
Fund may assume a temporary defensive position. For temporary defensive
purposes, the Fund may invest without limit in cash or in investment grade cash
equivalents, including (1) short-term obligations of the U.S. Government and its
agencies or instrumentalities ("U.S. Government Securities"), (2) prime quality
certificates of deposit, bankers' acceptances and
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interest-bearing savings deposits of commercial banks doing business in the
United States that have, at the time of investment, total assets in excess of
one billion dollars (or the equivalent in other currencies) and that are members
of the Federal Deposit Insurance Corporation, (3i) prime commercial paper rated
A-2 or higher by S&P or Prime-2 or higher by Moody's or, if not rated,
determined by the Adviser to be of comparable quality, (iv) repurchase
agreements covering any of the securities in which the Fund may invest directly
and subject to the limits of the 1940 Act, and (5) money market mutual funds.
During periods when the Fund has assumed a temporary defensive position, it is
not pursuing its investment objective.
FOREIGN CURRENCY FORWARD CONTRACTS
Investments in foreign companies will usually involve currencies of foreign
countries. In addition, the Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of investment programs. Accordingly,
the value of the assets of the Fund as measured in United States dollars may be
affected by changes in foreign currency exchange rates and exchange control
regulations, and the Fund may incur costs in connection with conversions between
various currencies. The Fund may conduct foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into foreign currency forward
contracts ("forward contracts") to purchase or sell foreign currencies. A
forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (usually less than one
year) from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers and involve the risk that the other 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 utilize foreign currency forward contracts in order to hedge
against uncertainty in the level of future foreign exchange rates. The Fund will
not enter into these contracts for speculative purposes. The Fund may enter into
foreign currency forward contracts to manage currency risks and to facilitate
transactions in foreign securities. These contracts involve a risk of loss if
the Adviser fails to predict currency values correctly and also involve similar
risks to those described under "Hedging Strategies." The Fund may also buy and
sell foreign currency options and other derivatives, foreign currency futures
contracts and options on those futures contracts. See "Hedging Strategies."
The Fund may enter into forward contracts under two circumstances. First, with
respect to specific transactions, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
may be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, the Fund may enter into forward currency contracts in connection with
existing portfolio positions. For example, when the Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract to sell, for
a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Forward contracts involve the
risk of inaccurate predictions of currency price movements, which may cause the
Fund to incur losses on these contracts and transaction costs. The Adviser does
not intend to enter into forward contracts on a regular or continuous basis, and
will not do so if, as a result, the Fund will have more than 25% of the value of
its total assets committed to such
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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.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated in a longer term investment decision made with regard to
overall diversification strategies. When required by applicable regulatory
guidelines, the Fund will set aside cash, U.S. Government Securities or other
liquid assets in a segregated account with its custodian in the prescribed
amount.
HEDGING STRATEGIES
The Adviser may engage in certain options and futures strategies to attempt to
hedge the Fund's portfolio. The instruments in which the Fund may invest include
(i) options on securities, stock indexes and foreign currencies, (ii) stock
index and foreign currency futures contracts ("futures contracts"), and (iii)
options on futures contracts. Use of these instruments is subject to regulation
by the Securities and Exchange Commission (the "SEC"), the several options and
futures exchanges upon which options and futures are traded, and the Commodities
Futures Trading Commission (the "CFTC"). No assurance can be given, however,
that any strategies will succeed.
The Fund will not use leverage in its hedging strategies. In the case of
transactions entered into as a hedge, the Fund will hold securities, currencies
or other options or futures positions whose values are expected to offset
("cover") its obligations thereunder. The Fund will not enter into a hedging
strategy that exposes the Fund to an obligation to another party unless it owns
either: (1) an offsetting ("covered") position or (2) cash, U.S. Government
Securities or other liquid assets with a value sufficient at all times to cover
its potential obligations. When required by applicable regulatory guidelines,
the Fund will set aside cash, U.S. Government Securities or other liquid assets
in a segregated account with its custodian in the prescribed amount. Any assets
used for cover or held in a segregated account cannot be sold or closed out
while the hedging strategy is outstanding, unless they are replaced with similar
assets. As a result, there is a possibility that the use of cover or segregation
involving a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
The Fund is subject to the following restrictions in its use of options and
futures contracts. The Fund will not: (1) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged through the use of options or futures contracts;
(2) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets; or (3) purchase call
options if, as a result, the current value of options premiums for options
purchased would exceed 5% of the Fund's total assets.
OPTIONS STRATEGIES. The Fund may purchase put and call options written by others
and write (sell) put and call options covering specified securities, stock
index-related amounts or currencies. A put option (sometimes called a "standby
commitment") gives the buyer of the option, upon payment of a premium, the right
to deliver a specified amount of a security or currency to the writer of the
option on or before a fixed date at a predetermined price. A
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call option (sometimes called a "reverse standby commitment") gives the
purchaser of the option, upon payment of a premium, the right to call upon the
writer to deliver a specified amount of a security or currency on or before a
fixed date, at a predetermined price. The predetermined prices may be higher or
lower than the market value of the underlying currency or security. The Fund may
buy or sell both exchange-traded and over-the-counter ("OTC") options. The Fund
will purchase or write an option only if that option is traded on a recognized
U.S. options exchange or if the Adviser believes that a liquid secondary market
for the option exists. When the Fund purchases an OTC option, it relies on the
dealer from which it has purchased the OTC option to make or take delivery of
the securities or currency underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. OTC options and the securities
underlying these options, currently are treated as illiquid securities.
The Fund may purchase call options on equity securities that the Adviser intends
to include in the Fund's portfolio in order to fix the cost of a future
purchase. Call options may also be purchased as a means of participating in an
anticipated price increase of a security on a more limited risk basis than would
be possible if the security itself were purchased. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; conversely, if the
market price of the underlying security increases above the exercise price and
the Fund either sells or exercises the option, any profit eventually realized
will be reduced by the premium paid. The Fund may similarly purchase put options
in order to hedge against a decline in market value of securities held in its
portfolio. The put enables the Fund to sell the underlying security at the
predetermined exercise price; thus the potential for loss to the Fund is limited
to the option premium paid. If the market price of the underlying security is
higher than the exercise price of the put, any profit the Fund realizes on the
sale of the security would be reduced by the premium paid for the put option
less any amount for which the put may be sold.
The Fund may write covered call options. The Fund may write call options on
behalf of the Fund when the Adviser believes that the market value of the
underlying security will not rise to a value greater than the exercise price
plus the premium received. Call options may also be written to provide limited
protection against a decrease in the market price of a security, in an amount
equal to the call premium received less any transaction costs. The Fund may
write covered put options only to effect closing transactions.
The Fund may purchase and write put and call options on stock indices in much
the same manner as the equity security options discussed above, except that
stock index options may serve as a hedge against overall fluctuations in the
securities markets (or market sectors) or as a means of participating in an
anticipated price increase in those markets. The effectiveness of hedging
techniques using stock index options will depend on the extent to which price
movements in the stock index selected correlate with price movements of the
securities which are being hedged. Stock index options are settled exclusively
in cash.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS. The Fund may take positions in
options on foreign currencies in order to hedge against the risk of foreign
exchange fluctuation on foreign securities the Fund holds in its portfolio or
which it intends to purchase. Options on foreign currencies are affected by the
factors discussed in "Foreign Currency Forward Transactions" which influence
foreign exchange sales and investments generally.
The value of foreign currency options is dependent upon the value of the foreign
currency relative to the U.S. dollar and has no relationship to the investment
merits of a foreign security. Because foreign currency transactions occurring in
the interbank market involve substantially larger amounts than those that may be
involved in the use of foreign currency options, the Fund may be disadvantaged
by having to deal in an odd lot market (generally consisting of transactions of
less than $1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies remains open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in the options
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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 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
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market values of the Fund's foreign securities holdings. The Fund may purchase a
foreign currency futures contract to hedge against an anticipated foreign
exchange rate increase pending completion of anticipated transactions. Such a
purchase would serve as a temporary measure to protect the Fund against such
increase. The Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. The
Fund may write call options on foreign currency futures contracts as a partial
hedge against the effects of declining foreign exchange rates on the value of
foreign securities.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING. No
price is paid upon entering into futures contracts; rather, the Fund is required
to deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash or U.S. Government Securities generally equal to 5% or
less of the contract value. This amount is known as initial margin. Subsequent
payments, called variation margin, to and from the broker, would be made on a
daily basis as the value of the futures position varies. When writing a call on
a futures contract, variation margin must be deposited in accordance with
applicable exchange rules. The initial margin in futures transactions is in the
nature of a performance bond or good-faith deposit on the contract that is
returned to the Fund upon termination of the contract, assuming all contractual
obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts. For example, futures contracts on broad-based stock
indices can currently be entered into with respect to the Standard & Poor's 500
Stock Index on the Chicago Mercantile Exchange, the New York Stock Exchange
Composite Stock Index on the New York Futures Exchange, the Value Line Composite
Stock Index on the Kansas City Board of Trade and the Major Market Index of the
Chicago Board of Trade.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for the Fund to close a
position, and in the event of adverse price movements, the Fund would have to
make daily cash payments of variation margin. In addition:
(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 future
contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In such event, it may not be
possible to close a position, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin.
(4) Like other options, options on futures contracts have a limited
life. The Fund will not trade options on futures contracts on any exchange or
board of trade unless and until, in the Adviser's opinion, the market for such
options has developed sufficiently that the risks in connection with options on
futures transactions are not greater than the risks in connection with futures
transactions.
10
<PAGE>
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that is at
risk. Sellers of options on futures contracts, however, must post an initial
margin and are subject to additional margin calls which could be substantial in
the event of adverse price movements.
(6) The Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of added
brokerage commissions.
(7) Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the buying and selling of futures
generally. In addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those associated with
options on foreign currencies described above. In addition, settlement of
foreign currency futures contracts must occur within the country issuing that
currency. Thus, the Fund must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulations
regarding the maintenance of foreign banking arrangements by U.S. residents, and
the Fund may be required to pay any fees, taxes or charges associated with such
delivery which are assessed in the issuing country.
REGULATORY COMPLIANCE WITH RESPECT TO COMMODITY FUTURES CONTRACTS
AND COMMODITY OPTIONS
The Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. The Fund
will only invest in futures contracts, options on futures contracts and other
options contracts that are subject to the jurisdiction of the CFTC after filing
a notice of eligibility and otherwise complying with the requirements of Section
4.5 of the rules of the CFTC. Under that section the Fund would be permitted to
purchase such futures or options contracts only for bona fide hedging purposes
within the meaning of the rules of the CFTC; provided, however. that in
addition, with respect to positions in commodity futures and option contracts
not for bona fide hedging purposes, the Fund represents that the aggregate
initial margin and premiums required to establish these positions (subject to
certain exclusions) will not exceed 5% of the liquidation value of the Fund's
assets after taking into account unrealized profits and losses on any such
contract the Fund has entered into.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand agreements,
there is no agreed upon repurchase date and interest payments are calculated
daily, often based upon the prevailing overnight repurchase rate.
Generally, a reverse repurchase agreement enables the Fund to recover for the
term of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by the Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase portfolio securities on a when-issued and purchase or sell
portfolio securities on forward commitment basis. When-issued or forward
commitment transactions arise when securities are purchased by the Fund with
payment and delivery to take place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time it
enters into the transaction. In those cases, the purchase price and the interest
rate payable on the securities are fixed on the transaction date and delivery
and payment may take
11
<PAGE>
place a month or more after the date of the transaction. When the Fund enters
into a forward commitment transaction, it becomes obligated to purchase
securities and it has all of the rights and risks attendant to ownership of the
security, although delivery and payment occur at a later date. To facilitate
such acquisitions, the Fund will maintain with its custodian a separate account
with portfolio securities in an amount at least equal to such commitments.
At the time the Fund makes the commitment to purchase securities on a
when-issued or forward commitment basis, the Fund will record the transaction as
a purchase and thereafter reflect the value each day of such securities in
determining its net asset value. The value of the fixed income securities to be
delivered in the future will fluctuate as interest rates and the credit of the
underlying issuer vary. On delivery dates for such transactions, the Fund will
meet its obligations from maturities, sales of the securities held in the
separate account or from other available sources of cash. The Fund generally has
the ability to close out a purchase obligation on or before the settlement date,
rather than purchase the security. If the Fund chooses to dispose of the right
to acquire a when-issued security prior to its acquisition, it could, as with
the disposition of any other portfolio obligation, realize a gain or loss due to
market fluctuation.
To the extent the Fund engages in when-issued or delayed delivery transactions,
it will do so for the purpose of acquiring securities consistent with the Fund's
investment objectives and policies and not for the purpose of investment
leverage or to speculate in interest rate changes. The Fund will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but the Fund reserves
the right to dispose of the right to acquire these securities before the
settlement date if deemed advisable.
The use of when-issued transactions and forward commitments enables the Fund to
hedge against anticipated changes in interest rates and prices. For instance, in
periods of rising interest rates and falling bond prices, the Fund might sell
securities which it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, a
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Adviser were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward transactions at prices inferior to the
current market values.
When-issued securities may include bonds purchased on a "when, as and if issued"
basis under which the issuance of the securities depends upon the occurrence of
a subsequent event, such as approval of a proposed financing by appropriate
municipal authorities. Any significant commitment of the Fund's assets committed
to the purchase of securities on a "when, as and if issued" basis may increase
the volatility of its net asset value. No when-issued or forward commitments
will be made by the Fund if, as a result, more than 10% of the value of the
Fund's total assets would be committed to such transactions.
3. ADDITIONAL INVESTMENT POLICIES
The investment objective and all investment policies of the Fund that are
designated as fundamental may be changed only with the approval of the holders
of a majority of the outstanding voting securities of the Fund. A majority of
the Fund's outstanding voting securities means the lesser of (1) 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, (2) more than 50% of the outstanding shares of the Fund. Unless otherwise
indicated, all investment policies are not fundamental and may be changed by the
Board without shareholder approval.
In addition to the fundamental investment policies identified in the Prospectus,
the Fund has adopted the following fundamental investment limitations, which may
not be changed without shareholder approval. The Fund may not:
(1) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted to be incurred by the Fund. The deposit in
12
<PAGE>
escrow of securities in connection with the writing of put and call
options, collateralized loans of securities and collateral arrangements
with respect to margin for futures contracts are not deemed to be
pledges or hypothecations for this purpose.
(2) Borrow money, except that the Fund may enter into commitments to
purchase securities in accordance with its investment program,
including delayed-delivery and when-issued securities and reverse
repurchase agreements, provided that the total amount of any such
borrowing does not exceed 33 1/3% of the Fund's total assets.
(3) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed to be an underwriter for purpose of
the Securities Act of 1933.
(4) Purchase or sell real estate or any interest therein, except that
the Fund may invest in securities issued or guaranteed by corporate or
governmental entities secured by real estate or interests therein, such
as mortgage pass-throughs and collateralized mortgage obligations, or
issued by companies that invest in real estate or interests therein.
(5) Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not
prevent a Fund from purchasing or selling options and futures contracts
or from investing in securities or other instruments backed by physical
commodities).
(6) Issue any senior securities (as defined in the Investment Company
Act of 1940 (the "1940 Act"), except that: (a) the Fund may engage in
transactions that may result in the issuance of senior securities to
the extent permitted under applicable regulations and interpretations
of the 1940 Act or an exemptive order; (b) the Fund may acquire
securities to the extent otherwise permitted by its investment
policies, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations
or interpretations of the 1940 Act; and (c) subject to the restrictions
set forth in the prospectus, the Fund may borrow money as authorized by
the 1940 Act.
In addition to the nonfundamental investment policies identified in the
Prospectus, the Fund has adopted the following nonfundamental investment
limitations that may be changed by the Trust's Board without shareholder
approval. The Fund:
(1) May borrow money for temporary or emergency purposes in an amount
not exceeding 5% of the value of its total assets at the time when the
loan is made; provided that any such temporary or emergency borrowings
representing more than 5% of the Fund's total assets must be repaid
before the Fund may make additional investments.
(2) May not purchase securities on margin, except for the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities, but the Fund may make margin deposits in
connection with permitted transactions in options, futures and options
on futures.
(3) May not invest in securities of another registered investment
company except to the extent permitted by the 1940 Act.
(4) May not invest more than 15% of its net assets in securities that
are not readily marketable, including repurchase agreements maturing in
more than seven days.
Except as required by the 1940 Act, whenever an amended or restated investment
policy or limitation states a maximum percentage of the Fund's assets that may
be invested, such percentage limitation will be determined immediately after and
as a result of the acquisition of such security or other asset. Any subsequent
change in values, assets or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment
limitations. If the Fund were to invest in money market funds as described in
limitation (c), it would indirectly incur its proportionate share of the
advisory and other expenses of the money market fund.
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<PAGE>
4. 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.
Total return information for the Funds as of March 31, 1998 is set forth in the
following table:
<TABLE>
<S> <C> <C> <C>
Total Return Since
Total Return 1 Year Total Return 5 Year Inception*
Oak Hall Small Cap Contrarian Fund 49.71% 15.27% 16.96%
</TABLE>
*Oak Hall Small Cap Contrarian Fund commenced operations on July 13, 1992.
In performance advertising the Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). The Fund may also compare any of its performance
information with the performance of recognized stock, bond and other indices,
including but not limited to the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Salomon Brothers Bond Index, the
Shearson Lehman Bond Index, U.S. Treasury bonds, bills or notes and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. The
Fund may refer to general market performances over past time periods such as
those published by Ibbotson Associates. In addition, the Fund may refer in such
materials to mutual fund performance rankings and other data published by Fund
Tracking Companies. Performance advertising may also refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
TOTAL RETURN CALCULATIONS
The Fund may advertise total return. Total returns quoted in advertising reflect
all aspects of the Fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the Fund's net asset value per
share over the period. Average annual returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in the Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of the Fund.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)n = ERV; where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value (ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 payment made
at the beginning of the applicable period.
14
<PAGE>
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over time. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1); where:
PT = period total return;
The other definitions are the same as in average annual total
return above.
OTHER ADVERTISING MATTERS
The Fund may also include various information in their advertisements including,
but not limited to: (1) portfolio holdings and portfolio allocation as of
certain dates, such as portfolio diversification by instrument type, by
instrument, by location of issuer or by maturity; (2) statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds that may be employed by an investor to meet specific financial
goals, such as funding retirement, paying for children's education and
financially supporting aging parents; (3) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of earning interest on principal plus interest that was earned earlier;
interest can be compounded at different intervals, such as annually, quarterly
or daily); (4) information relating to inflation and its effects on the dollar;
for example, after ten years the purchasing power of $25,000 would shrink to
$16,621, $14,968, $13,465 and $12,100, respectively, if the annual rates of
inflation were 4%, 5%, 6% and 7%, respectively; (5) information regarding the
effects of automatic investment and systematic withdrawal plans, including the
principal of dollar cost averaging; (6) background information regarding the
Fund's Adviser and biographical descriptions of the management staff of the
Adviser; (7) summaries of the views of the Adviser with respect to the financial
markets; (8) background information regarding the Trust; (9) the results of a
hypothetical investment in a fund over a given number of years, including the
amount that the investment would be at the end of the period; (10) the effects
of investing in a tax-deferred account, such as an individual retirement account
or Section 401(k) pension plan; and (11) the net asset value, net assets or
number of shareholders of the Fund as of one or more dates.
5. MANAGEMENT
TRUSTEES AND OFFICERS
THE TRUST
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Trustee, Chairman and President (age 56)
President, Forum Financial Group, LLC (mutual fund services company
holding company).. Mr. Keffer is a director and/or officer of various
registered investment companies for which the various Forum Financial
Group of Companies provides services. His address is Two Portland
Square, Portland, Maine 04101.
15
<PAGE>
Costas Azariadis, Trustee (age 55)
Professor of Economics, University of California, Los Angeles, since
July 1992. Prior thereto, Dr. Azariadis was Professor of Economics at
the University of Pennsylvania. His address is Department of
Economics, University of California, Los Angeles, 405 Hilgard Avenue,
Los Angeles, California 90024.
James C. Cheng, Trustee (age 56)
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 54)
Partner at the law firm of Reid & Priest L.L.P. since 1995. From 1989
to 1995, he was a partner at the law firm of Winthrop, Stimson, Putnam
& Roberts. Prior thereto, he was a partner at LeBoeuf, Lamb, Leiby &
MacRae, a law firm of which he was a member from 1974 to 1989. His
address is 40 West 57th Street, New York, New York 10019.
Mark D. Kaplan, Vice President (age 42)
Director, Investments, Forum Financial Group, LLC, with which he has
been associated 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.
Stacey Hong, Treasurer (age 32)
Director, Fund Accounting, Forum Financial Group, LLC, with which he
has been associated since April 1992. Prior thereto, Mr. Hong was a
Senior Accountant with Ernst & Young, LLP. His
address is Two Portland Square, Portland, Maine 04101.
Max Berueffy, Secretary (age 46)
Senior Counsel, Forum Financial Group, LLC, 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 also
serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. His address is Two Portland Square, Portland, Maine 04101.
Leslie K. Klenk, Assistant Secretary (age 33)
Assistant Counsel, Forum Financial Group LLC, with which she has been
associated since April 1998. Prior thereto, Ms. Klenk was Vice
President and Associate General Counsel of Smith Barney Inc. Ms. Klenk
also serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. Her address is Two Portland Square, Portland, ME 04101.
Pamela Stutch, Assistant Secretary (age 30)
Fund Administrator, Forum Financial Group, LLC, with which she has
been associated since May 1998. Prior thereto, Ms. Stutch attended
Temple University School of Law and graduated in 1997. Ms. Stutch was
also a legal intern for the Maine Department of the Attorney General.
Ms. Stutch also serves as an officer of other registered investment
companies for which the various Forum Financial Group of Companies
provides services. Her address is Two Portland Square, Portland, ME
04101.
16
<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) and is paid $1,000 for each committee
meeting attended on a date when a Board meeting is not held. As of March 31,
1997, in addition to $1,000 for each Board meeting attended, each Trustee
receives $100 per active portfolio of the Trust. To the extent a meeting relates
to only certain portfolios of the Trust, Trustees are paid the $100 fee only
with respect to those portfolios. Trustees are also reimbursed for travel and
related expenses incurred in attending meetings of the Board. No officer of the
Trust is compensated by the Trust.
The following table provides the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1998.
<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 $9,718.64 None None $9,718.64
Mr. Cheng $9,718.64 None None $9,718.64
Mr. Parish $9,718.64 None None $9,718.64
</TABLE>
TRUSTEE COMPENSATION FOR CORE TRUST (DELAWARE)
Each of the Trustees of the Trust is also a Trustee of Core Trust (Delaware), a
registered, open-end management investment company ("Core Trust"). Each Trustee
of Core Trust (other than John Y. Keffer, who is an interested person of Core
Trust) is paid $1,000 for each Core Trust Board meeting attended (whether in
person or by electronic communication) plus $100 per active portfolio of Core
Trust and is paid $1,000 for each committee meeting attended on a date when a
Core Trust Board meeting is not held. To the extent a meeting relates to only
certain portfolios of Core Trust, trustees are paid the $100 fee only with
respect to those portfolios. Core Trust trustees are also reimbursed for travel
and related expenses incurred in attending meetings of the Core Trust Board.
THE ADVISER
Pursuant to an Investment Advisory Agreement with the Trust , , Oak Hall Capital
Advisors, L.P. furnishes at its own expense all services, facilities and
personnel necessary in connection with managing the Fund's investments and
effecting portfolio transactions for the Fund. Subject to the general
supervision of the Board, the Adviser is responsible for, among other things,
developing a continuing investment program for the Fund in accordance with its
investment objectives and reviewing the investments, investment strategies, and
policies of the Fund. In this regard, it is the responsibility of the Adviser to
make decisions relating to the Fund's investments and to place purchase and sale
orders regarding such investments with brokers or dealers selected by it in its
discretion. The Adviser also furnishes to the Board, which has overall
responsibility for the business and affairs of the Trust, periodic reports on
the investment performance of the Fund.
The Investment 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 (1) by the
Board or by majority vote of the shareholders and (2) by a majority of the
Trustees who are not parties to the Advisory Agreement or interested persons of
any such party.
The Investment Advisory Agreement is terminable without penalty by the Board or
a majority vote of the shareholders on 60 days' written notice to the Adviser,
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
17
<PAGE>
in the performance of its duties or by reason of reckless disregard of its
obligations and duties under the Investment Advisory Agreement.
The Investment Advisory Agreement provides that the Adviser may render services
to others. 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.
For its services under the Investment Advisory Agreement, the Adviser receives a
fee at an annual rate of 0.75% of the average daily net assets of the Fund. The
following table shows the dollar amount of fees payable under the Investment
Advisory Agreement between the Fund and Oak Hall Capital Advisors, L.P., the
amount of fee that was waived by the Adviser, if any, and the actual fee
received by the Adviser. The data is for the past three fiscal years.
<TABLE>
<S> <C> <C> <C>
Advisory Fee Advisory Fee Advisory Fee
Payable Waived Retained
Oak Hall Small Cap Contrarian Fund ------- ------ --------
Year Ended March 31, 1998 $49,135 $49,135 $0
Year Ended March 31, 1997 $54,263 $54,263 $0
Year Ended June 30, 1996 110,257 64,502 45,755
</TABLE>
THE ADMINISTRATOR
Pursuant to an Administration Agreement with the Trust, Forum Administrative
Services, LLC ("FAdS") acts as the administrator of the Trust on behalf of the
Fund. As administrator, FAdS provides management and administrative services
necessary to the operation 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) and provided
the Trust with general office facilities. At the request of the Board, FAdS also
provides persons satisfactory to the Board to serve as officers of the Trust.
Those officers, as well as certain other employees and Trustees of the Trust,
may be directors, officers or employees of FAdS, the Adviser or their respective
affiliates. 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.
The Administration 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 or by
majority vote of 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 (other than as Trustees of the Trust). The Administration Agreement may be
terminated with respect to any Fund, without payment of a penalty, by the Board
or FAdS on 60 days' written notice. The Administration Agreement provides that
FAdS shall not be liable for any action or inaction taken in the administration
or management of the Trust, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties under the Administration Agreement.
Until May 31, 1994, Stone Bridge Trust Company ("SBTC"), as administrator, and
Forum Financial Services, Inc. ("FFSI"), as sub-administrator, supervised the
overall management of the Fund, which was then a series of The Stone Bridge
Funds, Inc., a registered management investment company (the "Company"),
including the administrative duties described above, pursuant to a
Co-Administration Agreement and a Distribution and Administration Agreement,
respectively. Effective June 1, 1994, the Company entered into an Administration
and Distribution Agreement with FFSI under which FFSI provided the
administration and distribution services it has provided since the Fund's
inception and assumed the administrative responsibilities formerly performed by
SBTC. As of November 25, 1996, administrative services were provided to the Fund
pursuant to a Management and Distribution Agreement between the Trust and FFSI.
Effective June 19, 1997, administrative services are provided by FAdS under the
current Administration Agreement with the Trust.
18
<PAGE>
For the fiscal years ending March 31, 1998 and 1997 and June 30, 1996, the
administration fees were $ 16,378, $18,088, and $36,752 , respectively.
THE DISTRIBUTOR
Pursuant to a Distribution Agreement with the Trust, FFSI acts as distributor of
the Fund's shares (the The Distributor is under no obligation to sell any
specific amount of the Fund's shares. All subscriptions of shares that are
obtained by FFSI are directed to the Trust for acceptance and are not binding on
the Trust until accepted.
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 (1) by the Board
or by majority vote of the shareholders and (2) 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 majority vote of the
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.
FFSI may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of the Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Fund are sold without sales charges or
distribution fees. These financial institutions may otherwise act as processing
agents, and will be responsible for promptly transmitting purchase, redemption
and other requests to the Fund.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition to, or
different from, those listed herein. Information concerning any charges or
services will be provided to customers by the financial institution. Investors
purchasing shares of the Fund in this manner should acquaint themselves with
their institution's procedures and should read this Prospectus in conjunction
with any materials and information provided by their institution. The financial
institution and not its customers will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
On December 5, 1997, the Board terminated a distribution plan previously adopted
by the Board in accordance with Rule 12b-1 under the 1940 Act ("Plan"). The Plan
required the Trust and FFSI to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by FFSI pursuant to
the Plan and identifying the distribution activities for which those
expenditures were made. For the fiscal year ended March 31, 1998, the Plan did
not incur any expenses,
THE TRANSFER AGENT
Pursuant to a Transfer Agency and Services Agreement with the Trust dated May
19, 1998, Forum Shareholder Services, LLC ("FSS") acts as transfer agent and
dividend disbursing agent of the Trust. FSS became the transfer agent effective
January 1, 1998 when it succeeded to the transfer agency business of Forum
Financial Corp. (FSS and Forum Financial Corp. ("FFC") are commonly controlled
entities).
The Transfer Agency and Services Agreement will remain in effect for a period of
one year and will continue in effect thereafter only if its continuance is
specifically approved at least annually (1) by the Board or by majority vote of
the shareholders and (2) by a majority of the Trustees who are not parties to
the respective agreement or interested persons of any such party. The Transfer
Agency and Services Agreement may also be terminated on 60
19
<PAGE>
days written notice by either the Board or FSS. The Transfer Agency and Services
Agreement also provides that FSS shall not be liable for any action or inaction
taken except for willful misfeasance, bad faith, and gross negligence in the
performance of its duties under the Fund Accounting Agreement.
Among the responsibilities of FSS as agent for the Trust are: (1) answering
customer inquiries regarding account status and history, the manner in which
purchases and redemptions of shares of the Funds may be effected and certain
other matters pertaining to the Funds; (2) assisting shareholders in initiating
and changing account designations and addresses; (3) providing necessary
personnel and facilities to establish and maintain shareholder accounts and
records, assisting in processing purchase and redemption transactions and
receiving wired funds; (4) transmitting and receiving funds in connection with
customer orders to purchase or redeem shares; (5) verifying shareholder
signatures in connection with changes in the registration of shareholder
accounts; (6) furnishing periodic statements and confirmations of purchases and
redemptions; (7) arranging for the transmission of proxy statements, annual
reports, prospectuses and other communications from the Trust to its
shareholders; (8) arranging for the receipt, tabulation and transmission to the
Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
FSS or any sub-transfer agent or processing agent may also act and receive
compensation for acting as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Funds with
respect to assets invested in the Funds. FSS 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
FSS with respect to assets of those customers or clients invested in the Funds.
FSS, FAdS or sub-transfer agents or processing agents retained by FSS may be
Processing Organizations (as defined in the Prospectus) and, in the case of
sub-transfer agents or processing agents, may also be affiliated persons of FSS
or FAdS.
For its services, FSS receives with respect to the Fund an annual fee of $12,000
plus $25 per shareholder account. FFC served as the transfer agent for the Trust
pursuant to similar terms and compensation as FSS.
THE FUND ACCOUNTANT
Pursuant to a Fund Accounting Agreement with the Trust, Forum Accounting
Services, LLC ("FAcS") provides the Fund with portfolio accounting, including
the calculation of the Fund's net asset value. For these services, the Transfer
Agent receives with respect to the Fund an annual fee of $36,000 plus certain
surcharges based upon the amount and type of the Fund's portfolio transactions
and positions.
The Fund Accounting Agreement will remain in effect for a period of one year and
will continue in effect thereafter only if its continuance is specifically
approved at least annually (1) by the Board or by majority vote of the
shareholders and (2) by a majority of the Trustees who are not parties to the
respective agreement or interested persons of any such party. The Fund
Accounting Agreement may also be terminated on 60 days written notice by either
the Board or FAcS. The Fund Accounting Agreement also provides that FAcS shall
not be liable for any action or inaction taken except for willful misfeasance,
bad faith or gross negligence in the performance of its duties under the Fund
Accounting Agreement.
For the fiscal years ending March 31, 1998 and 1997 and June 30, 1996, the
accounting fees were $41,000, $30,000, and $40,000, respectively.
EXPENSES
Subject to the obligations of the Adviser to reimburse the Trust for its excess
expenses as described in the Prospectus, the Trust has, under the Advisory
Agreement, confirmed its obligation to pay all its other expenses.
The Trust's expenses include: interest charges, taxes, brokerage fees and
commissions; certain insurance premiums; fees, interest charges and expenses of
the Trust's custodian and transfer 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
20
<PAGE>
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; state securities
laws registration fees and related expenses; the fees payable under the Advisory
Agreement, the Administration Agreement and the Distribution and
Sub-Administration Agreement; and any fees and expenses payable pursuant to the
Plan.
6. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of 4:00 p.m.,
Eastern time, on each Business Day (as defined in the Prospectus), by dividing
the value of the Fund's net assets (i.e., the value of its securities and other
assets less its liabilities, including expenses payable or accrued) by the
number of shares outstanding at the time the determination is made. The Trust
does not determine net asset value on the following holidays: New Year's Day,
Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
7. PORTFOLIO TRANSACTIONS
The Fund generally purchases and sells securities through brokers who charge
commissions. Allocations of transactions to brokers and dealers and the
frequency of transactions are determined by the Adviser in its best judgment and
in a manner deemed to be in the best interest of shareholders of the Fund rather
than by any formula. The primary consideration is prompt execution of orders in
an effective manner and at the most favorable price available to the Fund.
The Fund may not always pay the lowest commission or spread available. Rather,
in determining the amount of commission, including certain dealer spreads, paid
in connection with Fund transactions, the Adviser takes into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below) and any
risk assumed by the executing broker. The Adviser may also take into account
payments made by brokers effecting transactions for the Fund (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 will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. If, however, the Fund and other investment
companies or accounts managed by the Adviser are contemporaneously engaged in
the purchase or sale of the same security, the transactions may be averaged as
to price and allocated equitably to each account. In some cases, this policy
might adversely affect the price paid or received by the Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for the Fund and for other investment companies and accounts
managed by the Adviser occur contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
The Fund contemplates that, consistent with the policy of obtaining best net
results, brokerage transactions may be conducted through the Adviser's
affiliates, affiliates of those persons or Forum. The Advisory Agreement
authorizes the Adviser to so execute trades. The Board has adopted procedures in
conformity with applicable rules under the Investment Company Act to ensure that
all brokerage commissions paid to these persons are reasonable and fair. For the
Trust's fiscal years ended March 31, 1998, March 31, 1997, and June 30, 1996 the
aggregate brokerage commissions incurred by the Fund were $26,268, $66,316, and
$198,598, respectively, of which 0%, 0%, and 5.1% ($0, $0, and $10,095,
respectively) was paid to American Securities Corporation, an affiliate of the
21
<PAGE>
Adviser. During those periods, approximately 0%, 0%, and 4.67% , respectively,
of the total dollar amount of transactions by the Fund involving the payment of
commissions were effected through American Securities Corporation.
8. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by FFSI at the net asset value
next determined without any sales charge. As of March 31, 1998, the Fund's net
asset value was $20.66.
REDEMPTION IN KIND
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partly in portfolio securities if the Board determines economic
conditions exist which would make payment in cash detrimental to the best
interests of the Fund. If payment for shares redeemed is made wholly or partly
in portfolio securities, brokerage costs may be incurred by the shareholder in
converting the securities to cash. The Trust has filed an election with the
Securities and Exchange Commission pursuant to which the Fund may only effect a
redemption in portfolio securities if the particular shareholder is redeeming
more than $250,000 or 1% of the Fund's total net assets, whichever is less,
during any 90-day period.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily to reimburse
the Fund for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to transactions effected for the benefit of a shareholder which
is applicable to the Fund's shares as provided in the Prospectus from time to
time.
Shareholders' rights of redemption may not be suspended, except (i) for any
period during which the New York Stock Exchange, Inc. is closed (other than
customary weekend and holiday closings) or during which the Securities and
Exchange Commission determines that trading thereon is restricted, (ii) for any
period during which an emergency (as determined by the Securities and Exchange
Commission) exists as a result of which disposal by the Fund of its securities
is not reasonably practicable or as a result of which it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(iii) for such other period as the Securities and Exchange Commission may by
order permit for the protection of the shareholders of the Fund.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, the Fund may accept portfolio securities that meet the investment
objective and policies of the Fund as payment for Fund shares. The Fund will
only accept securities that (i) are not restricted as to transfer either by law
or liquidity of market and (ii) have a value which is readily ascertainable (and
not established only by valuation procedures).
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Fund to exchange their shares
for Investor shares of the Daily Asset Government Fund, a money market fund of
the Trust (the "Daily Assets 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 FSS 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 FSS to be genuine.
The records of FSS of such instructions are binding. Proceeds of an exchange
transaction may be invested in the Daily Assets Fund in the name of the
shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction. Shares of the Fund may be
redeemed and the proceeds used to purchase, without a sales charge, shares of
the Daily Assets Fund. The terms of the exchange privilege are subject to
change, and the privilege may be
22
<PAGE>
terminated by the Daily Assets Fund or the Trust. However, the privilege will
not be terminated, and no material change that restricts the availability of the
privilege to shareholders will be implemented, without reasonable advance notice
to shareholders.
9. TAX MATTERS
The Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended. Such qualification does not, of course, involve governmental
supervision of management or investment practices or policies. Investors should
consult their own counsel for a complete understanding of the requirements the
Fund must meet to qualify for such treatment. The information set forth in the
Prospectus and the following discussion relate solely to Federal income taxes on
dividends and distributions by the Fund and assumes that the Fund qualifies as a
regulated investment company. Investors should consult their own counsel for
further details and for the application of state and local tax laws to his or
her particular situation.
A portion of the dividends paid out of the Fund's net ordinary income may be
eligible for the dividends received deduction allowed to corporations.
For federal income tax purposes, gains and losses attributable to fluctuations
in exchange rates which occur between the time the Fund accrues interest or
other receivable or accrues expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects such receivables or
pays such liabilities are treated as ordinary income or ordinary loss.
Similarly, gains or losses from the disposition of foreign currencies, from the
disposition of debt securities denominated in a foreign currency, or from the
disposition of a forward contract denominated in a foreign currency which are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the asset and the date of disposition also are treated as
ordinary gain or loss.
For federal income tax purposes, when equity or over-the-counter put and call
options which the Fund has purchased or sold or expire unexercised, the premiums
paid by the Fund give rise to short or long-term capital losses at the time of
sale or expiration (depending on the Fund's holding period with respect to the
put or call). When put and call options written by the Fund expire unexercised,
the premiums received by the Fund give rise to short-term capital gains at the
time of expiration. When the Fund exercises a call, the purchase price of the
security purchased is increased by the amount of the premium paid by the Fund.
When the Fund exercises a put, the proceeds from the sale of the related
security are decreased by the premium paid. When a put or call written by the
Fund is exercised, the purchase price (selling price in the case of a call) of
the security is decreased (increased in the case of a call) for tax purposes by
the premium received. There may be short or long term gains and losses
associated with closing purchase or sale transactions.
In addition, the use of certain hedging strategies such as writing and
purchasing options, futures contracts and options on futures contracts, and
entering into foreign currency forward contracts and other foreign instruments,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of income received in connection therewith.
10. OTHER INFORMATION
COUNSEL
Legal matters in connection with the issuance of shares of stock of the Trust
are passed upon by Seward & Kissel, 1200 G. Street, NW, Washington, DC 20005.
CUSTODIAN
Pursuant to a Custodian Agreement, BankBoston, N.A. (formerly The First National
Bank of Boston), P.O. Box 1959, Boston, Massachusetts, 02105, acts as the
custodian of the Funds' assets. The custodian's responsibilities
23
<PAGE>
include safeguarding and controlling the Fund's cash and securities, determining
income and collecting interest on Fund investments.
INDEPENDENT AUDITORS
Deloitte & Touche, LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, have been selected as auditors for the Trust.
FINANCIAL STATEMENTS
The audited financial statements of the Fund for the fiscal year ended March 31,
1998 (included in the Annual Report to Shareholders), which are delivered along
with this Statement of Additional Information, are incorporated herein by
reference.
24
<PAGE>
APPENDIX A
----------
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
---------------------------------------------------
As of July 1, 1998, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned more than 5% of each Fund. Shareholders owning
25% or more of the shares of a Fund or of the Trust as a whole may be deemed to
be controlling persons. By reason of their substantial holdings of shares, these
persons may be able to require the Trust to hold a shareholder meeting to vote
on certain issues and may be able to determine the outcome of any shareholder
vote. As noted, certain of these shareholders are known to the Trust to hold
their shares of record only and have no beneficial interest, including the right
to vote, in the shares.
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
OAK HALL SMALL CAP CONTRARIAN FUND
- ----------------------------------
Maryann Wolf 13.30% 40,946.955
55 Central Park West Apt 12-13
New York NY 10023
Simeon Gold & Heide Gold, Jt. Ten. 9.05% 27,856.149
136 East 76th Street Apt. 10F
New York NY 10021
Jane Levy 5.73% 17,622.969
320 West 87th Street Apt. 3W
New York NY 10024
Bank of Boston, IRA Custodian 5.70% 17,553.097
FBO Maryann Wolf
55 Central Park West Apt. 12-13
New York NY 10023
WR Family Associates 401K Plan Option 5.48% 16,870.661
Attn: Olga M. Dimmini
122 East 42nd Street, Suite 2400 New York, NY 10168-002
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS GOVERNMENT FUND ------------ -------------
INSTITUTIONAL SHARES
- ---------------------
H M Payson & Co. Custody Account 56.56% 18,033,015.150
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland ME 04112
H M Payson & Co. Trust Account 43.44% 13,850,465.390
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS GOVERNMENT FUND
INSTITUTIONAL SERVICE SHARES
Bank of Boston, IRA Rollover Custodian 16.52% 826,387.330
FBO Merne E. Young Rollover
18751 San Rufino
Irvine, CA 92612
Casa Colina Centers for Rehabilitation 15.90% 795,276.550
Foundation Smith Family Care Fund
Attn: Kristy Hurley
2850 N. Garey Avenue
P.O. Box 6001
Pomona, CA 91769-6001 15.90% 795,276.550
Lansdowne Parking Associates LP 9.99% 499,939.120
c/o Meredith Management
29 Crafts Street #300
Newton, MA 02158
DAILY ASSETS GOVERNMENT FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.920
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS CASH FUND
INSTITUTIONAL SHARES
- --------------------
Allagash & Co. 46.30% 12,236,932.890
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS CASH FUND ------------ -------------
INSTITUTIONAL SHARES CON'T
H M Payson & Co. Custody Account 34.44% 9.101,914.440
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
H M Payson & Co. Trust Account 19.27% 5,092,100.590
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS CASH FUND
INSTITUTIONAL SERVICE SHARES
Cutler Approved List Equity Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Cutler Equity Income Fund 18.12% 951,550.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM All Cap Value Fund 9.45% 496,164.720
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Mid Cap Value Fund 5.70% 299,263.830
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
------------ ------------
DAILY ASSETS CASH FUND
INVESTORS SHARES
Forum Administrative Services, Inc. 100% 101.200
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SHARES
- --------------------
Allagash & Co. 72.89% 11,915,149.240
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Babb & Co. #02-6004105 26.73% 4,368,592.160
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SERVICE SHARES
Dirigo Drywall Assoc. 22.89% 682,716.350
225 Riverside Street
Portland, ME 04103
Cutler Approved List Equity Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc./
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 19.58% 583,950,000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
</TABLE>
A-4
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND ------------ ------------
INSTITUTIONAL SERVICE SHARES-CON'T
Cutler Equity Income Fund 9.05% 269,894.440
C/O Forum Financial Services, Inc.
Two Portland Square
CRM All Cap Value Fund 6.23% 185,729.030
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.900
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SHARES
- --------------------
Babb & Co. #02-6004105 46.72% 9,494,221.860
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 25.38% 5,157,680.310
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Imperial Securities Corp. 23.96% 4,868,005.220
Attn: Jack Singer
9920 South La Cieniega Blvd 14th Fl
Inglewood, CA 90301
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SERVICE SHARES
Forum Financing 100% 5.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
</TABLE>
A-5
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS MUNICIPAL FUND ------------ ------------
INVESTOR SHARES
Forum Administrative Services, LLC 100% 100.060
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SHARES
- --------------------
Babb & Co. #02-6004105 65.16% 62,106,021.450
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
Allagash & Co. 34.84% 33,201,966.980
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SERVICE
Allagash & Co. 99.10% 1,657,595.720
c/o Bank of New Hampshire
P.O. Box 477
CONCORD, NH 03302-0477
INVESTORS BOND FUND
- -------------------
Firstrust Co. 72.38% 5,714,958.415
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 11.10% 876,782.753
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
</TABLE>
A-6
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
FORUM TAXSAVER BOND FUND
- ------------------------
First Trust Co. 49.33% 1,717,000.264
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 21.80% 758,668.285
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
Leonore Zusman Ttee 6.03% 209,963.557
Leonore Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Ct.
Englewood OH 45322
Lawrence L. Zusman Ttee 5.41% 188,185.433
Lawrence L. Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Court
Englewood OH 45322
HIGH GRADE BOND FUND
Babb & Co. #02-6004105 99.76% 3.451,019.518
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
NEW HAMPSHIRE BOND FUND
Independence Trust 45.62% 565,735.702
Attn: Linda Feliciano
200 Bedford Street 5th
Manchester, NH 03101
</TABLE>
A-7
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
PAYSON BALANCED FUND
- --------------------
ALA & Co. 15.49% 258,329.088
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
Payse & Co. 14.98% 249,788.506
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
PAYSON VALUE FUND
- -----------------
Payse & Co. 21.90% 208,621.301
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
ALA & Co. 18.09% 172,271.808
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
INVESTORS EQUITY FUND
- ---------------------
Babb & Co. #02-6004105 94.40% 2,383,117.225
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 5.18% 130,658.987
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
</TABLE>
A-8
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
INTERNATIONAL EQUITY FUND
- -------------------------
Forum Financing 67.80% 500.000
Forum Financial Group
Two Portland Square
Portland ME 04101
Donaldson, Lufkin & Jenrette Sec Corp. 32.20% 237.417
Mutual Funds Dept. - 5th Floor
PO Box 2052
Jersey City NJ 07303
INVESTORS GROWTH FUND
- ---------------------
Firstrust Co. 99.95% 3,013,520.631
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
EQUITY INDEX FUND
- -----------------
Allagash & Co. 99.27% 440,772.554
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
SMALL COMPANY OPPORTUNITIES FUND
Forum Administrative Services, LLC 100% 500.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
EMERGING MARKETS FUND
Forum Financing 65.52% 500.00
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
Donald, Lufkin & Jenrette Securities Corp. 34.48% 263.158
Mutual Funds Dept.-5th Floor
P.O. Box 2052
Jersey City, NJ 07303
</TABLE>
A-9
<PAGE>
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
QUADRA VALUE EQUITY FUND
- ------------------------
Holly Melosi & Arturo R. Melosi TTEE 80.77% 406,724.176
FBO Atrgur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
HMK Enterprises, Inc. 8.41%% 42,337.003
800 South Street
Suite 355
Waltham MA 02154
QUADRA GROWTH FUND
- ------------------
Holly Melosi & Arturo R. Melosi TTEE 77.64% 454,757.022
FBO Arthur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
John E. Rosenthal 12.52 73,322.092
1212 West Street
Carlisle, MA 01741-1428
POLARIS GLOBAL VALUE FUND
- -------------------------
David Solomont 11.39% 271,791.712
c/o Utopia Inc.
200 Fifth Avenue
Waltham, MA 02154
DCGT TR 5.35% 127,724.287
FBO Audrey Lewis-REG IRA
10 Rogers Street
Cambridge, MA 02142
</TABLE>
A-10
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS
CORPORATE BONDS (INCLUDING CONVERTIBLE DEBT)
(A) MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues,
as follows:
Bonds which are rated Aaa are judged by Moody's to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1, and B1.
B-1
<PAGE>
(B) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as
follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas, they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Bonds rated `BB' have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
Bonds rated `B' have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal payments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
Bonds rated `CCC' have currently identifiable vulnerability to default,
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
The `C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued. The rating
`Cl' is reserved for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor
has filed for bankruptcy. Bonds rated `D' are in payment default. The `D' rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will made during such grace period. The `D' rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Note: The ratings from AA to CCC may be modified by the addition of a
plus (+) or minus (-) sign to show the relative standing within the rating
category.
PREFERRED STOCK
(A) MOODY'S
Moody's rates preferred stock issues as follows:
B-2
<PAGE>
An issue which is rated aaa is a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue which is rated "aa" is a high-grade preferred stock. This
rating indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rated "a" is an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue which is rated "baa" is a medium-grade preferred stock,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
An issue which is rated "ba" has speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue which is rated "c" can be regarded as having extremely poor
prospects of ever attaining any real investment standing. This is the lowest
rated class of preferred or preference stock.
(B) STANDARD & POOR'S
Standard & Poor's rates preferred stock issues as follows:
"AAA" is the highest rating that is assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas if normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
B-3
<PAGE>
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
To provide more detailed indications of preferred stock quality, the
ratings from "AA" to "B" may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories.
B-4
<PAGE>
INVESTORS GROWTH FUND
- --------------------------------------------------------------------------------
Account Information and
Shareholder Servicing: Distributor:
Forum Shareholder Servicing, LLC Forum Financial Services, Inc.
P.O. Box 446 Two Portland Square
Portland, Maine 04112 Portland, Maine 04101
207-879-0001 207-879-1900
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1998
Investors Growth Fund (the "Fund") is a series of Forum Funds (the "Trust"), a
registered, open-end investment company. This Statement of Additional
Information supplements the Prospectus dated August 1, 1998 offering shares of
the Fund, and should be read only in conjunction with the Prospectus, a copy of
which may be obtained by an investor without charge by contacting the Trust's
Distributor at the address listed above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
TABLE OF CONTENTS
Page
----
1. General...................................................... 2
2. Investment Policies.......................................... 4
3. Additional Investment Policies............................... 7
4. Performance Data............................................. 8
5. Management...................................................10
6. Determination of Net Asset Value.............................16
7. Portfolio Transactions.......................................16
8. Additional Purchase and
Redemption Information.......................................17
9. Tax Matters..................................................19
10. Other Information............................................20
Appendix A - Control Persons and Principal Holders of Securities......A-1
Appendix B - Description of Securities Ratings........................B-1
Appendix C - Additional Advertising Materials.........................C-1
<PAGE>
1. GENERAL
THE TRUST. The Trust is registered with the SEC as an open-end, management
investment company and was organized as a business trust under the laws of the
State of Delaware on August 29, 1995. On January 5, 1996 the Trust succeeded to
the assets and liabilities of Forum Funds, Inc. Forum Funds, Inc. was
incorporated on March 24, 1980 and assumed the name of Forum Funds, Inc. on
March 16, 1987. The Board of Trustees (the "Board") without shareholder
approval, has the authority to issue an unlimited number of shares of beneficial
interest of separate series with no par value per share and create separate
classes of shares within each series (such as Investor and Institutional
Shares). The Trust currently offers shares of 23 series The series of the Trust
are as follows:
Investors Bond Fund Oak Hall Small Cap Contrarian Fund
TaxSaver Bond Fund Austin Global Equity Fund
High Grade Bond Fund Quadra Value Equity Fund
Maine Municipal Bond Fund Quadra Growth Fund
New Hampshire Bond Fund Polaris Global Value Fund
Daily Assets Government Fund Investors Equity Fund
Daily Assets Treasury Obligations Fund Equity Index Fund
Daily Assets Cash Fund Small Company Opportunities Fund
Daily Assets Government Obligations Fund International Equities Fund
Daily Assets Municipal Fund Emerging Markets Fund
Payson Value Fund Investors Growth Fund
Payson Balanced Fund
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. A shareholder in a portfolio is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that portfolio's assets
and, upon redeeming shares, will receive the portion of the portfolio's net
assets represented by the redeemed shares.
As of July 1, 1998, the Officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of the Fund. Also as of that date,
Appendix A identifies all shareholders who own of record 5% or more of the
outstanding shares of any of the Registrant's series.
DEFINITIONS. As used in this Statement of Additional Information, the following
terms shall have the meanings listed:
"Board" means the Board of Trustees of Forum Funds.
"FAdS" means Forum Administrative Services, LLC.
"FAcS" means Forum Accounting Services, LLC.
"FFC" means Forum Financial Corp.
"FFSI" means Forum Financial Services, Inc.
2
<PAGE>
"Adviser" " means Forum Investment Advisors, LLC
"Fund" means Investors Growth Fund, a separate series of Forum Funds.
"Fund Business Day" has the meaning ascribed thereto in the current Prospectus
of the Fund.
"NRSRO" means a nationally recognized statistical rating organization.
"SAI" means this Statement of Additional Information.
"SEC" means the U.S. Securities and Exchange Commission.
"Trust" means Forum Funds, a Delaware business trust.
"U.S. Government Securities" has the meaning ascribed thereto by the current
Prospectus of the Funds.
"1940 Act" means the Investment Company Act of 1940, as amended.
3
<PAGE>
2. INVESTMENT POLICIES
The following information supplements the discussion found under "Investment
Objective and Policies" and "Additional Investment Policies" in the Prospectus.
TEMPORARY DEFENSIVE POSITION
For temporary defensive purposes, to accumulate cash for investments, or to meet
anticipated redemptions, the Fund may invest in (or enter into repurchase
agreements with banks and broker dealers with respect to) short-term debt
securities, including Treasury bills and other U.S. Government securities, and
certificates of deposit and bankers' acceptances of U.S. banks.
ILLIQUID AND RESTRICTED SECURITIES
"Illiquid and Restricted Securities" under "Additional Investment Policies" in
the Prospectus sets forth the circumstances in which the Fund may invest in
"restricted securities". In connection with the Fund's original purchase of
restricted securities it may negotiate rights with the issuer to have such
securities registered for sale at a later time. Further, the registration
expenses of illiquid restricted securities may also be negotiated by the Fund
with the issuer at the time such securities are purchased by the Fund. When
registration is required, however, a considerable period may elapse between the
decision to sell the securities and the time the Fund would be permitted to sell
such securities. A similar delay might be experienced in attempting to sell such
securities pursuant to an exemption from registration. Thus, the Fund may not be
able to obtain as favorable a price as that prevailing at the time of the
decision to sell.
U.S. GOVERNMENT SECURITIES
The Fund may invest in obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities which have remaining maturates not
exceeding one year. Agencies and instrumentalities which issue or guarantee debt
securities and which have been established or sponsored by the U.S. Government
include the Bank for Cooperatives, the Export-Import Bank, the Federal Farm
Credit System, the Federal Home Loan Banks, the Federal Home Loan Mortgage
Corporation, the Federal Intermediate Credit Banks, the Federal Land Banks, the
Federal National Mortgage Association, the Government National Mortgage
Association and the Student Loan Marketing Association. Except for obligations
issued by the U.S. Treasury and the Government National Mortgage Association,
none of the obligations of the other agencies or instrumentalities referred to
above are backed by the full faith and credit of the U.S.
Government.
4
<PAGE>
BANK OBLIGATIONS
The Fund may invest in obligations of U.S. banks (including certificates of
deposit and bankers' acceptances) having total assets at the time of purchase in
excess of $1 billion. Such banks must be members of the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Insurance Corporation.
The Fund also may invest in certificates of deposit issued by foreign banks,
denominated in any major foreign currency. The Fund will invest in instruments
issued by foreign banks which, in the view of its investment adviser and the
Trustees of the Trust, are of credit-worthiness and financial stature in their
respective countries comparable to U.S. banks used by the Fund.
A certificate of deposit is an interest-bearing negotiable certificate issued by
a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities subject to the restrictions stated in
the Prospectus. Under applicable regulatory requirements (which are subject to
change), the loan collateral must (a) on each business day, at least equal the
market value of the loaned securities and (b) must consist of cash, bank letters
of credit, U.S. Government securities, or other cash equivalents in which the
Fund is permitted to invest. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank must be satisfactory to the
Fund. When lending portfolio securities, the Fund receives from the borrower an
amount equal to the interest paid or the dividends declared on the loaned
securities during the term of the loan plus the interest on the collateral
securities (less any finders' or administrative fees the Fund pays in arranging
the loan). A Fund may share the interest it receives on the collateral
securities with the borrower as long as it realizes at least a minimum amount of
interest required by the lending guidelines established by the Board. The Fund
will not lend its portfolio securities to any officer, director, employee or
affiliate of the Fund or the investment adviser to the Fund. The terms of the
Fund's loans must meet certain tests under the Internal Revenue Code and permit
the Fund to reacquire loaned securities on five business days' notice or in time
to vote on any important matter.
SHORT-TERM DEBT SECURITIES
The Fund may invest in commercial paper, that is short-term unsecured promissory
notes issued in bearer form by bank holding companies, corporations and finance
companies. The commercial paper purchased by the Fund for temporary defensive
purposes consists of direct obligations of domestic issuers which, at the time
of investment, are rated "P-1" by Moody's Investors Service, Inc. ("Moody's") or
"A-1" by Standard & Poor's Corporation ("S&P"), or securities which, if not
rated, are issued by companies having an outstanding debt issue currently rated
Aa by Moody's or AAA or AA by S&P. The rating "P-1" is the highest commercial
paper rating assigned by Moody's and the rating "A-1" is the highest commercial
paper ratings assigned by S&P.
REPURCHASE AGREEMENTS
The Fund may invest in securities subject to repurchase agreements with U.S.
banks or broker-dealers maturing in seven days or less. In a typical repurchase
agreement the seller of a security commits itself at the time of the sale to
repurchase that security from the buyer at a mutually agreed-upon time and
price. The repurchase price exceeds the sale price, reflecting an agreed-upon
interest rate effective for the period the buyer owns the security subject to
repurchase. The agreed-upon rate is unrelated to the interest rate on that
security. The Fund's investment adviser will monitor the value of the underlying
security at the time the transaction is entered into and at all times during the
term of the repurchase agreement to insure that the value of the security always
equals or exceeds the repurchase price. In the event of default by the seller
under the repurchase agreement, the Fund may have difficulties in exercising its
rights to the underlying securities and may incur costs and experience time
delays in connection with
5
<PAGE>
the disposition of such securities. To evaluate potential risks, the investment
adviser reviews the credit-worthiness of those banks and dealers with which the
Fund enters into repurchase agreements.
CONVERTIBLE SECURITIES
The Fund may invest in convertible preferred stocks and convertible debt
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. Convertible securities rank
senior to common stocks in a corporation's capital structure and, therefore,
carry less risk than the corporation's common stock. The value of a convertible
security is a function of its "investment value" (its value as if it did not
have a conversion privilege), and its "conversion value" (the security's worth
if it were to be exchanged for the underlying security, at market value,
pursuant to its conversion privilege).
DEPOSITARY RECEIPTS
Investments in securities of foreign issuers may be in the form of sponsored or
unsponsored American Depositary Receipts ("ADRs") or European Depositary
Receipts ("EDRs"), or other similar securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued in the United States by a bank or trust company, evidencing
ownership of the underlying securities. EDRs are typically issued in Europe
under a similar arrangement. Generally, ADRs, in registered form, are designed
for use in the U.S. securities markets and EDRs, in bearer form, are designed
for use in European securities markets. Unsponsored ADRs may be created without
the participation of the foreign issuer. Holders of these ADRs generally bear
all the costs of the ADR facility, whereas foreign issuers typically bear
certain costs in a sponsored ADR. The bank or trust company depository of an
unsponsored ADR may be under no obligation to distribute shareholder
communications received from the foreign issuer or to pass through voting
rights.
FOREIGN SECURITIES
Investment in the securities of foreign issuers may involve risks in addition to
those normally associated with investments in the securities of U.S. issuers.
There may be less publicly available information about foreign issuers than is
available for U.S. issuers, and foreign auditing, accounting and financial
reporting practices may differ from U.S. practices. Foreign securities markets
may be less active than U.S. markets, trading may be thin and consequently
securities prices may be more volatile. The Fund's investment adviser, will, in
general, invest only in securities of companies and governments of countries
which, in its judgment, are both politically and economically stable.
Nevertheless, all foreign investments are subject to risks of foreign political
and economic instability, adverse movements in foreign exchange rates, the
imposition or tightening of exchange controls or other limitations on the
repatriation of foreign capital and changes in foreign governmental attitudes
toward private investment, possibly leading to nationalization, increased
taxation, or confiscation of Fund assets.
WARRANTS AND STOCK RIGHTS
The Fund may invest in warrants, which are options to purchase an equity
security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance). A Fund may not invest more than 5% of its net assets (at
the time of investment) in warrants (other than those that have been acquired in
units or attached to other securities). No more than 2% of the Fund's net assets
(at the time of investment) may be invested in warrants that are not listed on
the New York or American Stock Exchanges. Investments in warrants involve
certain risks, including the possible lack of a liquid market for the resale of
the warrants, potential price fluctuations as a result of speculation or other
factors and failure of the price of the underlying security to reach a level at
which the warrant can be prudently exercised (in which case the warrant may
expire without being exercised, resulting in the loss of the Fund's entire
investment therein). The prices of warrants do not necessarily move parallel to
the prices of the underlying securities. Warrants have no voting rights, receive
no dividends and have no rights with respect to the assets of the issuer.
6
<PAGE>
In addition, the Fund may invest up to 5% of its assets (at the time of
investment) in stock rights. A stock right is an option given to a shareholder
to buy additional shares at a predetermined price during a specified time
period.
3. ADDITIONAL INVESTMENT POLICIES
The investment objective and all investment policies of the Fund that are
designated as fundamental may be changed only with the approval of the holders
of a majority of the outstanding voting securities of the Fund. A majority of
outstanding voting securities means the lesser of (1) 67% of the shares present
or represented at a shareholder meeting at which the holders of more than 50% of
the outstanding shares are present or represented, or (2) more than 50% of
outstanding shares. Unless otherwise indicated, all investment policies are not
fundamental and may be changed by the Board without approval by shareholders of
the Fund. The Fund has adopted the following investment policies in addition to
those described under "Investment Objective and Policies" and "Additional
Investment Policies" in the Prospectus.
(a) DIVERSIFICATION:
The Fund may not, with respect to 75% of its assets, purchase a
security if as a result: (i) more than 5% of its assets would be
invested in the securities of any single issuer or (ii) the Fund would
own more than 10% of the outstanding voting securities of any single
issuer. This restriction does not apply to securities issued by the
U.S. Government, its agencies or instrumentalities.
(b) ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in "illiquid
securities", which are securities that cannot be disposed of within
seven days at their then current value. For purposes of this
limitation, "illiquid securities" includes, except in those
circumstances described below, (i) "restricted securities", which are
securities that cannot be resold to the public without registration
under the Federal securities laws, and (ii) securities of issuers
having a record (together with all predecessors) of less than three
years of continuous operation.
(c) CONCENTRATION
The Fund will not invest 25% or more of the value of its total assets
in any one industry.
(d) UNDERWRITING ACTIVITIES
The Fund will not underwrite securities issued by other persons except
to the extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under U.S.
securities laws.
(e) BORROWING
The Fund may borrow money for temporary or emergency purposes,
including the meeting of redemption requests, but not in excess of 33
1/3% of the value of the Fund's total assets (computed immediately
after the borrowing).
(f) PLEDGING
As a non-fundamental policy, the Fund may not pledge, mortgage,
hypothecate or encumber any of its assets except to secure permitted
borrowings or to secure other permitted transactions.
(g) MARGIN AND SHORT SALES
7
<PAGE>
The Fund may not purchase securities on margin; however, the Fund may
make margin deposits in connection with any Hedging Instruments, which
it may use as permitted by any of its other fundamental policies.
The Fund may not sell securities short.
(h) INVESTING FOR CONTROL
The Fund may not make investments for the purpose of exercising control
or management.
(i) REAL ESTATE
The Fund may not purchase or sell real estate, provided that the Fund
may invest in securities issued by companies which invest in real
estate or interests therein.
(j) LENDING
The Fund will not lend money except in connection with the acquisition
of that portion of publicly-distributed debt securities which the
Fund's investment policies and restrictions permit it to purchase (see
"Investment Objective and Policies" and "Additional Investment
Policies" in the Prospectus); the Fund may also make loans of portfolio
securities (see "Loans of Portfolio Securities") and enter into
repurchase agreements (see "Repurchase Agreements");
(k) SENIOR SECURITIES
The Fund will not issue senior securities except pursuant to Section 18
of the Investment Company Act of 1940 ("1940 Act") and except that the
Fund may borrow money subject to investment limitations specified in
the Fund's Prospectus
(l) PURCHASES AND SALES OF COMMODITIES
The Fund will not invest in commodities or commodity contracts (other
than Hedging Instruments which it may use as permitted by any of its
other fundamental policies, whether or not any such Hedging Instrument
is considered to be a commodity or a commodity contract);
(m) OPTIONS AND FUTURES CONTRACTS
The Fund may not purchase or write puts or calls except as permitted by
any of its other fundamental investment policies.
(n) WARRANTS
The Fund may not invest in warrants, valued at the lower of cost or
market, more than 5% of the value of the Fund's net assets (included
within that amount, but not to exceed 2% of the value of the Fund's net
assets, may be warrants which are not listed on the New York or
American Stock Exchange. Warrants acquired by the Fund in units or
attached to securities may be deemed to be without value).
4. 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.
8
<PAGE>
For the period beginning December 12, 1997 (the commencement of operations) to
March 31, 1998, the Fund's unannualized total return was 8.96%. The total return
figure takes into consideration the applicable maximum sales charge.
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, from time to time, include quotations of its average annual total
return in advertisements or reports to shareholders or prospective investors.
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in the
Fund over periods of 1, 5 and 10 years (up to the life of the Fund), calculated
pursuant to the following formula:
P (1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures will reflect the deduction of Fund expenses (net of certain
reimbursed expenses) on an annual basis, and will assume that all dividends and
distributions are reinvested when paid.
Quotations of total return will reflect only the performance of a hypothetical
investment in the Fund during the particular time period shown. Total return for
the Fund will vary based on changes in market conditions and the level of the
Fund's expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
In connection with communicating total return to current or prospective
investors, the Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services or to other unmanaged
indexes which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments and/or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns may be quoted with or without taking into consideration a
Fund's front-end sales charge; excluding sales charges from a total return
calculation produces a higher return figure. Total returns, yields, and other
performance information may be quoted numerically or in a table, graph, or
similar illustration.
9
<PAGE>
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.
Investors who purchase and redeem shares of the Fund through a customer account
maintained at a Service Organization may be charged one or more of the following
types of fees as agreed upon by the Service Organization and the investor, with
respect to the customer services provided by the Service Organization: account
fees (a fixed amount per month or per year); transaction fees (a fixed amount
per transaction processed); compensating balance requirements (a minimum dollar
amount a customer must maintain in order to obtain the services offered); or
account maintenance fees (a periodic charge based upon a percentage of the
assets in the account or of the dividends paid on these assets). Such fees will
have the effect of reducing the average annual total return of the Fund for
those investors.
OTHER ADVERTISING MATTERS
The Funds may also include various information in their advertisements
including, but not limited to: (1) portfolio holdings and portfolio allocation
as of certain dates, such as portfolio diversification by instrument type, by
instrument, by location of issuer or by maturity; (2) statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds that may be employed by an investor to meet specific financial
goals, such as funding retirement, paying for children's education and
financially supporting aging parents; (3) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of earning interest on principal plus interest that was earned earlier;
interest can be compounded at different intervals, such as annually, quarterly
or daily); (4) information relating to inflation and its effects on the dollar;
for example, after ten years the purchasing power of $25,000 would shrink to
$16,621, $14,968, $13,465 and $12,100, respectively, if the annual rates of
inflation were 4%, 5%, 6% and 7%, respectively; (5) information regarding the
effects of automatic investment and systematic withdrawal plans, including the
principal of dollar cost averaging; (6) background information regarding the
Funds' Adviser and biographical descriptions of the management staff of the
Adviser; (7) summaries of the views of the Adviser with respect to the financial
markets; (8) background information regarding the Trust; (9) the results of a
hypothetical investment in a fund over a given number of years, including the
amount that the investment would be at the end of the period; (10) the effects
of investing in a tax-deferred account, such as an individual retirement account
or Section 401(k) pension plan; and (11) the net asset value, net assets or
number of shareholders of the Funds as of one or more dates.
5. MANAGEMENT
TRUSTEES AND OFFICERS
THE TRUST
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Trustee, Chairman and President (age 55)
President, Forum Financial Group, LLC (mutual fund services company
holding company). Mr. Keffer is a director and/or officer of various
registered investment companies for which the various Forum Financial
Group of Companies provides services.. His address is Two Portland
Square, Portland, Maine 04101.
10
<PAGE>
Costas Azariadis, Trustee (age 55)
Professor of Economics, University of California, Los Angeles, since
July 1992. Prior thereto, Dr. Azariadis was Professor of Economics at
the University of Pennsylvania. His address is Department of
Economics, University of California, Los Angeles, 405 Hilgard Avenue,
Los Angeles, California 90024.
James C. Cheng, Trustee (age 56)
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 54)
Partner at the law firm of Reid and Priest, LLP, since 1995. Prior
thereto, he was a partner at the law firm of Winthrop, Stimson, Putnam
& Roberts from 1989 to 1995 and was a partner at LeBoeuf, Lamb, Leiby
& MacRae, a law firm of which he was a member from 1974 to 1989. His
address is 40 West 57th Street, New York, New York 10019.
Mark D. Kaplan, Vice President (age 42)
Director, Investments, Forum Financial Group, LLC, with which he has
been associated 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.
Stacey Hong, Treasurer (age 32)
Director, Fund Accounting, Forum Financial Group, LLC, with which he
has been associated since April 1992. Prior thereto, Mr. Hong was a
Senior Accountant with Ernst & Young, LLP. His address is Two Portland
Square, Portland, Maine 04101.
Max Berueffy, Secretary (age 46)
Senior Counsel, Forum Financial Group, LLC, 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 also
serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. His address is Two Portland Square, Portland, Maine 04101.
Leslie K. Klenk, Assistant Secretary (age 33)
Assistant Counsel, Forum Financial Group LLC with which she has been
associated since April 1998. Prior thereto, Ms. Klenk was Vice
President and Associate General Counsel of Smith Barney Inc. Ms. Klenk
also serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. Her address is Two Portland Square, Portland, Maine 04101.
Her address is Two Portland Square, Portland, ME 04101.
Pamela Stutch, Assistant Secretary (age 31)
Fund Administrator, Forum Financial Group, LLC with which she has been
associated since May 1998. Prior thereto, Ms. Stutch attended Temple
University School of Law and graduated in 1997. Ms. Stutch was also a
legal intern for the Maine Department of the Attorney General. Ms.
Stutch also serves as an officer of other registered investment
companies for which the various Forum Financial Group of Companies
provides services. Her address is Two Portland Square, Portland, Maine
04101.
11
<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) and is paid $1,000 for each committee
meeting attended on a date when a Board meeting is not held. As of March 31,
1997, in addition to $1,000 for each Board meeting attended, each Trustee
receives $100 per active portfolio of the Trust. To the extent a meeting relates
to only certain portfolios of the Trust, Trustees are paid the $100 fee only
with respect to those portfolios. Trustees are also reimbursed for travel and
related expenses incurred in attending meetings of the Board. No officer of the
Trust is compensated by the Trust.
The following table provides the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1998.
<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 $9,718.64 None None $9,718.64
Mr. Cheng $9,718.64 None None $9,718.64
Mr. Parish $9,718.64 None None $9,718.64
</TABLE>
TRUSTEE COMPENSATION FOR CORE TRUST (DELAWARE)
Each of the Trustees of the Trust is also a Trustee of Core Trust (Delaware), a
registered, open-end management investment company ("Core Trust"). Each Trustee
of Core Trust (other than John Y. Keffer, who is an interested person of Core
Trust) is paid $1,000 for each Core Trust Board meeting attended (whether in
person or by electronic communication) plus $100 per active portfolio of Core
Trust and is paid $1,000 for each committee meeting attended on a date when a
Core Trust Board meeting is not held. To the extent a meeting relates to only
certain portfolios of Core Trust, trustees are paid the $100 fee only with
respect to those portfolios. Core Trust trustees are also reimbursed for travel
and related expenses incurred in attending meetings of the Core Trust Board. For
the fiscal year ended March 31, 1997, each Core Trust trustee received fees
totaling $7,200.
THE ADVISER
Pursuant to an Investment Advisory Agreement with the Trust, Forum Investment
Advisors, LLC ("Adviser") furnishes, at its own expense, all services,
facilities and personnel necessary in connection with managing the Fund's
investments and effecting portfolio transactions. Subject to the general
supervision of the Board, the Adviser is responsible for among other things,
developing a continuing investment program for the Fund in accordance with its
investment objective and reviewing the investments, investment strategies and
policies of the Fund In this regard, it is the responsibility of the Adviser to
make decisions relating to the Fund's investments and to place purchase and sale
orders regarding such investments with brokers or dealers selected by it in its
discretion. The Adviser also furnishes to the Board, which has overall
responsibility for the business and affairs of the Trust, periodic reports on
the investment performance of the Fund. Under the terms of the Investment
Advisory Agreement, the Adviser is required to manage the Fund's investment
portfolio in accordance with applicable laws and regulations. In making its
investment decisions, the Adviser does not use material information that may be
in its possession or in the possession of its affiliates.
The Investment Advisory Agreement provides, with respect to the Fund, for an
initial term of two years from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
approved annually (1) by the Board or by majority vote of shareholders and (2)
by a majority of the Trustees who are not parties to such agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
Investment Advisory Agreement may be terminated, without penalty, by vote of the
Board or by majority vote of the shareholders of the Fund on 30 days' written
notice to the Adviser, or by the Adviser on 90
12
<PAGE>
days' written notice to the Trust and it will terminate automatically if
assigned. The Investment Advisory Agreement also provides that, with respect to
the Fund, the Adviser shall not be liable for any mistake of judgment, or in any
event whatsoever, except for willful misfeasance, bad faith or gross negligence
in the performance of its duties or by reason of reckless disregard of its or
their obligations and duties under the investment advisory agreement.
For services under the Investment Advisory Agreement, the Adviser received a fee
at an annual rate of 0.65% of the average daily net assets of the Fund. The
following table shows the dollar amount of fees payable to the Adviser for
services rendered to the Fund under the Investment Advisory Agreement, the
amount of fee that was waived by the Adviser, if any, and the actual fee
received by the Adviser. The data is for the period of December 12, 1997 (the
date the Fund commenced public operations) through March 31, 1998.
<TABLE>
<S> <C> <C> <C>
Fiscal Year Advisory Fee Payable Advisory Fee Waived Advisory Fee Retained
Year Ended March 31, 1998
$59,250 $0 $59,250
</TABLE>
THE ADMINISTRATOR
Pursuant to an Administration Agreement, Forum Administrative Services, LLC
("FAdS") acts as administrator to the Trust on behalf of the Fund. As
administrator, FAdS provides management and administrative services necessary to
the operation of the Trust (which include, among other responsibilities,
negotiation of contracts and fees with, and monitoring of performance and
billing of, the transfer agent and custodian and arranging for maintenance of
books and records of the Trust) and provides the Trust with general office
facilities. At the request of the Board, FAdS provides persons satisfactory to
the Board to serve as officers of the Trust. Those officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of FAdS, the Adviser or their affiliates.
The Administration Agreement will remain in effect for a period of twelve
months with respect to the Fund and will continue in effect thereafter only if
it is specifically approved at least annually (1) by the Board or by majority
vote of the shareholders and (2) by a majority of the Trustees who are not
parties to the Administration Agreement are not interested persons of any such
party (other than as Trustees of the Trust).The Administration Agreement may be
terminated without penalty with respect to the Fund by the Board or FAdS upon 60
days written notice. The Administration Agreement also provides that FAdS shall
not be liable for any error of judgment or mistake of law or for any act or
omission in the administration or management of the Trust, except for willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its obligations and duties under the
Administration Agreement.
The following table shows the dollar amount of fees payable to FAdS for services
rendered to the Fund under the Administration Agreement, the amount of fee that
was waived by FAdS, if any, and the actual fee received by FAdS. The data is for
the period of December 12, 1997 (the date the Fund commenced public operations)
through March 31, 1998.
<TABLE>
<S> <C> <C> <C>
Fiscal Year Administration Fee Payable Administration Fee Waived Administration Fee Retained
Year Ended March 31, 1998
$18,231 $18,231 $0
</TABLE>
THE DISTRIBUTOR
Pursuant to a Distribution Agreement, Forum Financial Services, Inc. ("FFSI"),
an affiliate of FAdS, is the Trust's distributor and acts as the agent of the
Trust in connection with the offering of shares of the Fund pursuant to a
Distribution Agreement. The Distributor is under no obligation to sell any
specific amount of Fund shares. All subscriptions of shares obtained by FFSI are
directed to the Trust for acceptance and are not binding on the Trust until
accepted.
13
<PAGE>
The Distribution Agreement will continue in effect for twelve months from the
date of its effectiveness and will continue in effect thereafter only if its
continuance is specifically approved at least annually (1) by the Board or by
majority vote of the shareholders and (2) by a majority of the Trustees who are
not parties to the Distribution Agreement are not interested persons of any such
party (other than as Trustees of the Trust).
The Distribution Agreement terminates automatically upon assignment and may be
terminated with respect to the Fund without penalty (1) by the Board or by a
majority vote of outstanding voting securities of the Fund on 60 days' written
notice to FFSI or (2) by FFSI on 60 days' written notice to the Trust. The
Distribution Agreement provides that FFSI shall not be liable for any error of
judgment or mistake of law or in any event whatsoever, except for willful
misfeasance, bad faith or gross negligence in the performance of FFSI's duties
or by reason of reckless disregard of its obligations and duties under the
Distribution Agreement.
FFSI may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of the Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Fund are sold without sales charges or
distribution fees. These financial institutions may otherwise act as processing
agents, and will be responsible for promptly transmitting purchase, redemption
and other requests to the Fund.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition to, or
different from, those listed herein. Information concerning any charges or
services will be provided to customers by the financial institution. Investors
purchasing shares of the Fund in this manner should acquaint themselves with
their institution's procedures and should read this Prospectus in conjunction
with any materials and information provided by their institution. The financial
institution and not its customers will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
For these services, FFSI receives, and may reallow to certain financial
institutions, the sales charge paid by the purchasers of the Fund's shares. For
the fiscal year ended March 31, 1998, no sales charges were paid to FFSI in
connection with purchases of the Fund.
THE TRANSFER AGENT
Pursuant to a Transfer and Services Agency Agreement dated May 19, 1998, Forum
Shareholder Services, LLC ("FSS") acts as transfer agent of the Trust FSS became
the transfer agent effective January 1, 1998 when it succeeded to the transfer
agency business of Forum Financial Corp. (FSS and Forum Financial Corp. ("FFC")
are commonly controlled entities).
The Transfer Agency and Services Agreement provided, 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 either Fund, by a vote of the shareholders of that Fund, and in
either case by a majority of the directors who are not parties to the Transfer
Agency Agreement or interested persons of any such party at a meeting called for
the purpose of voting on the Transfer Agency Agreement. The Transfer Agency and
Services Agreement may also be terminated on 60 days written notice by either
the Board or FSS. The Transfer Agency And Services Agreement also provides that
FSS shall not be liable for any action or inaction taken except for willful
misfeasance, bad faith, and gross negligence in the performance of its duties
under the Transfer Agency and Services Agreement.
Among the responsibilities of FSS 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
14
<PAGE>
shareholder signatures in connection with changes in the registration of
shareholder accounts; (6) furnishing periodic statements and confirmations of
purchases and redemptions; (7) arranging for the transmission of proxy
statements, annual reports, prospectuses and other communications from the Trust
to its shareholders; (8) arranging for the receipt, tabulation and transmission
to the Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
FSS 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. FSS 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 FSS with respect to
assets of those customers or clients invested in the Fund. FSS, FAdS or
sub-transfer agents or processing agents retained by FFC may be Processing
Organizations (as defined in the Prospectus) and, in the case of sub- transfer
agents or processing agents, may also be affiliated persons of FSS or FAdS.
For its services under the Transfer Agency Agreement, FFS receives: (i) a fee at
an annual rate of 0.25 percent of the average daily net assets of the Fund and
(ii) a fee of $12,000 per year; such amounts to be computed and paid monthly in
arrears by the Fund; and (iii) Annual Shareholder Account Fees of $18.00; such
fees to be computed as of the last business day of the prior month.
FSS or any sub-transfer agent or processing agent may also act and receive
compensation for acting as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Fund with
respect to assets invested in the Fund.
For its services, FSS receives with respect to the Fund an annual fee of $12,000
plus $25 per shareholder account. FFC served as the transfer agent for the Trust
pursuant to similar terms and compensation as FSS. The following table shows the
dollar amount of fees payable to FSS and FFC for services rendered to the Fund
under the Transfer Agency and Services Agreement, the amount of fee that was
waived by either FSS or FFC, if any, and the actual fee received by FSS or FFC.
FFC served as the transfer agent of the Trust pursuant to similar terms and
compensation as FSS. The data is for the period of December 12, 1997 (the date
the Fund commenced public operations) through March 31, 1998.
<TABLE>
<S> <C> <C> <C>
Fiscal Year Transfer Agency Fee Payable Transfer Agency Fee Waived Transfer Agency Fee
Retained
Year Ended March 31, 1998
$26,445.00 $22,744.00 $3,701.00
</TABLE>
THE FUND ACCOUNTANT
Pursuant to a Fund Accounting Agreement with the Trust, Forum Accounting
Services, LLC ("FAcS") performs portfolio accounting services for the Fund
pursuant to the Fund Accounting Agreement with the Trust. Under its agreement,
FAcS prepares and maintains books and records prepares and maintains books and
records of the Fund on behalf of the Trust as required under the 1940 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.
The Fund Accounting Agreement will continue in effect for twelve months from the
date of its effectiveness and will continue in effect only if such continuance
is specifically approved at least annually (1) by the Board of Trustees or by a
vote of the shareholders of the Trust and (2)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. The Fund Accounting Agreement may also be terminated on 60 days
written notice by either the Board or FAcS. The Fund Accounting Agreement also
provides that FAcS shall not be liable for any action of inaction taken except
for willful misfeasance, bad faith or gross negligence in the performance of its
duties under the Fund Accounting Agreement.
15
<PAGE>
For its services, FAcS receives from the Trust with respect to the Fund a fee of
$36,000 subject to adjustments for the number and type of portfolio
transactions. The following table shows the dollar amount of fees payable to
FAcS for services rendered to the Fund under the Administration Agreement, the
amount of fee that was waived by FAcS, if any, and the actual fee received by
FAcS. The data is for the period of December 12, 1997 (the date the Fund
commenced public operations) through March 31, 1998.
<TABLE>
<S> <C> <C> <C>
Fiscal Year Accounting Fee Payable Accounting Fee Waived Accounting Fee Retained
Year Ended March 31, 1998
$10,935 $0 $10,935
</TABLE>
6. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of
4:00 p.m., Eastern Time, on each Fund Business Day as defined in the Prospectus,
by dividing the value of the Fund's net assets (I.E., the value of its portfolio
securities and other assets less its liabilities) by the number of that Fund's
shares outstanding at the time the determination is made. Purchases and sales
are effected at the time of the next determination of net asset value following
the receipt of any purchase or redemption order.
Securities owned by the Fund listed on the recognized stock exchanges are valued
at the last reported trade price, prior to the time when the assets are valued,
on the exchange on which the securities are principally traded. Listed
securities traded on recognized stock exchanges where last trade prices are not
available are valued at mid-market prices. Securities traded in over-the-counter
markets, or listed securities for which no trade is reported on the valuation
date, are valued at the most recent reported mid-market price. Other securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith using methods approved by the Board.
Trading in securities on European and Far Eastern Securities exchanges and
over-the-counter markets may not take place on every day that the New York Stock
Exchange is open for trading. Furthermore, trading takes place in various
foreign markets on days on which the Fund's NAV is not calculated. If events
materially affecting the value of foreign securities occur between the time when
their price is determined and the time when net asset value is calculated, such
securities will be valued at fair value as determined in good faith by the
Board.
All assets and liabilities of the Fund denominated in foreign currencies are
converted to U.S. dollars at the mid price of such currencies against U.S.
dollars last quoted by a major bank prior to the time when NAV of the Fund is
calculated.
7. PORTFOLIO TRANSACTIONS
INVESTMENT DECISIONS
Investment decisions for the Fund and for the other investment advisory clients
of the investment advisers are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors in
addition to basic suitability for the particular client involved. Thus, a
particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as is possible, averaged
as to price and allocated between such clients in a manner which in the
investment adviser's opinion is equitable to each and in accordance with the
amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients.
16
<PAGE>
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Fund of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities generally involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by the Fund usually includes
an undisclosed dealer commission or mark-up. In underwritten offerings, the
price paid by the Fund includes a disclosed, fixed commission or discount
retained by the underwriter or dealer. For the fiscal year ended March 31, 1998,
the aggregate brokerage commission paid by the Fund was $9,612. For the fiscal
year ended March 31, 1998, $0.00 or 0.0% of aggregate brokerage commissions paid
was paid to an affiliated broker and 0.0% of the total dollar amount of
transactions involving payment of commissions was effected through an affiliated
broker.
The Investment Advisory Agreement authorizes and directs the investment adviser
to place orders for the purchase and sale of assets with brokers or dealers
selected by the investment advisers in their discretion and to seek "best
execution" of such portfolio transactions. An investment adviser places all such
orders for the purchase and sale of portfolio securities and buys and sells
securities for the Fund through a substantial number of brokers and dealers. In
so doing, the investment adviser uses its best efforts to obtain for the Fund
the most favorable price and execution available. The Fund may, however, pay
higher than the lowest available commission rates when the investment adviser
believes it is reasonable to do so in light of the value of the brokerage and
research services provided by the broker effecting the transaction. In seeking
the most favorable price and execution, the investment adviser, having in mind
the Fund's best interests, considers all factors it deems relevant, including,
by way of illustration, price, the size of the transaction, the nature of the
market for the security, the amount of the commission, the timing of the
transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker-dealers involved and the
quality of service rendered by the broker-dealers in other transactions.
It has for many years been a common practice in the investment advisory business
as conducted in certain countries, including the United States, for advisers of
investment companies and other institutional investors to receive research
services from broker-dealers which execute portfolio transactions for the
clients of such advisers. Consistent with this practice, an investment adviser
may receive research services from broker-dealers with which it places the
Fund's portfolio transactions. These services, which in some cases may also be
purchased for cash, include such items as general economic and security market
reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to the investment adviser in advising various of its
clients (including the Fund), although not all of these services are necessarily
useful and of value in managing the Fund. The investment advisory fee paid by
the Fund is not reduced because the investment adviser and its affiliates
receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"Act"), an investment adviser may cause the Fund to pay a broker-dealer which
provides "brokerage and research services" (as defined in the Act) to it an
amount of disclosed commission for effecting a securities transaction in excess
of the commission which another broker-dealer would have charged for effecting
that transaction.
The annual portfolio turnover rate of the Fund may exceed 50% but will not
ordinarily exceed 100%.
8. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Detailed information pertaining to the purchase of shares of the Fund,
redemption of shares and the determination of the net asset value of Fund shares
is set forth in the Prospectus under "Purchases and Redemptions of Shares".
Shares of the Fund are sold on a continuous basis by the distributor.
17
<PAGE>
Set forth below is an example of the method of computing the offering price of
the Fund's shares. The example assumes a purchase of shares of beneficial
interest aggregating less than $100,000 subject to the schedule of sales charges
set forth in the Prospectus at a price based on the net asset value per share of
the Fund on March 31, 1998.
Net Asset Value Per Share $ 11.35
Sales Charge, 4.00% of offering
price (4.17% of net asset value
per share) $ 0.47
Offering to Public $ 11.82
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse the Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to the Fund's shares as provided in the
Prospectus.
The Trust has filed a formal election with the Securities and Exchange
Commission pursuant to which the Fund will only effect a redemption in portfolio
securities if a shareholder is redeeming more than $250,000 or 1% of the Fund's
total net assets, whichever is less, during any 90-day period.
REDEMPTION IN KIND
In the event that payment for redeemed shares is made wholly or partly in
portfolio securities, brokerage costs may be incurred by the shareholder in
converting the securities to cash. An in kind distribution of portfolio
securities will be less liquid than cash. The shareholder may have difficulty in
finding a buyer for portfolio securities received in payment for redeemed
shares. Portfolio securities may decline in value between the time of receipt by
the shareholder and conversion to cash. A redemption in kind of the Fund's
portfolio securities could result in a less diversified portfolio of investments
for the Fund and could affect adversely the liquidity of the Fund's portfolio.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Fund to exchange their shares
for shares of any other fund of the Trust or shares of certain other portfolios
of investment companies which retain FAdS or its affiliates as investment
adviser or distributor and which participate in the Trust's exchange privilege
program ("Participating Fund"). For Federal income tax purposes, exchange
transactions are treated as sales on which a purchaser will realize a capital
gain or loss depending on whether the value of the shares redeemed is more or
less than his basis in such shares at the time of the transaction.
By use of the exchange privilege, the shareholder authorizes FSS 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 FSS to be genuine.
The records of FSS of such instructions are binding. Proceeds of an exchange
transaction may be invested in another Participating Fund in the name of the
shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares are being acquired. Shares of any
Participating Fund may be redeemed and the proceeds used to purchase, without a
sales charge, shares of any other Participating Fund that are offered without a
sales charge. Shares of any Participating Fund purchased with a sales charge may
be redeemed and the proceeds used to purchase, without a sales charge, shares of
any other Participating Fund otherwise sold with the same sales charge. If the
Participating Fund purchased in the exchange transaction imposes a higher sales
charge than was paid originally on the exchanged shares, the shareholder will be
responsible for the difference between the two sales charges. Shares acquired
through the reinvestment of dividends
18
<PAGE>
and distributions are deemed to have been acquired with a sales charge rate
equal to that paid on the shares on which the dividend or distribution was paid.
The terms of the exchange privilege are subject to change, and the privilege may
be terminated by any of the Participating Funds or the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
9. TAX MATTERS
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a
regulated investment company the Fund intends to distribute to shareholders at
least 90% of its net investment income (which includes, among other items,
dividends, interest and the excess of any net short-term capital gains over net
long-term capital losses), and to meet certain diversification of assets, source
of income, and other requirements of the Code. By so doing, the Fund will not be
subject to Federal income tax on its net investment income and net realized
capital gains (the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders. If the Fund does not meet all of
these Code requirements, it will be taxed as an ordinary corporation, and its
distributions will be taxable to shareholders as ordinary income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a 4% nondeductible excise tax. To
prevent imposition of the excise tax, the Fund must distribute for each calendar
year an amount equal to the sum of (1) at least 98% its ordinary income
(excluding any capital gains or losses) for the calendar year, (2) at least 98%
of the excess of its capital gains over capital losses realized during the
one-year period ending October 31 of such year, and (3) all such ordinary
income and capital gains for previous years that were not distributed during
such years. A distribution will be treated as paid during the calendar year if
it is declared by the Fund in October, November or December of the year with a
record date in such month and paid by the Fund during January of the following
year. Such distributions will be taxable to shareholders in the calendar year in
which the distributions are declared, rather than the calendar year in which the
distributions are received.
In addition to satisfying the distribution requirement, a regulated investment
company must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies and other income
(including but not limited to gain from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies.
Distributions of net investment income (including realized net short-term
capital gain) are taxable to shareholders as ordinary income. It is expected
that a portion of such distributions will be eligible for the dividends received
deduction available to corporations.
Distributions of net capital gain (i.e., the excess of net gain from capital
assets held for more than one year over net loss from capital assets held for
not more than one year) will be treated in the hands of shareholders as
long-term capital gain, regardless of how long a shareholder has held shares in
the Fund. Distributions of net capital gain are not eligible for the dividends
received deduction. A loss realized by a shareholder on the sale of shares of
the Fund with respect to which distributions of net capital gain have been paid
will, to the extent of such distributions, be treated as long-term capital loss
although such shares may have been held by the shareholder for one year or less.
Further, a loss realized on a disposition will be disallowed to the extent the
shares disposed of are replaced (whether by reinvestment of distributions or
otherwise) within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
All distributions are taxable to the shareholder whether reinvested in
additional shares or received in cash. Shareholders receiving distributions in
the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of the
Fund on the reinvestment date. Shareholders will be notified annually as to the
Federal tax status of distributions.
19
<PAGE>
Distributions by the Fund reduce the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, such distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will receive a distribution which will nevertheless
be taxable to them.
Upon redemption or sale of his shares, a shareholder will realize a taxable gain
or loss depending upon his basis in his shares. Such gain or loss generally will
be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. Such gain or loss generally will be long-term or short-term
depending upon the shareholder's holding period for the shares.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all distributions as well as gross proceeds from the redemption of the Fund
shares, except in the case of certain exempt shareholders. All such
distributions and proceeds generally will be subject to withholding of Federal
income tax at a rate of 31% ("backup withholding") in the case of nonexempt
shareholders if (1) the shareholder fails to furnish the Fund with and to
certify the shareholder's correct taxpayer identification number or social
security number, (2) the IRS notifies the Fund that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup withholding. If
the withholding provisions are applicable, any such distributions or proceeds,
whether reinvested in additional shares or taken in cash, will be reduced by the
amount required to be withheld. Any amounts withheld may be credited against the
shareholder's Federal income tax liability. Investors may wish to consult their
tax advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as applicable to
U.S. persons (i.e., U.S. citizens and residents and U.S. domestic corporations,
partnerships, trusts and estates). Distributions by the Fund also may be subject
to state and local taxes, and their treatment under state and local income tax
laws may differ from the Federal income tax treatment. Shareholders should
consult their tax advisors with respect to particular questions of Federal,
state and local taxation. Shareholders who are not U.S. persons should consult
their tax advisors regarding U.S. and foreign tax consequences of ownership of
shares of the Fund including the likelihood that distributions to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower rate under a tax
treaty).
10. OTHER INFORMATION
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, 1200 G Street,
N.W. Washington, D.C. 20005.
20
<PAGE>
CUSTODIAN
Pursuant to a Custodian Agreement, BankBoston, N.A. ,100 Federal Street, Boston,
MA 02106, acts as the custodian of the Fund's assets. The custodian's
responsibilities include safeguarding and controlling the Fund's cash and
securities, determining income and collecting interest on Fund investments.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, act as auditors for the Trust.
FINANCIAL STATEMENTS
The financial statements of Investors Growth Fund for the year ended March 31,
1998, which are included in the Annual Report to Shareholders of the Trust and
delivered along with this Statement of Additional Information, are incorporated
herein by reference.
21
<PAGE>
APPENDIX A
----------
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
---------------------------------------------------
As of July 1, 1998, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned more than 5% of each Fund. Shareholders owning
25% or more of the shares of a Fund or of the Trust as a whole may be deemed to
be controlling persons. By reason of their substantial holdings of shares, these
persons may be able to require the Trust to hold a shareholder meeting to vote
on certain issues and may be able to determine the outcome of any shareholder
vote. As noted, certain of these shareholders are known to the Trust to hold
their shares of record only and have no beneficial interest, including the right
to vote, in the shares.
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
OAK HALL SMALL CAP CONTRARIAN FUND
- ----------------------------------
Maryann Wolf 13.30% 40,946.955
55 Central Park West Apt 12-13
New York NY 10023
Simeon Gold & Heide Gold, Jt. Ten. 9.05% 27,856.149
136 East 76th Street Apt. 10F
New York NY 10021
Jane Levy 5.73% 17,622.969
320 West 87th Street Apt. 3W
New York NY 10024
Bank of Boston, IRA Custodian 5.70% 17,553.097
FBO Maryann Wolf
55 Central Park West Apt. 12-13
New York NY 10023
WR Family Associates 401K Plan Option 5.48% 16,870.661
Attn: Olga M. Dimmini
122 East 42nd Street, Suite 2400 New York, NY 10168-002
A-1
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS GOVERNMENT FUND ------------ -------------
INSTITUTIONAL SHARES
- ---------------------
H M Payson & Co. Custody Account 56.56% 18,033,015.150
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland ME 04112
H M Payson & Co. Trust Account 43.44% 13,850,465.390
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS GOVERNMENT FUND
INSTITUTIONAL SERVICE SHARES
Bank of Boston, IRA Rollover Custodian 16.52% 826,387.330
FBO Merne E. Young Rollover
18751 San Rufino
Irvine, CA 92612
Casa Colina Centers for Rehabilitation 15.90% 795,276.550
Foundation Smith Family Care Fund
Attn: Kristy Hurley
2850 N. Garey Avenue
P.O. Box 6001
Pomona, CA 91769-6001 15.90% 795,276.550
Lansdowne Parking Associates LP 9.99% 499,939.120
c/o Meredith Management
29 Crafts Street #300
Newton, MA 02158
DAILY ASSETS GOVERNMENT FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.920
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS CASH FUND
INSTITUTIONAL SHARES
- --------------------
Allagash & Co. 46.30% 12,236,932.890
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
A-2
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS CASH FUND ------------ -------------
INSTITUTIONAL SHARES CON'T
H M Payson & Co. Custody Account 34.44% 9.101,914.440
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
H M Payson & Co. Trust Account 19.27% 5,092,100.590
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS CASH FUND
INSTITUTIONAL SERVICE SHARES
Cutler Approved List Equity Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Cutler Equity Income Fund 18.12% 951,550.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM All Cap Value Fund 9.45% 496,164.720
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Mid Cap Value Fund 5.70% 299,263.830
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
A-3
<PAGE>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
------------ ------------
DAILY ASSETS CASH FUND
INVESTORS SHARES
Forum Administrative Services, Inc. 100% 101.200
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SHARES
Allagash & Co. 72.89% 11,915,149.240
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Babb & Co. #02-6004105 26.73% 4,368,592.160
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SERVICE SHARES
Dirigo Drywall Assoc. 22.89% 682,716.350
225 Riverside Street
Portland, ME 04103
Cutler Approved List Equity Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc./
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 19.58% 583,950,000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
A-4
<PAGE>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND ------------ ------------
INSTITUTIONAL SERVICE SHARES-CON'T
Cutler Equity Income Fund 9.05% 269,894.440
C/O Forum Financial Services, Inc.
Two Portland Square
CRM All Cap Value Fund 6.23% 185,729.030
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.900
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SHARES
Babb & Co. #02-6004105 46.72% 9,494,221.860
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 25.38% 5,157,680.310
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Imperial Securities Corp. 23.96% 4,868,005.220
Attn: Jack Singer
9920 South La Cieniega Blvd 14th Fl
Inglewood, CA 90301
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SERVICE SHARES
Forum Financing 100% 5.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
A-5
<PAGE>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS MUNICIPAL FUND ------------ ------------
INVESTOR SHARES
Forum Administrative Services, LLC 100% 100.060
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SHARES
Babb & Co. #02-6004105 65.16% 62,106,021.450
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
Allagash & Co. 34.84% 33,201,966.980
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SERVICE
Allagash & Co. 99.10% 1,657,595.720
c/o Bank of New Hampshire
P.O. Box 477
CONCORD, NH 03302-0477
INVESTORS BOND FUND
Firstrust Co. 72.38% 5,714,958.415
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 11.10% 876,782.753
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
A-6
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
FORUM TAXSAVER BOND FUND
First Trust Co. 49.33% 1,717,000.264
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 21.80% 758,668.285
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
Leonore Zusman Ttee 6.03% 209,963.557
Leonore Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Ct.
Englewood OH 45322
Lawrence L. Zusman Ttee 5.41% 188,185.433
Lawrence L. Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Court
Englewood OH 45322
HIGH GRADE BOND FUND
Babb & Co. #02-6004105 99.76% 3.451,019.518
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
NEW HAMPSHIRE BOND FUND
Independence Trust 45.62% 565,735.702
Attn: Linda Feliciano
200 Bedford Street 5th
Manchester, NH 03101
A-7
<PAGE>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
PAYSON BALANCED FUND
ALA & Co. 15.49% 258,329.088
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
Payse & Co. 14.98% 249,788.506
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
PAYSON VALUE FUND
Payse & Co. 21.90% 208,621.301
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
ALA & Co. 18.09% 172,271.808
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
INVESTORS EQUITY FUND
Babb & Co. #02-6004105 94.40% 2,383,117.225
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 5.18% 130,658.987
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
A-8
<PAGE>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
INTERNATIONAL EQUITY FUND
Forum Financing 67.80% 500.000
Forum Financial Group
Two Portland Square
Portland ME 04101
Donaldson, Lufkin & Jenrette Sec Corp. 32.20% 237.417
Mutual Funds Dept. - 5th Floor
PO Box 2052
Jersey City NJ 07303
INVESTORS GROWTH FUND
Firstrust Co. 99.95% 3,013,520.631
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
EQUITY INDEX FUND
Allagash & Co. 99.27% 440,772.554
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
SMALL COMPANY OPPORTUNITIES FUND
Forum Administrative Services, LLC 100% 500.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
EMERGING MARKETS FUND
Forum Financing 65.52% 500.00
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
Donald, Lufkin & Jenrette Securities Corp. 34.48% 263.158
Mutual Funds Dept.-5th Floor
P.O. Box 2052
Jersey City, NJ 07303
A-9
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
QUADRA VALUE EQUITY FUND
Holly Melosi & Arturo R. Melosi TTEE 80.77% 406,724.176
FBO Atrgur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
HMK Enterprises, Inc. 8.41%% 42,337.003
800 South Street
Suite 355
Waltham MA 02154
QUADRA GROWTH FUND
Holly Melosi & Arturo R. Melosi TTEE 77.64% 454,757.022
FBO Arthur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
John E. Rosenthal 12.52 73,322.092
1212 West Street
Carlisle, MA 01741-1428
POLARIS GLOBAL VALUE FUND
David Solomont 11.39% 271,791.712
c/o Utopia Inc.
200 Fifth Avenue
Waltham, MA 02154
DCGT TR 5.35% 127,724.287
FBO Audrey Lewis-REG IRA
10 Rogers Street
Cambridge, MA 02142
</TABLE>
A-10
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APPENDIX B
DESCRIPTION OF SECURITIES RATINGS
1. PREFERRED STOCK
(A) MOODY'S
Moody's rates preferred stock issues as follows:
An issue which is rated aaa is a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue which is rated "aa" is a high-grade preferred stock. This
rating indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rated "a" is an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue which is rated "baa" is a medium-grade preferred stock,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
An issue which is rated "ba" has speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue which is rated "c" can be regarded as having extremely poor
prospects of ever attaining any real investment standing. This is the lowest
rated class of preferred or preference stock.
(B) STANDARD & POOR'S
Standard & Poor's rates preferred stock issues as follows:
"AAA" is the highest rating that is assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
B-1
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An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. While it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
To provide more detailed indications of preferred stock quality, the
ratings from "AA" to "B" may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing
2. CORPORATE BONDS INCLUDING CONVERTIBLE DEBT
(A) MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues,
as follows:
Bonds which are rated Aaa are judged by Moody's to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or maintenance of
other terms of the contract over any long period of time may be small.
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Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1, and B1.
(B) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as
follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas, they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Bonds rated `BB' have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
Bonds rated `B' have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal payments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
Bonds rated `CCC' have currently identifiable vulnerability to default,
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
The `C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued. The rating
`Cl' is reserved for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor
has filed for bankruptcy. Bonds rated `D' are in payment default. The `D' rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such
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payments will made during such grace period. The `D' rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Note: The ratings from AA to CCC may be modified by the addition of a
plus (+) or minus (-) sign to show the relative standing within the rating
category.
3. COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
-- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION ("S&P")
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH IBCA, INC.("FITCH")
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
B-4
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F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
B-5
<PAGE>
APPENDIX C
ADDITIONAL ADVERTISING MATERIALS
TEXT OF FORUM BROCHURE
In connection with its advertisements, a Fund may provide a description of the
Fund's investment adviser and its affiliates, which are service providers to the
Fund. Text which is currently in use is set forth below.
"FORUM FINANCIAL GROUP OF COMPANIES
Forum Financial Group of Companies represent more than a decade of diversified
experience with every aspect of mutual funds. The Forum Family of Funds has
benefited from the informed, sharply focused perspective on mutual funds that
experience makes possible.
The Forum Family of Funds has been created and managed by affiliated companies
of Portland-based Forum Financial Group, among the nation's largest mutual fund
administrators providing clients with a full line of services for every type of
mutual fund.
The Forum Family of Funds is designed to give investment representatives and
investors a broad choice of carefully structured and diversified portfolios,
portfolios that can satisfy a wide variety of immediate as well as long-term
investment goals.
Forum Financial Group has developed its "brand name" family of mutual funds and
has made them available to the investment public and to institutions on both the
national and regional levels.
For more than a decade Forum has had direct experience with mutual funds from a
different perspective, a perspective made possible by Forum's position as a
leading designer and full-service administrator and manager of mutual funds of
all types.
Today Forum Financial Group administers and provides services for over 120
mutual funds for 17 different fund managers, with more than $30 billion in
client assets. Forum has its headquarters in Portland, Maine, and has offices in
Seattle, Bermuda, and Warsaw, Poland. In a joint venture with Bank Handlowy, the
largest and oldest commercial bank in Poland, Forum operates the only
independent transfer agent and mutual fund accounting business in Poland. Forum
directs an off-shore and hedge fund administration business through its Bermuda
office. It employs more than 230 professionals worldwide.
From the beginning, Forum developed a plan of action that was effective with
both start- up funds, and funds that needed restructuring and improved services
in order to live up to their potential. The success of its innovative approach
is evident in Forum's growth rate over the years, a growth rate that has
consistently outstripped that of the mutual fund industry as a whole, as well as
that of the fund service outsource industry.
Forum has worked with both domestic and international mutual fund sponsors,
designing unique mutual fund structures, positioning new funds within the
sponsors' own corporate planning and targeted markets.
Forum's staff of experienced lawyers, many of whom have been associated with the
Securities and Exchange Commission, have been available to work with fund
sponsors to customize fund components and to evaluate the potential of various
fund structures.
Forum has introduced fund sponsors to its unique proprietary Core and Gateway(R)
partnership, helping them to take advantage of this full-service master/feeder
structure.
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Fund sponsors understand that even the most efficiently and creatively designed
fund can disappoint shareholders if it is inadequately serviced. That is the
reason why fund sponsors have relied on Forum to meet all of a fund's complex
compliance, regulatory, and filing needs.
Forum's full service commitment includes providing state-of- the-art accounting
support (Forum has 8 CPAs on staff, as well as senior accountants who have been
associated with Big 6 accounting firms). Forum's proprietary accounting system
is continually upgraded and can provide custom-built modules to satisfy a fund's
specific requirements. This service is joined with transfer agency and
shareholder service groups that draw their strength both from the high caliber
of the people staffing each unit and from Forum's advanced technology support
system.
More than a decade of experience with mutual funds has given Forum practical
hands-on experience and knowledge of how mutual funds function "from the inside
out."
Forum has put that experience to work by creating the Forum Family of Funds, a
family where each member is designed and positioned for your best investment
advantage, and where each fund is serviced with the utmost attention to the
delivery of timely, accurate, and comprehensive shareholder information.
INVESTMENT ADVISERS
Forum Investment Advisors, LLC offers the services of portfolio managers with
the highest qualifications--because without such direction, a comprehensive and
goal-oriented investment program and ongoing investment strategy are not
possible. Serving as portfolio managers for the Forum Family of Funds are
individuals with decades of experience with some of the country's major
financial institutions.
Individual funds in the Forum Family of Funds invest in portfolios that have as
their investment adviser nationally recognized institutions, including Schroder
Capital Management International, Inc., a major figure in worldwide mutual funds
that, with its affiliates, managed over $175 billion as of September 30, 1997.
Forum Funds are also managed by the portfolio managers of H.M. Payson & Co.,
founded in Portland, Maine in 1854 and one of the oldest investment firms in the
country. Payson has approximately $1 billion in assets under management, with
clients that include pension plans, endowment funds, and institutional and
individual accounts.
FORUM INVESTMENT ADVISORS, LLC
Forum Investment Advisors, LLC is the largest Maine based investment adviser
with approximately $1.4 billion in assets under management. The portfolio
managers have decades of combined experience in a cross section of the country's
financial markets. The managers have specific, day-to-day experience in the
asset class portfolios they manage, bringing critical focus to meeting each
fund's explicit investment objectives. The portfolio managers have been involved
in investing the assets of large insurance companies, banks, pension plans,
individuals, and of course mutual funds. Forum Investment Advisors, LLC has a
staff of analysts and investment administrators to meet the demands of serving
shareholders in our funds.
FORUM FAMILY OF FUNDS
It has been said that mutual fund investment offerings--of which there are
nearly 10,000, with assets spread across stock, bond, and money market funds
worth more than $4 trillion--come in a rainbow of varieties. A better
description would be a "spectrum" of varieties, the spectrum graded from green
through amber and on to red. In simpler terms, from low risk investments,
through moderate to high risk. The lower the risk, the lower the possible reward
- -- the higher the risk, the higher the potential reward.
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The Forum Family of Funds provides conservative investment opportunities that
reduce the risk of loss of capital, using underlying money market investments
U.S. Government securities (although the shares of the Forum Funds are neither
insured nor guaranteed by the U.S. Government or its agencies), thus cushioning
the investment against market volatility. These funds offer regular income,
ready access to your money, and flexibility to buy or sell at any time.
In the less conservative but still not aggressive category are funds in the
Forum Family that seek to provide steady income and, in certain cases, tax-free
earnings. Such investments provide important diversification to an investment
portfolio.
Growth funds in the Forum Family more aggressively pursue a high return at the
risk of market volatility. These funds include domestic and international stock
mutual funds."
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PEOPLES HERITAGE NEWS RELEASE
Peoples Heritage Financial Group, Inc. (NASDAQ:PHBK) announced today that it has
formed an alliance with a major mutual fund provider and an investment advisory
firm to expand its mutual fund offerings. The alliance with Forum Financial
Group and H.M. Payson & Company will result in 18 funds, including the unique
Maine Municipal Bond Fund and New Hampshire Bond Fund, being offered through the
branches of Peoples' affiliate banks in Maine, New Hampshire and northern
Massachusetts and the Company's trust and investment subsidiaries
'There is no secret to where financial services are moving, under one roof,"
said William J. Ryan, Chairman, President and Chief Executive Officer of Peoples
Heritage. "One only has to watch the virtually daily announcements of
consolidations in the financial sector to understand that customers are
demanding and receiving 'one-stop' financial services.
"We think we are adding the additional competitive advantage of funds that are
managed and administered close to home."
Eighteen Forum funds will be offered including two Payson funds. The tax-free
Maine and New Hampshire state bond funds are the only two such funds available
and usually invest 80% of total assets in municipal securities. Other funds
being provided by the alliance include money market, fixed income and equity
funds.
Forum Financial, based in Portland, Maine since 1987, administers 146 funds with
more than $36 billion in assets. Forum manages mutual funds for independent
investment advisors such as Payson and for banks. Forum Investment Advisors, LLC
an affiliate, is the largest Maine-based investment advisor with approximately
$1.7 billion in fund assets under management.
"We are providing a great product set to the customers served by Peoples' nearly
200 branches in northern New England," said John Y. Keffer, Forum Financial
president, "The key today is to link a wide variety of investment options with
convergent, easy access for customers. I believe this alliance does just that."
H.M. Payson & Co., founded in 1854, is one of the nation's oldest investment
firms with nearly $1 billion in assets under management and $300 million in
non-managed custodial accounts. The Payson Value Fund and Payson Balanced Fund
are among the 18 offerings.
"I believe we have all the ingredients of a tremendous alliance," said John
Walker, Payson president and managing director. "We have the region's premier
community banking company, a community-based investment advisor, and a local
mutual fund company that operates nationally and specializes in working with
banks. We are poised to provide solid investment performance and service."
Peoples Heritage Financial Group is a $10 billion multi-state bank and financial
services holding company headquartered in Portland, Maine. Its Maine banking
affiliate, Peoples Heritage Bank, has the state's leading deposit market share.
Its New Hampshire banking affiliate, Bank of New Hampshire, has the state's
leading deposit market share. Family Bank, the Company's Massachusetts banking
subsidiary, has the state's tenth largest deposit market share and the leading
market share in many of the northern Massachusetts communities it serves.
Peoples affiliate banks also operate subsidiaries in leasing, trust and
investment services and insurance.
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FORUM FINANCIAL GROUP:
- ---------------------
Headquarters: Two Portland Square, Portland, Maine 04101
President: John Y. Keffer
Offices: Portland, Seattle, Warsaw, Bermuda
*Established in 1986 to administer mutual funds for independent investment
advisors and banks
*Among the nation's largest third-party fund administrators
*Uses proprietary in-house systems and custom programming capabilities
*ADMINISTRATION AND DISTRIBUTION SERVICES: Regulatory, compliance,
expense accounting, budgeting for all funds
*FUND ACCOUNTING SERVICES: Portfolio valuation, accounting, dividend
declaration, and tax advice
*SHAREHOLDER SERVICES: Preparation of statements, distribution support,
inquiries and processing of trades
*CLIENT ASSETS UNDER ADMINISTRATION AND DISTRIBUTION: $36.9 billion
*CLIENT ASSETS PROCESSED BY FUND ACCOUNTING: $47.6 billion
*CLIENT FUNDS UNDER ADMINISTRATION AND DISTRIBUTION: 146 mutual funds with 219
share classes
*INTERNATIONAL VENTURES:
Joint venture with Bank Handlowy in Warsaw, Poland, using Forum's
proprietary transfer agency and distribution systems Off-shore
investment fund administration, using Bermuda as Forum's center of
operations
*FORUM EMPLOYEES: United States -198, Poland - 61, Bermuda - 3
FORUM CONTACTS:
Mark Kaplan, Managing Director and Portfolio Manager, Forum Investment
Advisors, LLC,
(207) 879-1900 X 6123
Tony Santaniello, Director of Marketing, (207) 879-1900 X 6175
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H.M. PAYSON & CO.:
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Headquarters: One Portland Square, Portland, Maine
President and Managing Director: John Walker
Quality investment services and conservative wealth management since 1854
*Assets under Management: $1.5 Billion
*Non-managed Custody Assets: $388 Million
*Client Base: 85% individuals; 15% institutional
*Owned by 12 shareholders; 12 managing directors
*Payson Balanced Fund and Payson Value Fund (administrative and shareholder
services provided by Forum Financial Group)
*Employees: 45
H.M. PAYSON & CO. CONTACT:
Joel Harris, Marketing Coordinator, (207) 772-3761
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THE QUADRA FUNDS
QUADRA VALUE EQUITY FUND
QUADRA GROWTH FUND
INVESTMENT ADVISER, ACCOUNT INFORMATION
AND SHAREHOLDER SERVICES
Quadra Capital Partners, LLC
270 Congress Street
Boston, Massachusetts 02210
800.595.9291
617.426.0900
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
This Statement of Additional Information ("SAI") supplements the Prospectus
dated August 1, 1998, offering shares of Quadra Value Equity Fund and Quadra
Growth Fund (each a "Fund" and collectively the "Funds"). The Funds are each
diversified portfolios of Forum Funds (the "Trust"), a registered open-end,
management investment company. This SAI should be read only in conjunction with
the Prospectus, which you may obtain without charge by contacting the Trust's
Distributor, Forum Financial Services, Inc., Two Portland Square, Portland,
Maine 04101.
TABLE OF CONTENTS
PAGE
1. General.................................3
2. Investment Policies.....................3
3. Additional Investment Policies.........15
4. Performance Data.......................17
5. Management.............................19
6. Determination of Net Asset Value.......24
7. Portfolio Transactions.................24
8. Additional Purchase and................25
Redemption Information..............26
9. Tax Matters............................26
10. Other Information......................28
Appendix A - Control Persons
Principal Holders of Securities................A-1
Appendix B - Description of
Securities Ratings.............................B-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
As used in this SAI, the following terms shall have the meanings listed: (See
below)
"Adviser" shall mean Quadra Capital Partners, LLC. "Advisers" shall mean
Quadra and each of the investment subadvisers that provide investment
advice and portfolio management for one or more of the Funds pursuant to
an investment subadvisory agreement with Quadra Capital Partners, LLC.
<PAGE>
"Board" shall mean the Board of Trustees of the Trust.
"CFTC" shall mean the U.S. Commodities Futures Trading Commission.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Custodian" shall mean First National Bank of Boston, or its successor,
acting in its capacity as custodian of a Fund.
"FFC" shall mean Forum Financial Corp., the Trust's fund accountant.
"Fitch" shall mean Fitch IBCA
"FFSI" shall mean Forum Financial Services, Inc., the distributor of the
Trust's shares.
"FAdS" shall mean Forum Administrative Services, LLC, the Trust's
administrator.
"Fund" shall mean each of the separate portfolios of the Trust to which
this Statement of Additional Information relates as identified on the
cover page.
"Moody's" shall mean Moody's Investors Service, Inc.
"NRSRO" shall mean a nationally recognized statistical rating
organization.
"Quadra" or "Adviser" shall mean Quadra Capital Partners, LLC, the
investment adviser to the Funds.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's Rating Group.
"Subadviser" shall mean each of the investment advisers that provide
investment advice and portfolio management for the Funds pursuant to an
investment subadvisory agreements with Quadra.
"FSS" shall mean Forum Shareholder Services, LLC. acting in its capacity
as transfer and dividend disbursing agent of the a Fund.
"Trust" shall mean Forum Funds, an open-end management investment company
registered under the 1940 Act.
"U.S. Government Securities" shall mean obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
2
<PAGE>
1. GENERAL
The Trust is registered with the SEC as an open-end, management investment
company and was organized as a business trust under the laws of the State of
Delaware on August 29, 1995. On January 5, 1996, the Trust succeeded to the
assets and liabilities of Forum Funds, Inc.. Forum Funds, Inc. was incorporated
on March 24, 1980 and assumed the name of Forum Funds, Inc. on March 16, 1987.
The Trust has an unlimited number of authorized shares of beneficial interest.
The Board, without shareholder approval, has the authority to issues an
unlimited number of shares of beneficial interest of separate series with no par
value per share and to create separate classes of shares within each series
(such as Investor and Institutional Shares). The Trust currently offers shares
of 23 separate series. The series of the Trust are as follows:
Investors Bond Fund Oak Hall Small Cap Contrarian Fund
TaxSaver Bond Fund Austin Global Equity Fund
High Grade Bond Fund Quadra Value Equity Fund
Maine Municipal Bond Fund Quadra Growth Fund
New Hampshire Bond Fund Polaris Global Value Fund
Daily Assets Government Fund Investors Equity Fund
Daily Assets Treasury Obligations Fund Equity Index Fund
Daily Assets Cash Fund Small Company Opportunities Fund
Daily Assets Government Obligations Fund International Equities Fund
Daily Assets Municipal Fund Emerging Markets Fund
Payson Value Fund Investors Growth Fund
Payson Balanced Fund
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. A shareholder in a portfolio is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that portfolio's assets
and, upon redeeming shares, will receive the portion of the portfolio's net
assets represented by the redeemed shares.
From time to time, certain shareholders may own a large percentage of the shares
of a Fund. Accordingly, those shareholders may be able to greatly affect (if not
determine) the outcome of a shareholder vote. As noted, certain of these
shareholders are known to the Trust to hold their shares of record only and have
no beneficial interest, including the right to vote, in the shares.
As of July 1, 1998, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of the Funds. Also as of that date, Appendix A
identifies all shareholders who own of record 5% or more of the outstanding
shares of any of the Registrant's series.
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2. INVESTMENT POLICIES
The following discussion is intended to supplement the disclosure in the
Prospectus concerning each Fund's investments, investment techniques and
strategies and the risks associated therewith. No Fund may make any investment
or employ any investment technique or strategy not referenced in the Prospectus
which relates to that Fund. For example, while the SAI describes "swap"
transactions below, only those Funds whose investment policies, as described in
the Prospectus, allow the Fund to invest in swap transactions may do so.
SECURITY RATINGS INFORMATION
Moody's, S&P and other NRSROs are private services that provide ratings of the
credit quality of debt obligations. A description of the range of ratings
assigned to various types of bonds and other securities by several NRSROs is
included in Appendix B to this SAI. The Funds may use these ratings to determine
whether to purchase, sell or hold a security. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices. If an issue of securities ceases to be rated or if
its rating is reduced after it is purchased by a Fund (neither event requiring
sale of such security by a Fund), the Subadviser of the Fund will determine
whether the Fund should continue to hold the obligation. To the extent that the
ratings given by a NRSRO may change as a result of changes in such organizations
or their rating systems, the Subadviser will attempt to substitute comparable
ratings. Credit ratings attempt to evaluate the safety of principal and interest
payments and do not evaluate the risks of fluctuations in market value. Also,
rating agencies may fail to make timely changes in credit ratings. An issuer's
current financial condition may be better or worse than a rating indicates.
A Fund may purchase unrated securities if its Subadviser determines the security
to be of comparable quality to a rated security that the Fund may purchase.
Unrated securities may not be as actively traded as rated securities. A Fund may
retain securities whose rating has been lowered below the lowest permissible
rating category (or that are unrated and determined by its Subadviser to be of
comparable quality to securities whose rating has been lowered below the lowest
permissible rating category) if the Subadviser determines that retaining such
security is in the best interests of the Fund.
To limit credit risks, the Funds may only invest in securities that are
investment grade (rated in the top four long-term investment grades by an NRSRO
or in the top two short-term investment grades by an NRSRO.) Accordingly, the
lowest permissible long-term investment grades for corporate bonds, including
convertible bonds, are Baa in the case of Moody's and BBB in the case of S&P and
Fitch IBCA ("Fitch") ; the lowest permissible long-term investment grades for
preferred stock are baa in the case of Moody's and BBB in the case of S&P and
Fitch; and the lowest permissible short-term investment grades for short-term
debt, including commercial paper, are Prime-2 (P-2) in the case of Moody's, A-2
in the case of S&P and F-2 in the case of Fitch. All these ratings are generally
considered to be investment grade ratings, although Moody's indicates that
securities with long-term ratings of Baa have speculative characteristics.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment and settlement,
no payment is made for the securities purchased by the purchaser and, thus, no
interest accrues to the purchaser from the transaction. At the time a Fund makes
the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction as a purchase and thereafter reflect
the value each day of such securities in determining its net asset value.
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The use of when-issued transactions and forward commitments enables the Funds to
hedge against anticipated changes in interest rates and prices. For instance, in
periods of rising interest rates and falling bond prices, a Fund might sell
securities which it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, a
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Fund's Subadviser were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward commitment transactions at prices
inferior to the current market values.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Funds enter into when-issued and forward commitment
transactions only with the intention of actually receiving or delivering the
securities, as the case may be. If a Fund, however, chooses to dispose of the
right to acquire a when-issued security prior to its acquisition or to dispose
of its right to deliver or receive against a forward commitment, it can incur a
gain or loss. When-issued securities may include bonds purchased on a "when, as
and if issued" basis under which the issuance of the securities depends upon the
occurrence of a subsequent event. Any significant commitment of a Fund's assets
to the purchase of securities on a "when, as and if issued" basis may increase
the volatility of its net asset value.
Each Fund will establish and maintain with its custodian a separate account with
cash, U.S. Government Securities (as defined in the Prospectus) and other liquid
high-grade debt securities in an amount at least equal to its commitments to
purchase securities on a when-issued or delayed delivery basis.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid. The Board has delegated the function of
making day-to-day determinations of liquidity to the Advisers, pursuant to
guidelines approved by the Board. The Advisers take into account a number of
factors in reaching liquidity decisions, including but not limited to: (1) the
frequency of trades and quotations for the security; (2) the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; (3) the willingness of dealers to undertake to make a market in the
security; and (4) the nature of the marketplace trades, including the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer. A Fund's Subadviser monitors the liquidity of the
securities in the Fund's portfolio and reports periodically on such decisions to
the Board.
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Although no securities investment is without some risk, investment
in convertible securities generally entails less risk than in the issuer's
common stock. However, the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed income security. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to
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fluctuation in value than the underlying stocks since they have fixed income
characteristics and (3) provide the potential for capital appreciation if the
market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by a Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
TEMPORARY DEFENSIVE POSITION.
When a Fund assumes a temporary defensive position it may invest without limit
in (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 have, at the time of investment, total
assets in excess of one billion dollars and that are insured by the Federal
Deposit Insurance Corporation, (3) commercial paper of prime quality rated
Prime-2 or higher by Moody's or A-2 or higher by S&P or, if not rated,
determined by the Fund's Subadviser to be of comparable quality, (4) repurchase
agreements covering any of the securities in which the Fund may invest directly
and (5) money market mutual funds.
The Funds may invest in the securities of other investment companies within the
limits proscribed by the 1940 Act. In addition to the Fund's expenses (including
the various fees), as a shareholder in another investment company, a Fund would
bear its pro rata portion of the other investment company's expenses (including
fees).
FUTURES CONTRACTS AND OPTIONS
Each Fund may in the future seek to hedge against a decline in the value of
securities it owns or an increase in the price of securities which it plans to
purchase through the writing and purchase of exchange-traded and over-the-
counter options and the purchase and sale of futures contracts and options on
those futures contracts. Each Fund may buy or sell stock index futures
contracts, such as contracts on the S&P 500 stock index. In addition, each Fund
may buy or sell futures contracts on Treasury bills, Treasury bonds and other
financial instruments. The Funds may write covered options and buy options on
the futures contracts in which they may invest.
In addition, the Funds may write (sell) covered put and call options and may buy
put and call options on debt securities and bond indices. An option is covered
if, so long as the Fund is obligated under the option, it owns an offsetting
position in the underlying security, currency or futures contract or maintains
cash, U.S. Government Securities or other liquid, assets in a segregated account
with a value at all times sufficient to cover the Fund's obligation under the
option.
The Funds' use of options and futures contracts would subject the Funds to
certain investment risks and transaction costs to which they might not otherwise
be subject. These risks include: (1) dependence on the Subadviser's ability to
predict movements in the prices of individual securities and fluctuations in the
general securities markets; (2)
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imperfect correlation between movements in the prices of options, futures
contracts or related options and movements in the price of the securities hedged
or used for cover; (3) the fact that skills and techniques needed to trade these
instruments are different from those needed to select the other securities in
which the Funds invest; (4) lack of assurance that a liquid secondary market
will exist for any particular instrument at any particular time; and (5) the
possible need to defer closing out of certain options, futures contracts and
related options to avoid adverse tax consequences. Other risks include the
inability of the Fund, as the writer of covered call options, to benefit from
the appreciation of the underlying securities above the exercise price and the
possible loss of the entire premium paid for options purchased by the Fund.
The Funds have no current intention of investing in futures contracts and
options thereon for purposes other than hedging. No Fund may purchase any call
or put option on a futures contract if the premiums associated with all such
options held by the Fund would exceed 5 percent of the Fund's total assets as of
the date the option is purchased. No Fund may sell a put option if the exercise
value of all put options written by the Fund would exceed 50 percent of the
Fund's total assets or sell a call option if the exercise value of all call
options written by the Fund would exceed the value of the Fund's assets. In
addition, the current market value of all open futures positions held by a Fund
will not exceed 50 percent of its total assets.
A Fund will only invest in futures contracts and options after providing notice
to its shareholders and filing a notice of eligibility (if required) and
otherwise complying with the requirements of the Commodity Futures Trading
Commission ("CFTC"). The CFTC's rules provide that the Funds are permitted to
purchase such futures or options contracts only (1) for bona fide hedging
purposes within the meaning of the rules of the CFTC; provided, however, that in
the alternative with respect to each long position in a futures or options
contract entered into by a Fund, the underlying commodity value of such contract
at all times does not exceed the sum of cash, short-term United States debt
obligations or other United States dollar denominated short-term money market
instruments set aside for this purpose by the Fund, accrued profit on the
contract held with a futures commission merchant and cash proceeds from existing
Fund investments due in 30 days; and (2) subject to certain limitations.
HEDGING AND OPTION INCOME STRATEGIES
Each Fund may (1) purchase or sell (write) put and call options on securities to
enhance the Fund's performance and (2) seek to hedge against a decline in the
value of securities owned by it or an increase in the price of securities which
it plans to purchase through the writing and purchase of exchange-traded and
over-the-counter options on individual securities or securities or financial
indices and through the purchase and sale of financial futures contracts and
related options. The Funds currently do no not intend to enter into any such
transactions Whether or not used for hedging purposes, these investments
techniques involve risks that are different in certain respects from the
investment risks associated with the other investments of a Fund. Use of these
instruments is subject to regulation by the SEC, the several options and futures
exchanges upon which options and futures are traded or the CFTC.
No assurance can be given, however, that any hedging or option income strategy
will succeed in achieving its intended result.
Except as otherwise noted in the Prospectus or herein, the Funds will not use
leverage in their option income and hedging strategies. In the case of
transactions entered into as a hedge, a Fund will hold securities, currencies or
other options or futures positions whose values are expected to offset ("cover")
its obligations thereunder. A Fund will not enter into a hedging strategy that
exposes it to an obligation to another party unless it owns either (1) an
offsetting ("covered") position or (2) cash, U.S. Government Securities or other
liquid securities (or other assets as may be permitted by the SEC) with a value
sufficient at all times to cover its potential obligations. When required by
applicable regulatory guidelines, the Funds will set aside cash, U.S. Government
Securities or other liquid securities (or other assets as may be permitted by
the SEC) in a segregated account with its custodian in the prescribed amount.
Any assets used for cover or held in a segregated account cannot be sold or
closed out while the hedging or option income strategy is outstanding, unless
they are replaced with similar assets. As a result, there is a possibility that
the use of cover or segregation involving a large percentage of a Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
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OPTIONS STRATEGIES
A Fund may purchase put and call options written by others and sell put and call
options covering specified individual securities, securities or financial
indices or currencies. A put option (sometimes called a "standby commitment")
gives the buyer of the option, upon payment of a premium, the right to deliver a
specified amount of currency to the writer of the option on or before a fixed
date at a predetermined price. A call option (sometimes called a "reverse
standby commitment") gives the purchaser of the option, upon payment of a
premium, the right to call upon the writer to deliver a specified amount of
currency on or before a fixed date, at a predetermined price. The predetermined
prices may be higher or lower than the market value of the underlying currency.
A Fund may buy or sell both exchange-traded and over-the-counter ("OTC")
options. A Fund will purchase or write an option only if that option is traded
on a recognized U.S. options exchange or if the Subadviser believes that a
liquid secondary market for the option exists. When a Fund purchases an OTC
option, it relies on the dealer from which it has purchased the OTC option to
make or take delivery of the currency underlying the option. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as well
as the loss of the expected benefit of the transaction. OTC options and the
securities underlying these options currently are treated as illiquid securities
by the Funds.
Upon selling an option, a Fund receives a premium from the purchaser of the
option. Upon purchasing an option the Fund pays a premium to the seller of the
option. The amount of premium received or paid by the Fund is based upon certain
factors, including the market price of the underlying securities, index or
currency, the relationship of the exercise price to the market price, the
historical price volatility of the underlying assets, the option period, supply
and demand and interest rates.
Call options may also be purchased as a means of participating in an
anticipated price increase of a security on a more limited risk basis than would
be possible if the security itself were purchased. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; conversely, if the
market price of the underlying security increases above the exercise price and
the Fund either sells or exercises the option, any profit eventually realized
will be reduced by the premium paid. A Fund may similarly purchase put options
in order to hedge against a decline in market value of securities held in its
portfolio. The put enables the Fund to sell the underlying security at the
predetermined exercise price; thus the potential for loss to the Fund is limited
to the option premium paid. If the market price of the underlying security is
lower than the exercise price of the put, any profit the Fund realizes on the
sale of the security would be reduced by the premium paid for the put option
less any amount for which the put may be sold.
A Subadviser may write call options when it believes that the market value of
the underlying security will not rise to a value greater than the exercise price
plus the premium received. Call options may also be written to provide limited
protection against a decrease in the market price of a security, in an amount
equal to the call premium received less any transaction costs.
Each Fund may purchase and write put and call options on equity security indexes
in much the same manner as the options discussed above, except that index
options may serve as a hedge against overall fluctuations in the equity
securities markets (or market sectors) or as a means of participating in an
anticipated price increase in those markets. The effectiveness of hedging
techniques using index options will depend on the extent to which price
movements in the index selected correlate with price movements of the securities
which are being hedged. Index options are settled exclusively in cash.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
A Fund may effectively terminate its right or obligation under an option
contract by entering into a closing transaction. For instance, if the Fund
wished to terminate its potential obligation to sell securities or currencies
under a call option it had written, a call option of the same type would be
purchased by the Fund. Closing
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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 Subadviser's ability
to forecast the direction of price fluctuations in the underlying
securities or currency markets, or in the case of an index option,
fluctuations in the market sector represented by the index.
(2) Options normally have expiration dates of up to nine months. Options
that expire unexercised have no value. Unless an option purchased by a
Fund is exercised or unless a closing transaction is effected with
respect to that position, a loss will be realized in the amount of the
premium paid.
(3) A position in an exchange-listed option may be closed out only on an
exchange which provides a market for identical options. Most
exchange-listed options relate to equity securities. Exchange markets for
options on foreign currencies are relatively new, and the ability to
establish and close out positions on the exchanges is subject to the
maintenance of a liquid secondary market. Closing transactions may be
effected with respect to options traded in the over-the-counter markets
(currently the primary markets for options on foreign currencies) only by
negotiating directly with the other party to the option contract or in a
secondary market for the option if such market exists. There is no
assurance that a liquid secondary market will exist for any particular
option at any specific time. If it is not possible to effect a closing
transaction, a Fund would have to exercise the option which it purchased
in order to realize any profit. The inability to effect a closing
transaction on an option written by a Fund may result in material losses
to the Fund.
(4) A Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
(5) When a Fund enters into an over-the-counter contract with a
counterparty, the Fund will assume the risk that the counterparty will
fail to perform its obligations in which case the Fund could be worse off
than if the contract had not been entered into.
FUTURES STRATEGIES
A futures contract is a bilateral agreement wherein one party agrees to accept,
and the other party agrees to make, delivery of cash, an underlying debt
security or the currency as called for in the contract at a specified future
date and at a specified price. For futures contracts with respect to an index,
delivery is of an amount of cash equal to a specified dollar amount times the
difference between the index value at the time of the contract and the close of
trading of the contract.
A Fund may sell interest rate futures contracts in order to continue to receive
the income from a fixed income security, while endeavoring to avoid part of or
all of a decline in the market value of that security which would accompany an
increase in interest rates.
A Fund may purchase index futures contracts for several reasons: to simulate
full investment in the underlying index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce transactions costs, or to
seek higher investment returns when a futures contract is priced more
attractively than securities in the index.
A Fund may purchase call options on a futures contract as a means of obtaining
temporary exposure to market appreciation at limited risk. This strategy is
analogous to the purchase of a call option on an individual security, in that it
can be used as a temporary substitute for a position in the security itself.
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SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING
No price is paid upon entering into futures contracts; rather, a Fund is
required to deposit (typically with its custodian in a segregated account in the
name of the futures broker) an amount of cash or U.S. Government Securities
generally equal to 5% or less of the contract value. This amount is known as
initial margin. Subsequent payments, called variation margin, to and from the
broker, would be made on a daily basis as the value of the futures position
varies. When writing a call on a futures contract, variation margin must be
deposited in accordance with applicable exchange rules. The initial margin in
futures transactions is in the nature of a performance bond or good-faith
deposit on the contract that is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for a Fund to close a position,
and in the event of adverse price movements, it would have to make daily cash
payments of variation margin. In addition:
(1) Successful use by a Fund of futures contracts and related options
will depend upon the Subadviser's ability to predict movements in the
direction of the overall securities and currency markets, which requires
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the
current level of the underlying instrument but to the anticipated levels
at some point in the future; thus, for example, trading of stock index
futures may not reflect the trading of the securities which are used to
formulate an index or even actual fluctuations in the relevant index
itself.
(2) The price of futures contracts may not correlate perfectly with
movement in the price of the hedged currencies due to price distortions
in the futures market or otherwise. There may be several reasons
unrelated to the value of the underlying currencies which causes this
situation to occur. As a result, a correct forecast of general market
trends may still not result in successful hedging through the use of
futures contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In such event, it may not
be possible to close a position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash
payments of variation margin.
(4) Like other options, options on futures contracts have a limited life.
A Fund will not trade options on futures contracts on any exchange or
board of trade unless and until, in the Subadviser's opinion, the market
for such options has developed sufficiently that the risks in connection
with options on futures transactions are not greater than the risks in
connection with futures transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that
is at risk. Sellers of options on futures contracts, however, must post
an initial margin and are subject to additional margin calls which could
be substantial in the event of adverse price movements.
(6) A Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of
added brokerage commissions.
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FINANCIAL FUTURES CONTRACTS AND OPTIONS
A Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. A Fund
will only invest in futures contracts, options on futures contracts and other
options contracts that are subject to the jurisdiction of the CFTC after filing
a notice of eligibility and otherwise complying with the requirements of Section
4.5 of the rules of the CFTC. Under that section a Fund will not enter into any
futures contract or option on a futures contract if, as a result, the aggregate
initial margins and premiums required to establish such positions would exceed
5% of the Fund's net assets.
3. ADDITIONAL INVESTMENT POLICIES
The investment objective and all investment policies of each Fund that are
designated as fundamental may be changed only with the approval of the holders
of a majority of the outstanding voting securities of each Fund. A majority of
outstanding voting securities means the lesser of (i) 67% of the shares present
or represented at a shareholder meeting at which the holders of more than 50% of
the outstanding shares are present or represented, or (ii) more than 50% of
outstanding shares. Unless otherwise indicated, all investment policies are not
fundamental and may be changed by the Board without approval by shareholders of
the Fund.
The Funds have adopted the following fundamental investment policies which are
in addition to those contained in the Funds' Prospectus and which may not be
changed without shareholder approval. No Fund may:
(1) Borrow money from banks or by entering into reverse repurchase
agreements in excess of 33 1/3% of the value of the Fund's total
assets (computed immediately after the borrowing).
(2) Purchase securities, other than U.S. Government Securities, if,
immediately after each purchase, more than 25% of the Fund's total
assets taken at market value would be invested in securities of
issuers conducting their principal business activity in the same
industry, provided that the Funds may invest, to the extent
permitted by the 1940 Act, all or a portion of its assets in
another diversified, open-end management investment company with
substantially the same investment objective, policies and
restrictions as the Fund.
(3) With respect to 75% of its assets, purchase securities, other
than U.S. Government Securities, of any one issuer, if (a) more
than 5% of the Fund's total assets taken at market value would at
the time of purchase be invested in the securities of that issuer,
or (b) such purchase would at the time of purchase cause the Fund
to hold more than 10% of the outstanding voting securities of that
issuer; however, each Fund may invest all or a portion of its
assets in another diversified, open-end management investment
company with substantially the same investment objective, policies
and restrictions as the Fund.
(4) Act as an underwriter of securities of other issuers, except to
the extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed to be an underwriter for
purposes of the Securities Act of 1933.
(5) Make loans to other persons except for loans of portfolio
securities and except through the use of repurchase agreements and
through the purchase of commercial paper or debt securities which
are otherwise permissible investments.
(6) Purchase or sell real estate or any interest therein, except
that the Fund may invest in securities issued or guaranteed by
corporate or governmental entities secured by real estate or
interests therein, such as mortgage pass-throughs and
collateralized mortgage obligations, or issued by companies that
invest in real estate or interests therein.
(7) Purchase or sell physical commodities or contracts relating to
physical commodities, provided that currencies, currency-related
contracts and contracts on indices will not be deemed to be
physical commodities.
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(8) Issue senior securities except pursuant to Section 18 of the
Investment Company Act of 1940 ("1940 Act ) and except that the
Fund may borrow money subject to investment limitations specified
in the Fund's Prospectus.
(9) Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
Each Fund has adopted the following nonfundamental investment policies that may
be changed by the Board without shareholder approval. No Fund may:
(a) Borrow for purposes other than meeting redemptions in an amount
exceeding 5% of the value of the Fund's total assets or purchase
securities for investment while any borrowing equaling 5% or more
of the Fund's total assets is outstanding.
(b) Pledge, mortgage or hypothecate its assets, except to secure
permitted indebtedness. The deposit in escrow of securities in
connection with the writing of put and call options, collateralized
loans of securities and collateral arrangements with respect to
margin for futures contracts are not deemed to be pledges or
hypothecations for this purpose.
(c) Invest in securities of another registered investment company,
except in connection with a merger, consolidation, acquisition or
reorganization; and except to the extent permitted by the 1940 Act.
(d) Purchase securities on margin, or make short sales of
securities (except for short sales against the box), except for the
use of short-term credit necessary for the clearance of purchases
and sales of portfolio securities, but the Fund may make margin
deposits in connection with permitted transactions in options,
futures contracts and options on futures contracts.
(e) Acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (1) 15% of the
Fund's net assets (taken at current value) would be invested in
repurchase agreements not entitling the holder to payment of
principal within seven days and in securities which are not readily
marketable, including securities that are illiquid by virtue of
restrictions on the sale of such securities to the public without
registration under the Securities Act of 1933 ("Restricted
Securities") or (2) 10% of the Fund's total assets would be
invested in Restricted Securities.
(f) Invest in warrants if (1) more than 5% of the value of the
Fund's net assets will be invested in warrants (valued at the lower
of cost or market) or (2) more than 2% of the value of the Fund's
net assets would be invested in warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange. For
purpose of this limitation, warrants acquired by the Fund in units
or attached to securities are deemed to have no value.
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of the
Fund's assets or purchases and redemptions of shares will not be considered a
violation of the limitation.
5. PERFORMANCE DATA
The Funds may quote performance in various ways. All performance information
supplied by the Funds in advertising is historical and is not intended to
indicate future returns. A Fund's net asset value, yield and total return
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
12
<PAGE>
In performance advertising the Funds may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDC/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). In addition, a Fund may compare any of its performance
information with the performance of recognized stock, bond and other indexes,
including but not limited to the Salomon Brothers Bond Index, the Shearson
Lehman Bond Index, the Standard & Poor's 500 Composite Stock Price Index, the
Dow Jones Industrial Average, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. A Fund may refer in such materials
to mutual fund performance rankings and other data published by Fund Tracking
Companies. Performance advertising may also refer to discussions of a Fund and
comparative mutual fund data and ratings reported in independent periodicals,
such as newspapers and financial magazines.
For the fiscal year ended March 31, 1998, the one year total return for Quadra
Value Equity Fund was 37.47% while total return since inception (unannualized)
for the Quadra Growth Fund was 14.23%. Quadra Value Equity Fund commenced
operations on April 21, 1997 and Quadra Growth Fund commenced operations on
November 4, 1997.
YIELD CALCULATIONS
Yields for a Fund used in advertising are computed by dividing the Fund's
interest income for a given 30-day or one-month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced with
respect to bonds purchased at a premium over their par value by subtracting a
portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
Income calculated for the purpose of determining a Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that a Fund's yield for any given
period is not an indication or representation by the Fund of future yields or
rates of return on the Fund's shares. Also, Processing Organizations may charge
their customers direct fees in connection with an investment in a Fund, which
will have the effect of reducing the Fund's net yield to those shareholders. The
yields of each Fund are not fixed or guaranteed, and an investment in a Fund is
not insured or guaranteed. Accordingly, yield information may not necessarily be
used to compare shares of a Fund with investment alternatives which, like money
market instruments or bank accounts, may provide a fixed rate of interest. Also,
it may not be appropriate to compare a Fund's yield information directly to
similar information regarding investment alternatives which are insured or
guaranteed.
TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. While
average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the performance is not constant over
time but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over a given period
according to the following formula:
13
<PAGE>
n
P(1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments and/or a series of redemptions over any
period of time. 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.
Investors who purchase and redeem shares of a Fund through a customer account
maintained at a Processing Organization may be charged one or more of the
following types of fees as agreed upon by the Processing Organization and the
investor, with respect to the customer services provided by the Processing
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
these assets). Such fees will have the effect of reducing the average annual
total return of the Fund for those investors.
OTHER ADVERTISING MATTERS
The Funds may also include various information in their advertisements
including, but not limited to: (1) portfolio holdings and portfolio allocation
as of certain dates, such as portfolio diversification by instrument type, by
instrument, by location of issuer or by maturity; (2) statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds that may be employed by an investor to meet specific financial
goals, such as funding retirement, paying for children's education and
financially supporting aging parents; (3) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of earning interest on principal plus interest that was earned earlier;
interest can be compounded at different intervals, such as annually, quarterly
or daily); (4) information relating to inflation and its effects on the dollar;
for example, after ten years the purchasing power of $25,000 would shrink to
$16,621, $14,968, $13,465 and $12,100, respectively, if the annual rates of
inflation were 4%, 5%, 6% and 7%, respectively; (5) information regarding the
effects of automatic investment and systematic withdrawal plans, including the
principal of dollar cost averaging; (6) background information regarding the
Funds' Adviser and biographical descriptions of the management staff of the
Adviser; (7) summaries of the views of the Adviser with respect to the financial
markets; (8) background information regarding the Trust; (9) the results of a
hypothetical investment in a fund over a given number of years,
14
<PAGE>
including the amount that the investment would be at the end of the period; (10)
the effects of investing in a tax-deferred account, such as an individual
retirement account or Section 401(k) pension plan; and (11) the net asset value,
net assets or number of shareholders of the Funds as of one or more dates.
5. MANAGEMENT
TRUSTEES AND OFFICERS
THE TRUST
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Trustee, Chairman and President (age 56)
President, Forum Financial Group, LLC, (mutual fund services company
holding company). Mr. Keffer is a director and/or officer of various
registered investment companies for which the various Forum Financial
Group of Companies provides services. His address is Two Portland
Square, Portland, Maine 04101.
Costas Azariadis, Trustee (age 55)
Professor of Economics, University of California, Los Angeles, since
July 1992. Prior thereto, Dr. Azariadis was Professor of Economics at
the University of Pennsylvania. His address is Department of
Economics, University of California, Los Angeles, 405 Hilgard Avenue,
Los Angeles, California 90024.
James C. Cheng, Trustee (age 56)
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 54)
Partner at the law firm of Reid & Priest L.L.P. since 1995. From 1989
to 1995, he was a partner at the law firm of Winthrop, Stimson, Putnam
& Roberts. Prior thereto, he was a partner at LeBoeuf, Lamb, Leiby &
MacRae, a law firm of which he was a member from 1974 to 1989. His
address is 40 West 57th Street, New York, New York 10019.
Mark D. Kaplan, Vice President (age 42)
Director, Investments, Forum Financial Group, LLC, with which he has
been associated 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.
Stacey Hong, Treasurer (age 32)
Director, Fund Accounting, Forum Financial Group, LLC, with which he
has been associated since April 1992. Prior thereto, Mr. Hong was a
Senior Accountant with Ernst & Young, LLP. His address is Two Portland
Square, Portland, Maine 04101.
15
<PAGE>
Max Berueffy, Secretary (age 46)
Senior Counsel, Forum Financial Group, LLC, 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 also
serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provided
services. His address is Two Portland Square, Portland, Maine 04101.
Leslie K. Klenk, Assistant Secretary (age 33)
Assistant Counsel, Forum Financial Group, LLC, with which she has been
associated since April 1998. Prior thereto, Ms. Klenk was Vice
President and Associate General Counsel of Smith Barney Inc. Ms. Klenk
also serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provided
services. Her address is Two Portland Square, Portland, Maine 04101.
Pamela Stutch, Assistant Secretary (age 31)
Fund Administrator, Forum Financial Group, LLC, with which she has
been associated since May 1998. Prior thereto, Ms. Stutch attended
Temple University School of Law and graduated in 1997. Ms. Stutch also
was a legal intern for the Maine Department of the Attorney General.
Ms. Stutch also serves as an officer of other registered investment
companies for which the various Forum Financial Group of Companies
provided services. Her address is Two Portland Square, Portland, Maine
04101.
John Y. Keffer is an interested person of the Trust as that term is defined in
the 1940 Act.
TRUSTEE COMPENSATION
Each Trustee of the Trust (other than John Y. Keffer, who is an interested
person of the Trust) is paid $1,000 for each Board meeting attended (whether in
person or by electronic communication) and is paid $1,000 for each committee
meeting attended on a date when a Board meeting is not held. As of March 31,
1997, in addition to $1,000 for each Board meeting attended, each Trustee
receives $100 per active portfolio of a Trust. To the extent a meeting relates
to only certain portfolios of the Trust, Trustees are paid the $100 fee only
with respect to those portfolios. Trustees are also reimbursed for travel and
related expenses incurred in attending meeting 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, 1998.
<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 $9,718.64 None None $9,718.64
Mr. Cheng $9,718.64 None None $9,718.64
Mr. Parish $9,718.64 None None $9,718.64
</TABLE>
TRUSTEE COMPENSATION FOR CORE TRUST (DELAWARE)
Each of the Trustees of the Trust is also a Trustee of Core Trust (Delaware), a
registered, open-end management investment company ("Core Trust"). Each Trustee
of Core Trust (other than John Y. Keffer, who is an interested person of Core
Trust) is paid $1,000 for each Core Trust Board meeting attended (whether in
person or by electronic communication) plus $100 per active portfolio of Core
Trust and is paid $1,000 for each committee meeting attended on a date when a
Core Trust Board meeting is not held. To the extent a meeting relates to only
16
<PAGE>
certain portfolios of Core Trust, trustees are paid the $100 fee only with
respect to those portfolios. Core Trust trustees are also reimbursed for travel
and related expenses incurred in attending meetings of the Core Trust Board.
THE ADVISERS
Quadra Capital Partners, LLC ("Quadra"), 270 Congress Street, Boston,
Massachusetts 02210, serves as investment adviser to the Funds pursuant to an
investment advisory agreement with the Trust (the "Advisory Agreement"). The
business address of Quadra is 270 Congress Street, Boston, Massachusetts 02210.
As a new entity, Quadra has no previous experience managing an investment
company. The officers of Quadra have significant experience, however, in the
formation and management of trust and investment management entities including
registered investment companies, registered investment advisers, and a
commingled fund of funds.
Ms. Eileen Delasandro is founder and Chief Executive Officer of Quadra. She has
over twenty years of experience in the institutional investment management
industry. Prior to founding Quadra, she was Partner and Chief Operating Officer
at Nicholas-Applegate Capital Management, L.P. Mr. Donald Levi is founder and
Chief Operating Officer of Quadra. He has over thirty years of experience in the
banking and trust industries. Prior founding Quadra, he was founder and Chief
Executive Officer of Western Trust Services. Mr. Howard Stevenson is founder and
Chairman of Quadra. He is also the Sarafin-Rock Professor at Harvard Business
School, were he has taught for over twenty-five years, and was co-chairman of
the Baupost Group, a private registered investment adviser, which he co-founded.
Mr. Philip Hamilton is Senior Voce President at Quadra. Prior to joining Quadra,
he was Senior Researcher in Finance at Harvard Business School. He serves as
compliance officer for the firm.
To assist it in carrying out its responsibility, the Adviser has retained the
Subadvisers to render advisory services and make daily investment decisions for
each Fund pursuant to an investment subadvisory agreements with Quadra (the
"Subadvisory Agreements"). Quadra has retained the following Subadvisers:
CARL DOMINO ASSOCIATES, L.P., ("CDA") founded in 1987 by Mr. Carl Domino, CFA,
who is presently Managing Partner and Senior Portfolio Manager of CDA.
SMITH ASSET MANAGEMENT GROUP, L.P. ("Smith Group"), founded in 1995 by Stephen
S. Smith, CFA, who is the Chief Investment Officer of Smith Group.
The amount of the fees paid by Quadra to each Subadviser may vary from time to
time as a result of periodic negotiations with the Subadviser regarding such
matters as the nature and extent of the services (other than investment
selection and order placement activities) provided by the Subadviser to the
Fund, the increased cost and complexity of providing services to the Fund, the
investment record of the Subadviser in managing the Fund and the nature and
magnitude of the expenses incurred by the Subadviser in managing the Fund's
assets and by the Adviser in overseeing and administering management of the
Fund. However, the contractual fee payable to each Fund by Quadra for investment
advisory services that is set forth in the Prospectus will not vary as a result
of those negotiations.
The Advisers furnish at their own expense all services, facilities and personnel
necessary to perform their duties under the Advisory or Subadvisory Agreements.
The Advisory and Subadvisory Agreements provide, with respect to each Fund, for
an initial term of two years from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or, with respect to each
Fund, by vote of the shareholders of that Fund, and in either case by a majority
of the directors who are not parties to the Advisory Agreement or interested
persons of any such party.
The Advisory and Subadvisory Agreements are terminable without penalty by the
Trust and by the Adviser, respectively, with respect to a Fund on 30 days'
written notice when authorized either by vote of the Fund's shareholders or by a
vote of a majority of the Board, or by the Adviser and the Subadviser,
respectively, on not less than 90 days' written notice, and will automatically
terminate in the event of its assignment. The Agreements also provide that, with
respect to each Fund, the Adviser shall not be liable for any error of judgment
or mistake of law or for any act or omission in the performance of its duties to
the Fund, except for willful misfeasance, bad faith or
17
<PAGE>
gross negligence in the performance of the Adviser's duties or by reason of
reckless disregard of its obligations and duties under the Agreements. In
addition, under the Advisory Agreement, if the Adviser ceases to act as a Fund's
investment advisor, or in the event the Adviser so requests in writing, the
Trust will change a Fund's name so as not to include the word "Quadra." The
Advisory and Subadvisory Agreements provide that the Advisers may render
services to others.
In addition to receiving its advisory fee from the Funds, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in a Fund. In some instances the Adviser may elect to
credit against any investment management fee received from a client who is also
a shareholder in a Fund an amount equal to all or a portion of the fees received
by the Adviser or any affiliate of the Adviser from a Fund with respect to the
client's assets invested in that Fund.
The following table shows the dollar amount of fees payable under the Advisory
and Subadvisory Agreements for the Quadra Value Equity Fund and the Quadra
Growth Fund, the amount of fees that was waived by the Advisers and/or
Subadvisers, if any, and the actual fee received by the Advisers/Subadvisers.
<TABLE>
QUADRA VALUE EQUITY FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31 ADVISORY FEE PAYABLE ADVISORY FEE WAIVED ADVISORY FEE RETAINED
1998 $8,367 $8,367 $0
</TABLE>
18
<PAGE>
<TABLE>
QUADRA GROWTH FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31 ADVISORY FEE PAYABLE ADVISORY FEE WAIVED ADVISORY FEE RETAINED
1998 $5,793 $5,793 $0
</TABLE>
THE ADMINISTRATOR
Pursuant to an Administration Agreement approved by the Trust on June 19, 1997,
Forum Administrative Services, LLC ("FAdS") acts as administrator to the Trust
on behalf of the Funds.. As administrator, FAdS provides management and
administrative services necessary to the operation of the Trust (which include,
among other responsibilities, negotiation of contracts and fees with, and
monitoring of performance and billing of, the transfer agent and custodian and
arranging for maintenance of books and records of the Trust), and provides the
Trust with general office facilities. At the request of the Board, FAdS provides
persons satisfactory to the Board to serve as officers of the Trust. Those
officers, as well as certain other employees and Trustees of the Trust, may be
directors, officers or employees of FAdS or its affiliates. Prior to June 19,
1997, administrative services were provided to the Trust by Forum Financial
Services, Inc. ("FFSI") pursuant to a Management Agreement.
The Administration Agreement will remain in effect, with respect to each Fund,
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 (1) by the Board or by majority vote of shareholders of a Fund
and (2) by a majority of the Trustees who are not parties to the agreement or
interested persons of any such party (other than as Trustees of the Trust). The
Administration Agreement may be terminated with respect to a Fund, without
penalty, by the Board or FAdS on 60 days' written notice. The Administration
Agreement provides that FAdS shall not be liable for any action or inaction
taken in the administration or management of the Trust, except for willful
misfeasance, bad faith or gross negligence in the performance of its duties
under the Administration Agreement.
For administrative services performed on behalf of the Funds, FAdS receives a
fee at an annual rate of 0.10% of the first $50 million of the average daily net
assets of each Fund and 0.05% over $50 million. Prior to June 19, 1997, FSS
served as the administrator for the Trust pursuant to similar terms and
compensation as FFSI. The following table shows the dollar amount of fees
payable, the amount of fees that was waived, if any, and the actual fees
received with respect to the Funds under the Administration and Management
Agreements. The data is for the Funds' initial fiscal year ended March 31, 1998.
19
<PAGE>
<TABLE>
QUADRA VALUE EQUITY FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31 ADMINISTRATION FEE PAYABLE ADMINISTRATION FEE WAIVED ADMINISTRATION FEE RETAINED
1998 $39,889 $39,889 $0
</TABLE>
<TABLE>
QUADRA GROWTH FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31 ADMINISTRATION FEE PAYABLE ADMINISTRATION FEE WAIVED ADMINISTRATION FEE RETAINED
1998 $16,333 $6,333 $10,000
</TABLE>
THE DISTRIBUTOR
Pursuant to a Distribution Agreement, Forum Financial Services, Inc. ("FFSI"),
an affiliate of FAdS, is the Trust's distributor and acts as the agent of the
Trust in connection with the offering of shares of the Fund pursuant to a
Distribution Agreement. All subscriptions for shares obtained by Forum are
directed to the Trust for acceptance and are not binding on the Trust until
accepted by it. Forum receives no compensation or reimbursement of expenses for
the distribution services provided the Funds pursuant to the Distribution
Agreement and is under no obligation to sell any specific amount of Fund shares.
The Distribution Agreement will continue in effect, with respect to each Fund,
for twelve months and will continue in effect thereafter only if its continuance
is specifically approved at least annually by the Board or by majority vote of
the shareholders of a Fund, and in either case, by a majority of the Trustees
who (1) are not parties to the Distribution Agreement and are not interested
persons of any such party (other than as Trustees of the Trust..
The Distribution Agreement terminates automatically if assigned and may be
terminated without penalty by is the Board or by majority vote of the
shareholders of each Fund on 60 days' written to FFSI by FFSI on 60 days'
written notice to the Board. The Distribution Agreement provides that FFSI shall
not be liable for any error of judgment or mistake of law or in any event
whatsoever, except for willful misfeasance, bad faith or gross negligence in the
performance of FFSI's duties or by reason of reckless disregard of its
obligations and duties under the Distribution Agreement.
FFSI may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of a Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Fund are sold without sales charges or
distribution fees. These financial institutions may otherwise act as processing
agents, and will be responsible for promptly transmitting purchase, redemption
and other requests to the Fund.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition to, or
different from, those listed herein. Information concerning any charges or
services will be provided to customers by the financial institution. Investors
purchasing shares of the Fund in this manner should acquaint themselves with
their institution's procedures and should read this Prospectus in conjunction
with any materials and information provided by their institution. The financial
institution and not its customers will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
20
<PAGE>
THE TRANSFER AGENT
Pursuant to a Transfer Agency and Services Agreement with the Trust dated May
19, 1998, Forum Shareholder Services, LLC ("FSS") acts as transfer agent of the
Trust. FSS became the transfer agent effective January 1, 1998 when it succeeded
to the transfer agency business of Forum Financial Corp.
(FSS and Forum Financial Corp. ("FFC")) are commonly controlled entities.
The Transfer Agency Agreement provides, with respect to each Fund, for an
initial term of one year from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided that the
Transfer Agency and Services Agreement is specifically approved at least
annually (1) by the Board or by a majority vote of the shareholders of a Fund,
and in either case by a majority of the directors who are not parties to the
Transfer Agency and Services Agreement or interested persons of any such party..
The Transfer Agency and Services Agreement may also be terminated by the Trust
or the Board on 60 days written notice. The Transfer Agency and Services
Agreement also provides that FSS shall not be liable for any action or inaction
taken except for willful misfeasance, bad faith, and gross negligence in the
performance of its duties under the Transfer Agency and Services Agreement.
Among the responsibilities of FSS as agent for the Trust are: (1) answering
customer inquiries regarding account status and history, the manner in which
purchases and redemptions of shares of the Funds may be effected and certain
other matters pertaining to the Funds; (2) assisting shareholders in initiating
and changing account designations and addresses; (3) providing necessary
personnel and facilities to establish and maintain shareholder accounts and
records, assisting in processing purchase and redemption transactions and
receiving wired funds; (4) transmitting and receiving funds in connection with
customer orders to purchase or redeem shares; (5) verifying shareholder
signatures in connection with changes in the registration of shareholder
accounts; (6) furnishing periodic statements and confirmations of purchases and
redemptions; (7) arranging for the transmission of proxy statements, annual
reports, prospectuses and other communications from the Trust to its
shareholders; (8) arranging for the receipt, tabulation and transmission to the
Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
FSS or any sub-transfer agent or processing agent may also act and receive
compensation as custodian, investment manager, nominee, agent or fiduciary for
its customers or clients who are shareholders of the Funds with respect to
assets invested in the Funds. FSS 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 FSS with
respect to assets of those customers or clients invested in the Funds. FSS,
Forum or sub-transfer agents or processing agents retained by FSS may be
Processing Organizations (as defined in the Prospectus) and, in the case of sub-
transfer agents or processing agents, may also be affiliated persons of FSS or
Forum.
For its services, FSS receives with respect to each Fund an annual fee of
$24,000 per year plus shareholder account fees of $25.00 per retail account and
$125.00 per institutional. Prior to June 19, 1997, FFC served as the transfer
agent for the Trust pursuant to similar terms and compensation as FSS. The
following table shows the dollar amount of fees payable, the amount of fees that
was waived by FSS, if any, and the actual fee received by FSS with respect to
the Funds under the Transfer Agency and Services Agreement.
<TABLE>
QUADRA VALUE EQUITY FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31 TRANSFER AGENCY FEE PAYABLE TRANSFER AGENCY FEE WAIVED TRANSFER AGENCY FEE
RETAINED
1998 $24,310 $0 $24,310
</TABLE>
<TABLE>
QUADRA GROWTH FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31 TRANSFER AGENCY FEE PAYABLE TRANSFER AGENCY FEE WAIVED TRANSFER AGENCY FEE
RETAINED
1998 $9,883 $0 $9,883
</TABLE>
21
<PAGE>
FSS or any sub-transfer agent or processing agent may also act and receive
compensation for acting as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of a Fund with
respect to assets invested in the Fund.
THE FUND ACCOUNTANT
Pursuant to a Fund Accounting Agreement with the Trust dated June 19, 1997,
Forum Accounting Services, LLC ("FAcS"), provides the Funds with portfolio
accounting. Under the Fund Accounting Agreement, FAcS prepares and maintains
books and records of each Fund on behalf of the Trust as required under the 1940
Act, calculates the net asset value per share of each Fund and dividends and
capital gain distributions and prepares periodic reports to shareholders and the
Securities and Exchange Commission. Prior to June 19, 1997, accounting services
were provided to the Trust by FFC.
The Fund Accounting Agreement provides, with respect to each Fund, for an
initial period of one year from the date of its effectiveness and will continue
in effect only if such continuance is specifically approved at least annually by
(1) the Board or by majority vote of the shareholders of a Fund and (2) by a
majority of the Trustees who are not parties to the Fund Accounting Agreement or
interested persons of any such party. The Fund Accounting Agreement may also be
terminated on 60 days written notice by either the Board or FAcS.
For its services, FAcS receives, with respect to each Fund, a fee of $36,000 per
year plus certain surcharges depending upon the amount and type of the Fund's
portfolio transactions and positions. Prior to June 19, 1997, FFSI provided
accounting services to the Trust for a similar fee. The following table shows
the dollar amount of fees payable to FAcS for services rendered to the Funds
under the Fund Accounting Agreement, the amount of fee that was waived by FAcS,
if any, and the actual fee received by FAcS. The data is for the initial fiscal
year of operations ended March 31, 1998 for each Fund.
<TABLE>
QUADRA VALUE EQUITY FUND
<S> <C> <C> <C>
Fiscal Year
Year Ended March 31, Accounting Fee Payable Accounting Fee Waived Accounting Fee Retained
1998 $36,900 $27,900 $9,000
QUADRA GROWTH FUND
Fiscal Year
Year Ended March 31, Accounting Fee Payable Accounting Fee Waived Accounting Fee Retained
1998 $14,700 $5,700 $9,000
</TABLE>
EXPENSES
Under the Advisory Agreement, the Trust has confirmed its obligation to pay all
its expenses subject to the obligation of the Adviser to reimburse the Trust for
its excess expenses as described in the Prospectus. The Trust believes that
currently the most restrictive expense ratio limitation imposed by any state is
2-1/2% of the first $30 million of the Fund's average net assets, 2% of the next
$70 million of its average net assets and 1-1/2% of its average net assets in
excess of $100 million.
22
<PAGE>
The Trust's expenses include: interest charges, taxes, brokerage fees and
commissions; certain insurance premiums; fees, interest charges and expenses of
the Trust's custodian and transfer agent; fees of pricing, interest, dividend,
credit and other reporting services; costs of membership in trade associations;
telecommunications expenses; funds transmission expenses; auditing, legal and
compliance expenses; costs of forming the Trust and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information and shareholder reports and delivering them to
existing shareholders; costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; compensation of the Trust's Trustees;
compensation of the Trust's officers and employees who are not employees of the
Adviser, Forum or their respective affiliates and costs of other personnel
performing services for the Trust; costs of corporate meetings; Securities and
Exchange Commission registration fees and related expenses; expenses associated
with state securities laws; the fees payable under the Advisory Agreement, and
the Administration and Distribution Agreement.
6. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the each Fund as of 4:00
p.m., Eastern Time, on each Fund Business Day as defined in the Prospectus by
dividing the value of the Fund's net assets (i.e., the value of its portfolio
securities and other assets less its liabilities) by the number of that Fund's
shares outstanding at the time the determination is made. Securities owned by a
Fund for which market quotations are readily available are valued at current
market value, or, in their absence, at fair value as determined by the Board.
Purchases and redemptions are effected at the time of the next determination of
net asset value following the receipt in proper form of any purchase or
redemption order.
7. PORTFOLIO TRANSACTIONS
Each Fund will effect purchases and sales through brokers who charge
commissions. Allocations of transactions to brokers and dealers and the
frequency of transactions are determined by the Subadviser to the Fund in its
best judgment and in a manner deemed to be in the best interest of shareholders
of the Fund rather than by any formula. The primary consideration is prompt
execution of orders in an effective manner and at the most favorable price
available to the Fund.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with Fund transactions, the Subadviser 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 Subadviser may also take into account
payments made by brokers effecting transactions for a 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, each Subadviser may give consideration to research and investment
analysis services furnished by brokers or dealers to the Subadviser for its use
and may cause the Fund to pay these brokers a higher amount of commission than
may be charged by other brokers. Such research and analysis is of the types
described in Section 28(e)(3) of the Securities Exchange Act of 1934, as
amended, and is designed to augment the Subadviser's own internal research and
investment strategy capabilities. The Subadviser may use the research and
analysis in connection with services to clients other than the Fund, and the
Subadviser's fee is not reduced by reason of the Subadviser's receipt of the
research services.
Investment decisions for the Funds will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Advisers or their affiliates. If, however, a Fund and other investment
companies or accounts managed by one of the Advisers are contemporaneously
engaged in the purchase or sale of the same security, the transactions may be
averaged as to price and allocated equitably to each account. In some cases,
this policy might adversely affect the price paid or received by a Fund or the
size of the position obtainable for the Fund. In addition, when purchases or
sales of the same security for a Fund and for other investment companies and
accounts managed by one of the Advisers occur contemporaneously, the purchase or
sale
23
<PAGE>
orders may be aggregated in order to obtain any price advantages available to
large denomination purchases or sales.
In the future the Funds, consistent with the policy of obtaining best net
results, may conduct brokerage transactions through the Advisers' affiliates,
affiliates of those persons or Forum. If a Fund anticipates conducting brokerage
transactions through these persons, the Board will adopt procedures in
conformity with applicable rules under the 1940 Act to ensure that all brokerage
commissions paid to these persons are reasonable and fair. For the fiscal year
ended March 31, 1998, the aggregate brokerage commissions incurred by the Quadra
Value Equity Fund and the Quadra Growth Fund were $5,410 and $4,896,
respectively. For fiscal year ended March 31, 1998, $0.00 or 0.00% of aggregate
brokerage commissions was paid to an affiliate of the Advisers.
8. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor. As of
March 31, 1998, the net assets value of the Quadra Value Equity Fund and the
Quadra Growth Fund was $12.80 and $11.42, respectively.
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse a Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to a Fund's shares as provided in the
Prospectus.
The Trust has filed a formal election with the Securities and Exchange
Commission pursuant to which a Fund will only effect a redemption in portfolio
securities if a shareholder is redeeming more than $250,000 or 1% of the Fund's
total net assets, whichever is less, during any 90-day period.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of any other Fund or Investors shares of Daily Assets
Government Fund, a money market fund of Forum Funds (each, a "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 FSS to act upon any
instruction believed by FSS to be genuine of any person representing himself to
either be, or to have the authority to act on behalf of, the shareholder. The
records of FSS of such instructions are binding. Proceeds of an exchange
transaction may be invested in another Participating Fund in the name of the
shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction. Shares of any Participating Fund
may be redeemed and the proceeds used to purchase, without a sales charge,
shares of any other Participating Fund. The terms of the exchange privilege are
subject to change, and the privilege may be terminated by the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
The Funds offer an individual retirement plan (the "IRA") for individuals who
wish to use shares of the Funds as a medium for funding individual retirement
savings. Under the IRA, distributions of net investment income and capital gain
will be automatically reinvested in the IRA established for the investor. The
Funds' custodian furnishes custodial services to the IRAs for a service fee.
Shareholders wishing to use a Fund's IRA should contact FSS for further details
and information.
24
<PAGE>
9. TAX MATTERS
Each Fund intends, for each taxable year, to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code").
Qualification as a regulated investment company under the Code does not involve
governmental supervision of management or investment practices or policies.
Investors should consult their own counsel for a complete understanding of the
requirements the Funds must meet to qualify for such treatment. The information
set forth in the Prospectus and the following discussion relate solely to
Federal income taxes on dividends and distributions by a Fund and assume that
each Fund qualifies as a regulated investment company. Investors should consult
their own counsel for further details and for the application of state and local
tax laws to the investor's particular situation.
The Funds expect to derive a substantial amount of their gross income (exclusive
of capital gain) from dividends. Accordingly, that portion of the Funds'
dividends so derived will qualify for the dividends-received deduction for
corporations to the extent attributable to certain qualifying dividends received
by the Fund from domestic corporations. Capital gain distributions are not
eligible for the dividends received deduction for corporations.
For federal income and excise tax purposes, dividends declared and payable to
shareholders of record as of a date in October, November or December of a given
year but actually paid during the immediately following January will be treated
as if paid by the Fund on December 31 of that calendar year, and will be taxable
to these shareholders for the year declared, and not for the year in which the
shareholders actually receive the dividend.
Under the Code, gains or losses from the disposition of (1) foreign currencies,
(2) debt securities denominated in a foreign currency, (3) certain options on
foreign currencies or (4) certain forward contracts denominated in a foreign
currency, that are attributed to fluctuations in the value of the foreign
currency between the date of acquisition of the asset and the date of its
disposition are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, increase or
decrease the amount of a Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than affecting the
amount of the Fund's net capital gain. Because section 988 losses reduce the
amount of ordinary dividends a Fund will be allowed to distribute for a taxable
year, such losses may result in all or a portion of prior dividend distributions
for such year being recharacterized as a non-taxable return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his or her shares. To the extent that such distributions exceed a
shareholder's basis, each distribution will be treated as a gain from the sale
of shares. Under certain conditions, a Fund may elect to except from section 988
any foreign currency gain or loss realized by a Fund on any regulated futures
contract, option or future contract which would be "marked to market" under
section 1256 of the Code if held on the last day of the taxable year, as
described immediately below.
Certain listed options, regulated futures contracts and foreign exchange
contracts are considered "section 1256 contracts" for Federal income tax
purposes. Section 1256 contracts held by a Fund at the end of each taxable year
will be "marked to market" and treated for Federal income tax purposes as though
sold for fair market value on the last business day of such taxable year. Gain
or loss realized by a Fund on section 1256 contracts generally will be
considered 60% long-term and 40% short-term capital gain or loss. A Fund can
elect to exempt its section 1256 contracts which are part of a "mixed straddle"
from the application of section 1256.
With respect to equity or over-the-counter put and call options, gain or loss
realized by a Fund upon the lapse or sale of such options held by the Fund will
be either long-term or short-term capital gain or loss depending upon the
respective Fund's holding period with respect to such option. However, gain or
loss realized upon the lapse or closing out of such options that are written by
a Fund will be treated as short-term capital gain or loss. In general, if
25
<PAGE>
a Fund exercises an option, or if an option that a Fund has written is
exercised, gain or loss on the option will not be separately recognized but the
premium received or paid will be included in the calculation of gain or loss
upon disposition of the property underlying the option.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by such Fund may constitute a
"straddle" for Federal income tax purposes. A straddle of which at least one,
but not all, the positions are section 1256 contracts may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that (1) loss realized on
disposition of one position of a straddle not be recognized to the extent that a
Fund has unrealized gains with respect to the other position in such straddle;
(2) a Fund's holding period in straddle positions be suspended while the
straddle exists (possibly resulting in gain being treated as short-term capital
gain rather than long-term capital gain); (3) losses recognized with respect to
certain straddle positions which are part of a mixed straddle and which are
non-section 1256 positions be treated as 60% long-term and 40% short-term
capital loss; (4) losses recognized with respect to certain straddle positions
which would otherwise constitute short-term capital losses be treated as long-
term capital losses; and (5) the deduction of interest and carrying charges
attributable to certain straddle positions may be deferred. Various elections
are available to a Fund which may mitigate the effects of the straddle rules,
particularly with respect to mixed straddles. In general, the straddle rules
described above do not apply to any straddles held by a Fund all of the
offsetting positions of which consist of section 1256 contracts.
Pursuant to the Taxpayer Relief Act of 1997, if a Fund has unrealized gain with
respect to a security and enters into a short sale with respect to such
security, the Fund generally will be deemed to have sold the appreciated
security and, thus, will recognize gain for tax purposes.
A Fund's investment in zero coupon securities will be subject to special
provisions of the Code which may cause the Fund to recognize income without
receiving cash necessary to pay dividends or make distributions in amounts
necessary to satisfy the distribution requirements for avoiding federal income
and excise taxes. In order to satisfy those distribution requirements the Fund
may be forced to sell other portfolio securities.
If a Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to United States
federal income taxation on a portion of any "excess distribution" it receives
from the PFIC or any gain it derives from the disposition of such shares, even
if such income is distributed as a taxable dividend by the Fund to its
shareholders. A Fund may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any tax paid
by a Fund as a result of its ownership of shares in a PFIC will not give rise to
any deduction or credit to the Fund or to any shareholder. A PFIC means any
foreign corporation if, for the taxable year involved, either (1) it derives at
least 75% of its gross income from "passive income" (including, but not limited
to, interest, dividends, royalties, rents and annuities), or (2) on average, at
least 50% of the value (or adjusted tax basis, if elected) of the assets held by
the corporation produce "passive income." Under recently enacted legislation, a
Fund could elect for taxable years beginning after 1997 to "mark-to-market"
stock in a PFIC. Under such an election, a Fund would include in income each
year an amount equal to the excess, if any, of the fair market value of the PFIC
stock as of the close of the taxable year over the Fund's adjusted basis in the
PFIC stock. A Fund would be allowed a deduction for the excess, if any, of the
adjusted basis of the PFIC stock over the fair market value of the PFIC stock as
of the close of the taxable year, but only to the extent of any net
mark-to-market gains included by the Fund for prior taxable years. A Fund's
adjusted basis in the PFIC stock would be adjusted to reflect the amounts
included in, or deducted from, income under this election. Amounts included in
income pursuant to this election, as well as gain realized on the sale or other
disposition of the PFIC stock, would be treated as ordinary income. The
deductible portion of any mark-to-market loss, as well as loss realized on the
sale or other disposition of the PFIC stock to the extent that such loss does
not exceed the net mark-to-market gains previously included by a Fund, would be
treated as ordinary loss. A Fund generally would not be subject to the deferred
tax and interest charge provisions discussed above with respect to PFIC stock
for which a mark-to-market election has been made. If a Fund purchases shares in
a PFIC and the Fund does elect to treat the foreign corporation as a "qualified
electing fund" under the Code, the
26
<PAGE>
Fund may be required to include in its income each year a portion of the
ordinary income and net capital gains of the foreign corporation, even if this
income is not distributed to the Fund.
9. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement, BankBoston, 100 Federal Street, Boston, MA
02106, acts as the custodian of the Funds' assets. The custodian's
responsibilities include safeguarding and controlling the Funds' cash and
securities, determining income and collecting interest on Fund investments.
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, 1200 G. Street,
N.W., Washington, DC 20005.
INDEPENDENT ACCOUNTANTS
Wolf & Company, P.C., One International Place, Boston, Massachusetts 02110-9801,
act as independent accountants for the Funds.
27
<PAGE>
FINANCIAL STATEMENTS
The financial statements of the Funds for the fiscal year ended March 31, 1998,
which are included in the Annual Report to Shareholders of the Trust and
delivered along with this Statement of Additional Information, are incorporated
herein by reference.
28
<PAGE>
APPENDIX A
----------
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
---------------------------------------------------
As of July 1, 1998, the officers and Trustees of the Trust as a group owned less
than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned more than 5% of each Fund. Shareholders owning
25% or more of the shares of a Fund or of the Trust as a whole may be deemed to
be controlling persons. By reason of their substantial holdings of shares, these
persons may be able to require the Trust to hold a shareholder meeting to vote
on certain issues and may be able to determine the outcome of any shareholder
vote. As noted, certain of these shareholders are known to the Trust to hold
their shares of record only and have no beneficial interest, including the right
to vote, in the shares.
<TABLE>
<S> <C> <C>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
OAK HALL SMALL CAP CONTRARIAN FUND
Maryann Wolf 13.30% 40,946.955
55 Central Park West Apt 12-13
New York NY 10023
Simeon Gold & Heide Gold, Jt. Ten. 9.05% 27,856.149
136 East 76th Street Apt. 10F
New York NY 10021
Jane Levy 5.73% 17,622.969
320 West 87th Street Apt. 3W
New York NY 10024
Bank of Boston, IRA Custodian 5.70% 17,553.097
FBO Maryann Wolf
55 Central Park West Apt. 12-13
New York NY 10023
WR Family Associates 401K Plan Option 5.48% 16,870.661
Attn: Olga M. Dimmini
122 East 42nd Street, Suite 2400 New York, NY 10168-002
A-1
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS GOVERNMENT FUND ------------ -------------
INSTITUTIONAL SHARES
H M Payson & Co. Custody Account 56.56% 18,033,015.150
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland ME 04112
H M Payson & Co. Trust Account 43.44% 13,850,465.390
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS GOVERNMENT FUND
INSTITUTIONAL SERVICE SHARES
Bank of Boston, IRA Rollover Custodian 16.52% 826,387.330
FBO Merne E. Young Rollover
18751 San Rufino
Irvine, CA 92612
Casa Colina Centers for Rehabilitation 15.90% 795,276.550
Foundation Smith Family Care Fund
Attn: Kristy Hurley
2850 N. Garey Avenue
P.O. Box 6001
Pomona, CA 91769-6001 15.90% 795,276.550
Lansdowne Parking Associates LP 9.99% 499,939.120
c/o Meredith Management
29 Crafts Street #300
Newton, MA 02158
DAILY ASSETS GOVERNMENT FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.920
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS CASH FUND
INSTITUTIONAL SHARES
Allagash & Co. 46.30% 12,236,932.890
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
A-2
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
DAILY ASSETS CASH FUND ------------ -------------
INSTITUTIONAL SHARES CON'T
H M Payson & Co. Custody Account 34.44% 9.101,914.440
FBO Customer Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
H M Payson & Co. Trust Account 19.27% 5,092,100.590
FBO Trust Funds Under Mgmt
P.O. Box 31
Portland, ME 04112
DAILY ASSETS CASH FUND
INSTITUTIONAL SERVICE SHARES
Cutler Approved List Equity Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 18.73% 983,490.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Cutler Equity Income Fund 18.12% 951,550.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM All Cap Value Fund 9.45% 496,164.720
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
CRM Mid Cap Value Fund 5.70% 299,263.830
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
A-3
<PAGE>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
------------ ------------
DAILY ASSETS CASH FUND
INVESTORS SHARES
Forum Administrative Services, Inc. 100% 101.200
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SHARES
Allagash & Co. 72.89% 11,915,149.240
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Babb & Co. #02-6004105 26.73% 4,368,592.160
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INSTITUTIONAL SERVICE SHARES
Dirigo Drywall Assoc. 22.89% 682,716.350
225 Riverside Street
Portland, ME 04103
Cutler Approved List Equity Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
Sound Shore Fund 19.58% 583,950.000
c/o Forum Financial Services, Inc./
Two Portland Square
Portland, ME 04101
CRM Small Cap Value Fund 19.58% 583,950,000
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
A-4
<PAGE>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND ------------ ------------
INSTITUTIONAL SERVICE SHARES-CON'T
Cutler Equity Income Fund 9.05% 269,894.440
C/O Forum Financial Services, Inc.
Two Portland Square
CRM All Cap Value Fund 6.23% 185,729.030
c/o Forum Financial Services, Inc.
Two Portland Square
Portland, ME 04101
DAILY ASSETS GOVERNMENT OBLIGATIONS FUND
INVESTORS SHARES
Forum Administrative Services, LLC 100% 100.900
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SHARES
Babb & Co. #02-6004105 46.72% 9,494,221.860
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 25.38% 5,157,680.310
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Imperial Securities Corp. 23.96% 4,868,005.220
Attn: Jack Singer
9920 South La Cieniega Blvd 14th Fl
Inglewood, CA 90301
DAILY ASSETS MUNICIPAL FUND
INSTITUTIONAL SERVICE SHARES
Forum Financing 100% 5.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
A-5
<PAGE>
PERCENTAGE OF AMOUNT OF
SHARES OWNED SHARES OWNED
DAILY ASSETS MUNICIPAL FUND ------------ ------------
INVESTOR SHARES
Forum Administrative Services, LLC 100% 100.060
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SHARES
Babb & Co. #02-6004105 65.16% 62,106,021.450
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302-0477
Allagash & Co. 34.84% 33,201,966.980
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
DAILY ASSETS TREASURY OBLIGATIONS FUND
INSTITUTIONAL SERVICE
Allagash & Co. 99.10% 1,657,595.720
c/o Bank of New Hampshire
P.O. Box 477
CONCORD, NH 03302-0477
INVESTORS BOND FUND
Firstrust Co. 72.38% 5,714,958.415
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 11.10% 876,782.753
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
A-6
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
FORUM TAXSAVER BOND FUND
First Trust Co. 49.33% 1,717,000.264
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
SEI Trust Company 21.80% 758,668.285
c/o Irwin Union Bank & Trust
Attn: Mutual Funds Administrator
One Freedom Valley Drive
Oaks PA 19456
Leonore Zusman Ttee 6.03% 209,963.557
Leonore Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Ct.
Englewood OH 45322
Lawrence L. Zusman Ttee 5.41% 188,185.433
Lawrence L. Zusman Living Trust U/A/D 2/3/93
6439 Woodacre Court
Englewood OH 45322
HIGH GRADE BOND FUND
Babb & Co. #02-6004105 99.76% 3.451,019.518
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
NEW HAMPSHIRE BOND FUND
Independence Trust 45.62% 565,735.702
Attn: Linda Feliciano
200 Bedford Street 5th
Manchester, NH 03101
A-7
<PAGE>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
PAYSON BALANCED FUND
ALA & Co. 15.49% 258,329.088
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
Payse & Co. 14.98% 249,788.506
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
PAYSON VALUE FUND
Payse & Co. 21.90% 208,621.301
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
ALA & Co. 18.09% 172,271.808
c/o H.M. Payson & Co.
PO Box 31
Portland ME 04112
INVESTORS EQUITY FUND
Babb & Co. #02-6004105 94.40% 2,383,117.225
c/o Bank of New Hampshire
P.O. Box 477
Concord, NH 03302-0477
Allagash & Co. 5.18% 130,658.987
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
A-8
<PAGE>
PERCENTAGE OF SHARES AMOUNT OF SHARES
OF FUND OWNED OF FUND OWNED
------------- -------------
INTERNATIONAL EQUITY FUND
Forum Financing 67.80% 500.000
Forum Financial Group
Two Portland Square
Portland ME 04101
Donaldson, Lufkin & Jenrette Sec Corp. 32.20% 237.417
Mutual Funds Dept. - 5th Floor
PO Box 2052
Jersey City NJ 07303
INVESTORS GROWTH FUND
Firstrust Co. 99.95% 3,013,520.631
National City Bank Trust Dept.
227 Main Street
Evansville IN 47708
EQUITY INDEX FUND
Allagash & Co. 99.27% 440,772.554
c/o Bank of New Hampshire
PO Box 477
Concord NH 03302
SMALL COMPANY OPPORTUNITIES FUND
Forum Administrative Services, LLC 100% 500.000
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
EMERGING MARKETS FUND
Forum Financing 65.52% 500.00
Attn: Corporate Accounting
Two Portland Square
Portland, ME 04101
Donald, Lufkin & Jenrette Securities Corp. 34.48% 263.158
Mutual Funds Dept.-5th Floor
P.O. Box 2052
Jersey City, NJ 07303
A-9
<PAGE>
PERCENTAGE OF AMOUNT OF SHARES
SHARES OWNED OF FUND OWNED
------------ -------------
QUADRA VALUE EQUITY FUND
Holly Melosi & Arturo R. Melosi TTEE 80.77% 406,724.176
FBO Atrgur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
HMK Enterprises, Inc. 8.41%% 42,337.003
800 South Street
Suite 355
Waltham MA 02154
QUADRA GROWTH FUND
Holly Melosi & Arturo R. Melosi TTEE 77.64% 454,757.022
FBO Arthur & Holly Magill Foundation
36 Woodland Way Circle
Greenville, SC 29601
John E. Rosenthal 12.52 73,322.092
1212 West Street
Carlisle, MA 01741-1428
POLARIS GLOBAL VALUE FUND
David Solomont 11.39% 271,791.712
c/o Utopia Inc.
200 Fifth Avenue
Waltham, MA 02154
DCGT TR 5.35% 127,724.287
FBO Audrey Lewis-REG IRA
10 Rogers Street
Cambridge, MA 02142
</TABLE>
A-10
<PAGE>
THE QUADRA FUNDS
APPENDIX B - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE BONDS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
B-1
<PAGE>
STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated CC typically are debt subordinated to senior debt which is assigned
an actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated D are in payment default or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
B-2
<PAGE>
FITCH IBCA, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
2. PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
B-3
<PAGE>
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
B-4
<PAGE>
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
3. SHORT-TERM DEBT (COMMERCIAL PAPER)
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2, both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
--- Leading market positions in well-established industries.
--- High rates of return on funds employed.
--- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
--- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
--- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH IBCA, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
B-5
<PAGE>
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
F-3. Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
B-6