PAYSON VALUE FUND
PAYSON BALANCED FUND
- --------------------------------------------------------------------------------
Investment Advisor: Account Information and
H.M. Payson & Co. Shareholder Servicing:
One Portland Square Forum Financial Corp.
P.O. Box 31 P.O. Box 446
Portland, Maine 04112 Portland, Maine 04112
207-772-3761 207-879-0009
800-456-6710
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1997,
as amended January 21, 1998
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus dated August 1,
1997 offering shares of Payson Value Fund and Payson Balanced Fund (collectively
the "Funds" and individually a "Fund") and should be read only in conjunction
with the Prospectus, a copy of which may be obtained without charge by
contacting the Trust's Distributor, Forum Financial Services, Inc., Two Portland
Square, Portland, Maine 04101.
TABLE OF CONTENTS
PAGE
1. Investment Policies............................ 2
2. Investment Limitations......................... 5
3. Performance Data............................... 7
4. Management..................................... 8
5. Determination of Net Asset Value............... 15
6. Portfolio Transactions......................... 15
7. Additional Purchase and
Redemption Information...................... 16
8. Taxation....................................... 17
9. Other Information.............................. 18
Appendix A - Description of Securities Ratings
Appendix B - Text of Forum Brochure
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. INVESTMENT POLICIES
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") and other nationally recognized statistical rating organizations
("NRSROs") are private services that provide ratings of the credit quality of
debt obligations, including convertible securities. A description of the range
of ratings assigned to bonds and other securities by several NRSROs is included
in Appendix A to this Statement of Additional Information. The Funds may use
these ratings to determine whether to purchase, sell or hold a security.
However, ratings are general and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices. If an issue of securities ceases to be rated or if
its rating is reduced after it has been purchased by a Fund, H.M. Payson & Co.
(the "Advisor"), the Funds' investment advisor, will determine whether the Fund
should continue to hold the obligation. Credit ratings attempt to evaluate the
safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit ratings. An issuer's current financial condition may be better
or worse than a rating indicates.
Each Fund may retain securities whose rating has been lowered below the lowest
permissible rating category (or that are unrated and determined by the Advisor
to be of comparable quality) if the Advisor determines that retaining such
security is in the best interests of the Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but settlements delayed beyond two
months may be negotiated. During the period between a commitment and settlement,
no payment is made for the securities purchased by the purchaser and, thus, no
dividends or interest accrues to the purchaser from the transaction. At the time
a Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, the Fund will record the transaction as a purchase and
thereafter reflect the value each day of such securities in determining its net
asset value.
The use of when-issued transactions and forward commitments enables the Funds to
hedge against anticipated changes in interest rates and prices. For instance, in
periods of rising interest rates and falling bond prices, a Fund might sell
securities which it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, a
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Advisor were to forecast
incorrectly the direction of interest rate movements, the Fund might be required
to complete such when-issued or forward commitment transactions at prices
inferior to the current market values.
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.
2
<PAGE>
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Trust's Board of Trustees ("Board") has the ultimate responsibility for
determining whether specific securities are liquid or illiquid. The Board has
delegated the function of making day-to-day determinations of liquidity to the
Advisor, pursuant to guidelines approved by the Board. The Advisor takes into
account a number of factors in reaching liquidity decisions, including but not
limited to: (1) the frequency of trades and quotations for the security; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; and (4) the nature of the marketplace trades, including
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of the transfer. The Advisor monitors the liquidity of the
securities in each Fund's portfolio and reports periodically on such decisions
to the Board.
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital 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.
3
<PAGE>
TEMPORARY DEFENSIVE POSITION.
When a Fund assumes a temporary defensive position it may invest without limit
in (i) short-term U.S. Government Securities, (ii) certificates of deposit,
bankers' acceptances and interest-bearing savings deposits of commercial banks
doing business in the United States that have, at the time of investment, total
assets in excess of one billion dollars and that are insured by the Federal
Deposit Insurance Corporation, (iii) commercial paper of prime quality rated
Prime-2 or higher by Moody's or A-2 or higher by S&P or, if not rated,
determined by the Advisor to be of comparable quality, (iv) repurchase
agreements covering any of the securities in which the Fund may invest directly
and (v) money market mutual funds.
SECURITIES OF INVESTMENT COMPANIES
The Funds may invest in the securities of other investment companies within the
limits proscribed by the 1940 Act. Under normal circumstances, each Fund intends
to invest less than 5% of the value of its net assets in the securities of other
investment companies. In addition to the Fund's expenses (including the various
fees), as a shareholder in another investment company, a Fund would bear its pro
rata portion of the other investment company's expenses (including fees).
FUTURES CONTRACTS AND OPTIONS
Each Fund may in the future seek to hedge against a decline in the value of
securities it owns or an increase in the price of securities which it plans to
purchase through the writing and purchase of exchange-traded and
over-the-counter options and the purchase and sale of futures contracts and
options on those futures contracts. Payson Value Fund may buy or sell stock
index futures contracts, such as contracts on the S&P 500 stock index, and
Payson Balanced Fund may buy and sell bond index futures contracts. In addition,
both Funds may buy or sell futures contracts on Treasury bills, Treasury bonds
and other financial instruments. The Funds may write covered options and buy
options on the futures contracts in which they may invest.
In addition, the Funds may write (sell) covered put and call options and may buy
put and call options on debt securities and bond indices. An option is covered
if, so long as the Fund is obligated under the option, it owns an offsetting
position in the underlying security, currency or futures contract or maintains
cash, U.S. Government Securities or other liquid, assets in a segregated account
with a value at all times sufficient to cover the Fund's obligation under the
option.
The Funds' use of options and futures contracts would subject the Funds to
certain investment risks and transaction costs to which they might not otherwise
be subject. These risks include: (1) dependence on the Advisor's ability to
predict movements in the prices of individual securities and fluctuations in the
general securities markets; (2) imperfect correlation between movements in the
prices of options, futures contracts or related options and movements in the
price of the securities hedged or used for cover; (3) the fact that skills and
techniques needed to trade these instruments are different from those needed to
select the other securities in which the Funds invest; (4) lack of assurance
that a liquid secondary market will exist for any particular instrument at any
particular time; and (5) the possible need to defer closing out of certain
options, futures contracts and related options to avoid adverse tax
consequences. Other risks include the inability of the Fund, as the writer of
covered call options, to benefit from the appreciation of the underlying
securities above the exercise price and the possible loss of the entire premium
paid for options purchased by the Fund.
Neither Fund will hedge more than 30% of its total assets by selling futures
contracts, buying put options and writing call options. In addition, neither
Fund will buy futures contracts or write put options whose underlying value
exceeds 10% of the Fund's total assets and will not purchase call options if the
value of purchased call options would exceed 5% of the Fund's total assets. A
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.
4
<PAGE>
A Fund will only invest in futures and options contracts after providing notice
to its shareholders and filing a notice of eligibility (if required) and
otherwise complying with the requirements of the Commodity Futures Trading
Commission ("CFTC"). The CFTC's rules provide that the Funds are permitted to
purchase such futures or options contracts only (1) for bona fide hedging
purposes within the meaning of the rules of the CFTC; provided, however, that in
the alternative with respect to each long position in a futures or options
contract entered into by a Fund, the underlying commodity value of such contract
at all times does not exceed the sum of cash, short-term United States debt
obligations or other United States dollar denominated short-term money market
instruments set aside for this purpose by the Fund, accrued profit on the
contract held with a futures commission merchant and cash proceeds from existing
Fund investments due in 30 days; and (2) subject to certain other limitations.
2. INVESTMENT LIMITATIONS
The Funds have adopted the following fundamental investment limitations which
are in addition to those contained in the Funds' Prospectus and which may not be
changed without shareholder approval. Neither Fund may:
(1) Borrow money, except for temporary or emergency purposes
(including the meeting of redemption requests) and except for
entering into reverse repurchase agreements, and provided that
borrowings do not exceed 33 1/3% of the Fund's total assets
(computed immediately after the borrowing).
(2) Purchase securities, other than U.S. Government Securities,
if, immediately after each purchase, more than 25% of the
Fund's total assets taken at market value would be invested in
securities of issuers conducting their principal business
activity in the same industry.
(3) With respect to 75% of its assets, purchase securities, other
than U.S. Government Securities, of any one issuer, if (a)
more than 5% of the Fund's total assets taken at market value
would at the time of purchase be invested in the securities of
that issuer, or (b) such purchase would at the time of
purchase cause the Fund to hold more than 10% of the
outstanding voting securities of that issuer.
(4) Act as an underwriter of securities of other issuers, except
to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(5) Make loans to other persons except for loans of portfolio
securities and except through the use of repurchase agreements
and through the purchase of commercial paper or debt
securities which are otherwise permissible investments.
(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:
5
<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) Invest in securities (other than fully-collateralized debt
obligations) issued by companies that have conducted continuous
operations for less than three years, including the operations of
predecessors, unless guaranteed as to principal and interest by
an issuer in whose securities the Fund could invest, if as a
result, more than 5% of the value of the Fund's total assets
would be so invested.
(e) Invest in or hold securities of any issuer if officers and
Trustees of the Trust or the Advisor, individually owning
beneficially more than 1/2 of 1% of the securities of the issuer,
in the aggregate own more than 5% of the issuer's securities.
(f) Purchase securities for investment while any borrowing equaling
10% or more of the Fund's total assets is outstanding or borrow
for purposes other than meeting redemptions in an amount
exceeding 10% of the value of the Fund's total assets.
(g) Acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15% of
the Fund's net assets (taken at current value) would be invested
in repurchase agreements not entitling the holder to payment of
principal within seven days and in securities which are not
readily marketable, including securities that are illiquid by
virtue of restrictions on the sale of such securities to the
public without registration under the Securities Act of 1933
("Restricted Securities") or (ii) 10% of the Fund's total assets
would be invested in Restricted Securities.
(h) Invest in oil, gas or other mineral exploration or development
programs, or leases, provided that the Fund may invest in
securities issued by companies engaged in such activities.
(i) Purchase or sell real property (including limited partnership
interests but excluding readily marketable interests in real
estate investment trusts or readily marketable securities of
companies which invest in real estate.)
(j) Invest in warrants if (i) more than 5% of the value of the Fund's
net assets will be invested in warrants (valued at the lower of
cost or market) or (ii) more than 2% of the value of the Fund's
net assets would be invested in warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange. For
purpose of this limitation, warrants acquired by the Fund in
units or attached to securities are deemed to have no value.
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of the
Fund's assets or purchases and redemptions of shares will not be considered a
violation of the limitation.
6
<PAGE>
3. PERFORMANCE DATA
The Funds may quote performance in various ways. All performance information
supplied by the Funds in advertising is historical and is not intended to
indicate future returns. A Fund's net asset value, yield and total return
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
Total return information for the Funds as of March 31,1997, is set forth in the
following table:
<TABLE>
<S> <C> <C> <C>
Total Return 1 Total Return Total Return Since
Year 5 Year Inception*
---- ------ ----------
PAYSON VALUE FUND 13.01% N/A 14.77%
PAYSON BALANCED FUND 9.42% 11.69% 11.52%
</TABLE>
*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.
7
<PAGE>
TOTAL RETURN CALCULATIONS
Each of the Funds may advertise total return. Total returns quoted in
advertising reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
Fund's net asset value per share over the period. Average annual returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. While
average annual returns are a convenient means of comparing investment
alternatives, investors should realize that the performance is not constant over
time but changes from year to year, and that average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over a given period
according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value.
ERV is the value, at the end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gain and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return.
The other definitions are the same as in
average annual total return above.
4. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 54)
8
<PAGE>
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), Forum Financial Corp. (a registered transfer agent) and
Forum Advisors, Inc. (a registered investment adviser). Mr. Keffer is a
Trustee and/or officer of various registered investment companies for which
Forum Administrative Services, LLC serves as manager or administrator and
for which Forum Financial Services, Inc. serves as distributor. His address
is Two Portland Square, Portland, Maine 04101.
Costas Azariadis, Trustee (age 53)
Professor of Economics, University of California, Los Angeles, since July
1992. Prior thereto, Dr. Azariadis was Professor of Economics at the
University of Pennsylvania. His address is Department of Economics,
University of California, Los Angeles, 405 Hilgard Avenue, Los Angeles,
California 90024.
James C. Cheng, Trustee (age 54)
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President and
Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is 27 Temple Street, Belmont,
Massachusetts 02178.
J. Michael Parish, Trustee (age 53)
Partner at the law firm of 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 Wall Street,
New York, New York 10005.
Mark D. Kaplan, Vice President, Assistant Treasurer and Assistant Secretary (age
41)
Managing Director at Forum Financial Services, Inc. since September 1995.
Prior thereto, Mr. Kaplan was Managing Director and Director of Research at
H.M. Payson & Co. His address is Two Portland Square, Portland, Maine
04101.
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also Secretary or Assistant
Secretary of various registered investment companies for which Forum
Administrative Services, LLC or Forum Financial Services, Inc. serves as
manager, administrator and/or distributor. His address is Two Portland
Square, Portland, Maine 04101.
Max Berueffy, Assistant Secretary (age 44)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1994. Prior thereto, Mr. Berueffy was on the staff of the U.S.
Securities and Exchange Commission for seven years, first in the
9
<PAGE>
appellate branch of the Office of the General Counsel, then as a counsel to
Commissioner Grundfest and finally as a senior special counsel in the
Division of Investment Management. Mr. Berueffy is also Secretary or
Assistant Secretary of various registered investment companies for which
Forum Administrative Services, LLC or Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. His address is Two Portland
Square, Portland, Maine 04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has been
associated since July 1996. Prior thereto, Ms. Tumlin was on the staff of
the U.S. Securities and Exchange Commission as an attorney in the Division
of Market Regulation and prior thereto Ms. Tumlin was an associate with the
law firm of Robinson Silverman Pearce Aronsohn & Berman in New York, New
York. Ms. Tumlin is also Assistant Secretary of various registered
investment companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. Her address is Two Portland Square, Portland, Maine 04101.
M. Paige Turney, Assistant Secretary (age 28).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Turney was employed from 1992 as a Senior Fund
Accountant with First Data Corporation in Boston, Massachusetts. Ms. Turney
is also Assistant Secretary of various registered investment companies for
which Forum Administrative Services, LLC or Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. Prior thereto she was
a student at Montana State University Her address is Two Portland Square,
Portland, Maine 04101.
TRUSTEE COMPENSATION. Each Trustee of the Trust (other than John Y. Keffer, who
is an interested person of the Trust) is paid $1,000 for each Board meeting
attended (whether in person or by electronic communication) and is paid $1,000
for each committee meeting attended on a date when a Board meeting is not held.
As of March 31, 1997, in addition to $1,000 for each Board meeting attended,
each Trustee receives $100 per active portfolio of the Trust. To the extent a
meeting relates to only certain portfolios of the Trust, Trustees are paid the
$100 fee only with respect to those portfolios. Trustees are also reimbursed for
travel and related expenses incurred in attending meetings of the Board. No
officer of the Trust is compensated by the Trust.
The following table provides the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
<TABLE>
<S> <C> <C> <C> <C> <C>
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $4,000 None None $4,000
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
</TABLE>
10
<PAGE>
ADVISOR
Pursuant to an Investment Advisory Agreement with the Trust (the "Advisory
Agreement"), the Advisor furnishes at its own expense all services, facilities
and personnel necessary in connection with managing each Fund's investments and
effecting portfolio transactions for each Fund, pursuant to an investment
advisory agreement between the Advisor and the Trust (the "Advisory Agreement").
The Advisory Agreement provides, with respect to each Fund, for an initial term
of two years from its effective date and for its continuance in effect for
successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or, with respect to either
Fund, by vote of the shareholders of that Fund, and in either case by a majority
of the Trustees who are not parties to the Advisory Agreement or interested
persons of any such party.
The Advisory Agreement is terminable without penalty by the Trust with respect
to a Fund on 60 days' written notice when authorized either by vote of the
Fund's shareholders or by a vote of a majority of the Board, or by the Advisor
on not more than 60 days' nor less than 30 days' written notice, and will
automatically terminate in the event of its assignment. The Advisory Agreement
also provides that, with respect to each Fund, the Advisor shall not be liable
for any error of judgment or mistake of law or for any act or omission in the
performance of its duties to the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of the Advisor's duties or by reason of
reckless disregard of its obligations and duties under the Advisory Agreement.
In addition, under the Advisory Agreement, if the Advisor ceases to act as a
Fund's investment advisor, or in the event the Advisor so requests in writing,
the Trust will change a Fund's name so as not to include the word "Payson." The
Advisory Agreement provides that the Advisor may render services to others.
For its services under the Investment Advisory Agreement, H.M. Payson & Co.
receives with respect to each Fund a fee at an annual rate of 0.80% and 0.60% of
the average daily net assets of Payson Value Fund and Payson Balanced Fund,
respectively. Fees payable under the Advisory Agreement with respect to each
Fund are outlined in the following tables:
<TABLE>
PAYSON VALUE FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $92,360 $0 $92,360
1996 $71,662 $0 $71,662
1995 $51,285 $0 $51,285
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $107,243 $0 $107,243
1996 $95,588 $0 $95,588
1995 $75,058 $0 $75,058
</TABLE>
In addition to receiving its advisory fee from the Funds, the Advisor may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in a Fund. In some instances the Advisor may elect to
credit against any investment management fee received from a client who is also
a shareholder in a Fund an amount equal to all or a portion of the fees received
by the Advisor or any affiliate of the Advisor from a Fund with respect to the
client's assets invested in that Fund.
ADMINISTRATOR
11
<PAGE>
Pursuant to an Administration Agreement approved by the Board of Trustees on
June 19, 1997, Forum Administrative Services, LLC ("FAS") supervises the overall
management of the Trust (which includes, among other responsibilities,
negotiation of contracts and fees with, and monitoring of performance and
billing of, the transfer agent, fund accountant and custodian and arranging for
maintenance of books and records of the Trust). FAS also provides persons
satisfactory to the Board to serve as officers of the Trust. Those officers, as
well as certain other employees and Trustees of the Trust, may be directors,
officers or employees of (and persons providing services to the Trust may
include) FAS, the Advisor or their respective affiliates. In addition, under the
Agreement, FAS is directly responsible for managing the Trust's regulatory and
legal compliance and overseeing the preparation of its registration statement.
Prior to June 19, 1997, administrative services were provided to the Fund
pursuant to a Management and Distribution Agreement between the Trust and FFSI.
For its services under the Management and Distribution Agreement, FFSI received
with respect to each Fund a fee at an annual rate of 0.20% of the average daily
net assets of the Fund. Fees payable under the Management and Distribution
Agreement with respect to each Fund are set forth in the following tables:
<TABLE>
PAYSON VALUE FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $23,090 $23,090 $0
1996 $17,916 $17,916 $0
1995 $12,821 $12,821 $0
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $35,748 $35,748 $0
1996 $31,863 $31,863 $0
1995 $25,019 $25,019 $0
</TABLE>
Subject to the obligations of FAS to reimburse the Trust for its excess expenses
as described in the Prospectus, the Trust has confirmed its obligation to pay
all of its other expenses, including: interest charges, taxes, brokerage fees
and commissions; certain insurance premiums; fees, interest charges and expenses
of the custodian, transfer agent and dividend disbursing agent;
telecommunications expenses; auditing, legal and compliance expenses; costs of
forming the corporation and maintaining corporate existence; costs of preparing
and printing the Trust's prospectuses, statements of additional information,
account application forms and shareholder reports and delivering them to
existing and prospective shareholders; costs of maintaining books of original
entry for portfolio and fund accounting and other required books and accounts
and of calculating the net asset value of shares of the Trust; costs of
reproduction, stationery and supplies; compensation of directors, officers and
employees of the Trust and costs of other personnel performing services for the
Trust who are not officers of the Advisor, FAS or their respective affiliates;
costs of corporate meetings; SEC registration fees and related expenses; costs
incurred pursuant to state securities laws; fees payable to the Advisor under
the Advisory Agreement and to FAS under the Administration and all other fees
and expenses paid by the Trust under the Distribution Plan.
DISTRIBUTION
FFSI acts as distributor of the Fund's shares pursuant to a Distribution
Agreement with the Trust approved by the Board of Trustees on June 19, 1997 (the
"Distribution Agreement"). The Distribution Agreement will remain in effect for
a period of twelve months from the date of its effectiveness and will continue
in effect thereafter only if its continuance is specifically approved at least
annually by the Board of Trustees or by the shareholders and, in either
12
<PAGE>
case, by a majority of the Trustees who are not parties to the agreement or
interested persons of any such party and do not have any direct or indirect
financial interest in the Distribution Agreement.
The Distribution Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party to the agreement on 60 days' written notice to
the Trust. The Distribution Agreement also provides that FFSI shall not be
liable for any error of judgment or mistake of law or for any act or omission in
the administration or management of the Trust, except for willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the Distribution
Agreement.
Pursuant to the Distribution Agreement, FFSI receives, and may reallow to
certain financial institutions, the sales charge paid by the purchasers of each
Fund's shares.
DISTRIBUTION PLAN
In accordance with Rule 12b-1 under the 1940 Act, the Trust adopted a
distribution plan (the "Plan") which provides that all written agreements
relating to the Plan must be in a form satisfactory to the Board. In addition,
the Plan requires the Trust, the Advisor and FFSI to prepare, at least
quarterly, written reports setting forth all amounts expended for distribution
purposes by the Trust, the Advisor and FFSI pursuant to the Plan and identifying
the distribution activities for which those expenditures were made.
The Plan provides that it will remain in effect for one year from the date of
its adoption and thereafter shall continue in effect provided it is approved at
least annually by the shareholders or by the Board, including a majority of
directors who are not interested persons of the Trust and who have no direct or
indirect interest in the operation of the Plan or in any agreement related to
the Plan. The Plan further provides that it may not be amended to increase
materially the costs which may be borne by the Trust for distribution pursuant
to the Plan without shareholder approval and that other material amendments of
the Plan must be approved by the Trustees in the manner described in the
preceding sentence. The Plan may be terminated at any time by a vote of the
Board or, with respect to either Fund, by the Fund's shareholders.
During the fiscal year ended March 31, 1997, neither Fund paid any distribution
related expenses pursuant to the Distribution Plan.
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent of the Trust
pursuant to a transfer agency agreement (the "Transfer Agency Agreement"). The
Transfer Agency Agreement provides, with respect to each Fund, for an initial
term of one year from its effective date and for its continuance in effect for
successive twelve-month periods thereafter, provided that the agreement is
specifically approved at least annually by the Board or, with respect to either
Fund, by a vote of the shareholders of that Fund, and in either case by a
majority of the Trustees who are not parties to the Transfer Agency Agreement or
interested persons of any such party at a meeting called for the purpose of
voting on the Transfer Agency Agreement.
Among the responsibilities of the Transfer Agent as agent for the Trust are: (1)
answering customer inquiries regarding account status and history, the manner in
which purchases and redemptions of shares of the Funds may be effected and
certain other matters pertaining to the Funds; (2) assisting shareholders in
initiating and changing account designations and addresses; (3) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, assisting in processing purchase and redemption
transactions and receiving wired funds; (4) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (5) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (6) furnishing periodic statements and confirmations of
purchases and redemptions; (7) arranging for the transmission of proxy
statements, annual reports, prospectuses and other communications from the Trust
to its shareholders; (8) arranging for the receipt, tabulation and transmission
to the Trust of proxies executed by shareholders with respect
13
<PAGE>
to meetings of shareholders of the Trust; and (9) providing such other related
services as the Trust or a shareholder may reasonably request.
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation for acting as custodian, investment manager, nominee,
agent or fiduciary for its customers or clients who are shareholders of the
Funds with respect to assets invested in the Funds. The Transfer Agent or any
sub-transfer agent or other processing agent may elect to credit against the
fees payable to it by its clients or customers all or a portion of any fee
received from the Trust or from the Transfer Agent with respect to assets of
those customers or clients invested in the Funds. The Transfer Agent, FFSI or
sub-transfer agents or processing agents retained by the Transfer Agent may be
Processing Organizations (as defined in the Prospectus) and, in the case of
sub-transfer agents or processing agents, may also be affiliated persons of the
Transfer Agent or Forum.
For its services under the Transfer Agency Agreement, the Transfer Agent
receives, with respect to each Series: (i) a fee at an annual rate of 0.25
percent of the average daily net assets of the Series and (ii) a fee of $12,000
per year; such amounts to be computed and paid monthly in arrears by the Fund;
and (iii) Annual Shareholder Account Fees of $18.00 per shareholder account;
such fees to be computed as of the last business day of the prior month. Fees
payable under the Transfer Agent Agreement with respect to each Fund are set
forth in the following tables:
PAYSON VALUE FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $45,916 $27,131 $18,785
1996 $38,519 $21,273 $17,246
1995 $16,027 $3,820 $12,207
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $63,723 $42,011 $21,712
1996 $58,767 $37,798 $20,969
1995 $31,274 $19,059 $12,215
Pursuant to a Fund Accounting Agreement, the Transfer Agent also provides the
Fund with portfolio accounting, including the calculation of the Fund's net
asset value. For these services, the Transfer Agent receives an annual fee
ranging from $36,000 to $60,000 depending upon the amount and type of the Fund's
portfolio transactions and positions. Fees payable under the Fund Accounting
Agreement with respect to fund accounting services for the Fund are set forth in
the following table:
PAYSON VALUE FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $36,000 $0 $36,000
1996 $37,000 $0 $37,000
1995 $36,000 $0 $36,000
14
<PAGE>
PAYSON BALANCED FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $37,000 $0 $37,000
1996 $38,000 $0 $38,000
1995 $36,000 $0 $36,000
5. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value of the Funds on each Fund Business Day
as defined in the Prospectus. The Trust does not determine net asset value on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. Purchases and redemptions are effected at the time of the next
determination of net asset value following the receipt of any purchase or
redemption order.
6. PORTFOLIO TRANSACTIONS
Purchases and sales of debt securities for Payson Balanced Fund usually are
principal transactions. Debt securities for that Fund are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. There usually are no brokerage commissions paid for such purchases.
Purchases from underwriters of portfolio securities include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers include the spread between the bid and asked prices.
Payson Value Fund and Payson Balanced Fund (with respect to purchases of equity
securities) will effect purchases and sales through brokers who charge
commissions. Allocations of transactions to brokers and dealers and the
frequency of transactions are determined by the Advisor in its best judgment and
in a manner deemed to be in the best interest of shareholders of the Fund rather
than by any formula. The primary consideration is prompt execution of orders in
an effective manner and at the most favorable price available to the Fund. For
the fiscal years ended March 31, 1997, 1996, and 1995, the aggregate brokerage
commissions paid by Payson Value Fund were $17,303, $27,008 and $15,276,
respectively. For the fiscal years ended March 31, 1997, 1996, and 1995, the
aggregate brokerage commissions paid by Payson Balanced Fund were $37,474,
$36,756 and $27,143, respectively. For the fiscal year ended March 31, 1997,
$600, or 1.6% of aggregate brokerage commissions paid, was paid to H.M. Payson
an affiliated broker and 0.18% of the total dollar amount of transactions
involving payment of commission was effected through an affiliated broker.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with Fund transactions, the Advisor takes into account such factors
as size of the order, difficulty of execution, efficiency of the executing
broker's facilities (including the services described below) and any risk
assumed by the executing broker. The Advisor may also take into account payments
made by brokers effecting transactions for a Fund (i) to the Fund or (ii) to
other persons on behalf of the Fund for services provided to it for which it
would be obligated to pay.
In addition, the Advisor may give consideration to research and investment
analysis services furnished by brokers or dealers to the Advisor for its use and
may cause the Fund to pay these brokers a higher amount of commission than may
be charged by other brokers. Such research and analysis is of the types
described in Section 28(e)(3) of the Securities Exchange Act of 1934, as
amended, and is designed to augment the Advisor's own internal research and
investment strategy capabilities. The Advisor may use the research and analysis
in connection with services to clients other than the Fund, and the Advisor's
fee is not reduced by reason of the Advisor's receipt of the research services.
Investment decisions for the Funds will be made independently from those for any
other account or investment company that is or may in the future become managed
by the Advisor or its affiliates. If, however, a Fund and other investment
companies or accounts managed by the Advisor are contemporaneously engaged in
the purchase or sale of the same security, the transactions may be averaged as
to price and allocated equitably to each account. In some cases, this policy
might adversely affect the price paid or received by a Fund or the size of the
position obtainable
15
<PAGE>
for the Fund. In addition, when purchases or sales of the same security for a
Fund and for other investment companies and accounts managed by the Advisor
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantages available to large denomination purchases or
sales.
In the future the Funds, consistent with the policy of obtaining best net
results, may conduct brokerage transactions through the Advisor's affiliates,
affiliates of those persons or FFSI. If a Fund anticipates conducting brokerage
transactions through these persons, the Board will adopt procedures in
conformity with applicable rules under the 1940 Act to ensure that all brokerage
commissions paid to these persons are reasonable and fair.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis by FFSI.
Set forth below is an example of the method of computing the offering price of
each Fund's shares. The example assumes a purchase of shares of beneficial
interest aggregating less than $100,000 subject to the schedule of sales charges
set forth in the Prospectuses at a price based on the net asset value per share
of each Fund on March 31, 1997.
Payson Payson
Value Balanced
Fund Fund
---- ----
Net Asset Value Per Share $16.10 $13.20
Sales Charge, 4.00% of offering
price (4.17% of net asset value
per share) $0.67 $0.55
Offering to Public $16.77 $13.75
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse a Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to a Fund's shares as provided in the
Prospectus.
The Trust has filed an election with the SEC pursuant to which a Fund will only
effect a redemption in portfolio securities if a shareholder is redeeming more
than $250,000 or 1% of the Fund's total net assets, whichever is less, during
any 90-day period.
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of any other fund of the Trust or shares of certain other
portfolios of investment companies which retain FAS or FFSI or its affiliates
administrator or distributor and which participate in the Trust's exchange
privilege program ("Participating Fund"). For Federal income tax purposes,
exchange transactions are treated as sales on which a purchaser will realize a
capital gain or loss depending on whether the value of the shares redeemed is
more or less than his basis in such shares at the time of the transaction.
By use of the exchange privilege, the shareholder authorizes the Transfer Agent
to act upon the instruction of any person representing himself to either be, or
to have the authority to act on behalf of, the investor and believed by the
Transfer Agent to be genuine. The records of the Transfer Agent of such
instructions are binding. Proceeds of an exchange transaction may be invested in
another Participating Fund in the name of the shareholder.
16
<PAGE>
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 custodial services to the IRAs for a service fee.
Shareholders wishing to invest through an IRA should contact the Transfer Agent
for further details and information.
8. TAXATION
Qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended does not involve governmental supervision of management or
investment practices or policies. Investors should consult their own counsel for
a complete understanding of the requirements the Funds must meet to qualify for
such treatment. The information set forth in the Prospectus and the following
discussion relate solely to Federal income taxes on dividends and distributions
by a Fund and assume that each Fund qualifies as a regulated investment company.
Investors should consult their own counsel for further details and for the
application of state and local tax laws to the investor's particular situation.
Payson Value Fund expects to derive a substantial amount of its gross income
(exclusive of capital gain) from dividends. Accordingly, that portion of that
Fund's dividends so derived will qualify for the dividends-received deduction
for corporations. Payson Balanced Fund expects to derive substantially all of
its gross income (exclusive of capital gain) from sources other than dividends.
Accordingly, it is expected that most of that Fund's dividends or distributions
will not qualify for the dividends-received deduction for corporations.
17
<PAGE>
Certain listed options and regulated futures contracts are considered "section
1256 contracts" for Federal income tax purposes. Section 1256 contracts held by
a Fund at the end of each taxable year will be "marked to market" and treated
for Federal income tax purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a Fund on section
1256 contracts generally will be considered 60% long-term and 40% short-term
capital gain or loss. A Fund can elect to exempt its section 1256 contracts
which are part of a "mixed straddle" from the application of section 1256.
With respect to equity or over-the-counter put and call options, gain or loss
realized by a Fund upon the lapse or sale of such options held by the Fund will
be either long-term or short-term capital gain or loss depending upon the
respective Fund's holding period with respect to such option. However, gain or
loss realized upon the lapse or closing out of such options that are written by
a Fund will be treated as short-term capital gain or loss. In general, if a Fund
exercises an option, or if an option that a Fund has written is exercised, gain
or loss on the option will not be separately recognized but the premium received
or paid will be included in the calculation of gain or loss upon disposition of
the property underlying the option.
In addition, the use of certain hedging strategies such as writing and
purchasing options, futures contracts and options on futures contracts involves
complex rules that will determine for income tax purposes the character and
timing of recognition of income received in connection therewith.
9. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement, The First National Bank of Boston, 100
Federal Street, Boston, MA 02106, acts as the custodian of the Funds' assets.
The custodian's responsibilities include safeguarding and controlling the Funds'
cash and securities, determining income and collecting interest on Fund
investments.
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, 1200 G Street,
N.W., Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, act as auditors for the Trust.
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and assumed
the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996, Forum
Funds, Inc. was reorganized as a Delaware business trust. The Trust has an
unlimited number of authorized shares of beneficial interest. The Board may,
without shareholder approval, divide the authorized shares into an unlimited
number of separate portfolios or series (such as the Funds) and may in the
future divide portfolios or series into two or more classes of shares (such as
Investor and Institutional Shares). Currently the authorized shares of the Trust
are divided into 15 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of
18
<PAGE>
shareholders, and it is anticipated that shareholder meetings will be held only
when required by Federal or state law. Shareholders (and Trustees) have
available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders. A shareholder in a portfolio is entitled to the
shareholder's pro rata share of all dividends and distributions arising from
that portfolio's assets and, upon redeeming shares, will receive the portion of
the portfolio's net assets represented by the redeemed shares.
As of July 1, 1997, the officers and Directors of the Trust as a group owned
less than 1% of the outstanding shares of each Fund. Also as of that date, the
shareholders listed below owned or owned of record more than 5% of either Fund.
From time to time, certain shareholders may own a large percentage of the shares
of a Fund. Accordingly, those shareholders may be able to greatly affect (if not
determine) the outcome of a shareholder vote. As noted, certain of these
shareholders are known to the Trust to hold their shares of record only and have
no beneficial interest, including the right to vote, in the shares.
PAYSON VALUE FUND
PERCENTAGE OF FUND
SHARES OWNED
SHAREHOLDER ------------
- -----------
Payse & Co.
c/o H.M. Payson & Co.
P.O. Box 31
Portland, ME 04112 20.50%
Ala & Co.
c/o H.M. Payson & Co.
P.O. Box 31
Portland, ME 04112 16.72%
PAYSON BALANCED FUND
PERCENTAGE OF FUND
SHARES OWNED
SHAREHOLDER ------------
- -----------
Ala & Co.
c/o H.M. Payson & Co.
P.O. Box 31
Portland, ME 04112 17.75%
Payse & Co.
c/o H.M. Payson & Co.
P.O. Box 31
Portland, ME 04112 15.38%
FINANCIAL STATEMENTS
The financial statements of Payson Balanced Fund for the year ended March 31,
1997, which are included in the Annual Report to Shareholders of the Trust and
delivered along with this Statement of Additional Information, are incorporated
herein by reference.
19
<PAGE>
PAYSON VALUE FUND
PAYSON BALANCED FUND
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE BONDS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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.
A-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 INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
A-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.
A-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.
A-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:
o -- Leading market positions in well-established industries.
o -- High rates of return on funds employed.
o -- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
o -- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o -- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
A-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.
A-6
<PAGE>
APPENDIX B
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.
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.
B-1
<PAGE>
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.
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.
B-2
<PAGE>
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."
B-3
<PAGE>
INVESTORS HIGH GRADE BOND FUND
INVESTORS BOND FUND
TAXSAVER BOND FUND
MAINE MUNICIPAL BOND FUND
NEW HAMPSHIRE BOND FUND
- --------------------------------------------------------------------------------
Account Information and
Shareholder Servicing: Distributor:
Forum Financial Corp. Forum Financial Services, Inc.
P.O. Box 446 Two Portland Square
Portland, Maine 04112 Portland, Maine 04101
207-879-0001 207-879-1900
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1998,
as amended January 21, 1998
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectuses dated January
1, 1998 offering shares of the Investors High Grade Bond Fund, Investors Bond
Fund and TaxSaver Bond Fund, and the Prospectuses dated August 1, 1997 offering
shares of Maine Municipal Bond Fund and New Hampshire Bond Fund (collectively
the "Funds" and individually a "Fund") and should be read only in conjunction
with the Prospectus, a copy of which may be obtained without charge by
contacting the Trust's Shareholder Servicing agent at the address listed above.
TABLE OF CONTENTS
PAGE
1. General................................. 2
2. Investment Policies..................... 4
3. Investment Limitations.................. 16
4. Performance Data........................ 20
5. Management.............................. 23
6. Determination of Net Asset Value........ 31
7. Portfolio Transactions.................. 31
8. Additional Purchase and
Redemption Information.................. 32
9. Taxation................................ 33
10. Other Information....................... 34
Appendix A - Description of Securities Ratings
Appendix B - Description of Municipal Securities
Appendix C - Hedging Strategies - Investors Bond Fund
and TaxSaver Bond Fund
Appendix D - Hedging Strategies - Maine Municipal
Bond Fund
Appendix E - Text of Forum Brochure
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 U.S. Securities and Exchange
Commission as an open-end, management investment company and was organized as a
business trust under the laws of the State of Delaware on August 29, 1995. On
January 5, 1996 the Trust succeeded to the assets and liabilities of Forum
Funds, Inc. Forum Funds, Inc. was incorporated on March 24, 1980 and assumed the
name of Forum Funds, Inc. on March 16, 1987. The Board has the authority to
issue an unlimited number of shares of beneficial interest of separate series
with no par value per share and to create separate classes of shares within each
series. The Trust currently offers shares of twenty-four series. The series of
the Trust are as follows:
<TABLE>
<S> <C> <C>
Daily Assets Treasury Fund Austin Global Equity Fund
Daily Assets Treasury Obligations Fund Oak Hall Equity Fund
Daily Assets Government Fund
Daily Assets Cash Fund Quadra Limited Maturity Treasury Fund
Daily Assets Tax-Exempt Fund Quadra Value Equity Fund
Quadra Growth Fund
Investors High Grade Bond Fund Quadra International Equity Fund
Investors Bond Fund Quadra Opportunistic Bond Fund
TaxSaver Bond Fund
Maine Municipal Bond Fund S&P 500 Index Fund
New Hampshire Bond Fund Investors Growth Fund
Investors Equity Fund
Payson Value Fund International Equity Fund
Payson Balanced Fund. Emerging Markets Fund
</TABLE>
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.
"FAS" means Forum Administrative Services, LLC.
"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.
2
<PAGE>
"1940 Act" means the Investment Company Act of 1940, as amended.
3
<PAGE>
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 A to this Statement of Additional Information.
The Funds may use these ratings to determine whether to purchase, sell or hold a
security. However, ratings are general and are not absolute standards of
quality. Consequently, securities with the same maturity, interest rate and
rating may have different market prices. If an issue of securities ceases to be
rated or if its rating is reduced after it is purchased by a Fund, the
investment adviser of the Fund will determine whether the Fund should continue
to hold the obligation. Credit ratings attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value. Also, rating agencies may fail to make timely changes in credit
ratings. An issuer's current financial condition may be better or worse than a
rating indicates.
Each Fund may retain securities whose rating has been lowered below the lowest
permissible rating category (or that are unrated and determined by the
investment adviser to be of comparable quality) if the investment adviser
determines that retaining such security is in the best interests of the Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but settlements delayed beyond two
months may be negotiated. During the period between a commitment and settlement,
no payment is made for the securities purchased by the purchaser and, thus, no
interest accrues to the purchaser from the transaction. At the time a Fund makes
the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction as a purchase and thereafter reflect
the value each day of such securities in determining its net asset value.
The use of when-issued transactions and forward commitments enables the Funds to
hedge against anticipated changes in interest rates and prices. For instance, in
periods of rising interest rates and falling bond prices, a Fund might sell
securities which it owned on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising bond prices, a
Fund might sell a security and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the investment adviser to a Fund were
to forecast incorrectly the direction of 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.
4
<PAGE>
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.
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
5
<PAGE>
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 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
6
<PAGE>
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 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
7
<PAGE>
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 Prospectus and this Statement of
Additional Information means obligations of the type described in Appendix B
issued by or on behalf of states, territories, and possessions of the United
States and their political subdivisions, agencies and instrumentalities, the
interest on which is exempt from Federal income tax. The municipal securities in
which the Funds invest are limited to those obligations which at the time of
purchase: (i) in the case of TaxSaver Bond Fund, are backed by the full faith
and credit of the United States; (ii) are municipal notes rated in the two
highest rating categories by an NRSRO, or, if not rated, are of comparable
quality as determined by the Adviser; (iii) are municipal bonds rated in the six
highest rating categories by an NRSRO or, if not rated, are of comparable
quality as determined by the Fund's investment adviser; or (iv) are other types
of municipal securities, provided that such obligations are of comparable
quality, as determined by the Adviser, to instruments in which the Fund may
invest.
MUNICIPAL NOTES. Municipal notes, which may be either "general obligation" or
"revenue" securities, are intended to fulfill short-term capital needs and
generally have original maturities of 397 days or less. They include tax
anticipation notes, revenue anticipation notes, bond anticipation notes,
construction loan notes and tax-exempt commercial paper.
MUNICIPAL LEASES. Municipal leases frequently have special risks not normally
associated with general obligation or revenue bonds or notes. Lease and
installment purchase or conditional sale contracts (which normally provide for
title to the leased assets to pass eventually to the government issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations of many state constitutions and statutes
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. To reduce this risk, TaxSaver Bond
Fund will only purchase municipal leases subject to a non-appropriation clause
when the payment of principal and accrued interest is backed by an unconditional
irrevocable letter of credit or guarantee of a bank or other entity that has
long term outstanding debt securities rated in one of the top two rating
categories by an NRSRO.
VARIABLE AND FLOATING RATE OBLIGATIONS. The interest rates payable on certain
municipal securities, including municipal leases, in which a Fund may invest are
not fixed and may fluctuate based upon changes in market rates. These securities
are referred to as variable rate or floating rate obligations. Other features of
these obligations may include the right whereby the Fund may demand prepayment
of the principal amount of the obligation prior to its stated maturity and the
right of the issuer to prepay the principal amount prior to maturity. The main
benefit of a variable or floating rate municipal security is that the interest
rate adjustment minimizes changes in the market value of the obligation. As a
result, the purchase of these municipal securities enhances the ability of each
Fund to sell an obligation prior to maturity at a price approximating the full
principal amount of the obligation. The payment of principal and interest by
issuers of certain municipal securities purchased by a Fund may be guaranteed by
letters of credit or other credit facilities offered by banks or other financial
institutions. Such guarantees will be considered in determining whether a
municipal security meets the Fund's investment quality requirements. The
investment adviser will monitor the pricing, quality and liquidity of variable
rate and floating rate demand obligations held by each Fund on the basis of
published financial information, rating agency reports and other research
services to which a Fund or the Adviser may subscribe.
PARTICIPATION INTERESTS. Each Fund may purchase participation interests in
municipal bonds, including private activity bonds and floating and variable rate
securities that are owned by banks or other financial institutions. A
8
<PAGE>
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 which continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by a
Fund are valued at zero in determining net asset value. When a Fund pays
directly or indirectly for a stand-by commitment, its cost is reflected as
unrealized depreciation for the period during which the commitment is held.
Stand-by commitments do not affect the average weighted maturity of a Fund's
portfolio of securities.
GENERAL. Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the money market and of the municipal bond
and municipal note markets, the size of a particular offering, the maturity of
the obligation and the rating of the issue. Municipal securities with longer
maturities tend to produce higher yields and are generally subject to greater
price movements than obligations with shorter maturities. An increase in
interest rates will generally reduce the market value of portfolio investments,
and a decline in interest rates will generally increase the value of portfolio
investments.
There can be no assurance that a Fund's objective will be achieved. The
achievement of a Fund's investment objective is dependent in part on the
continuing ability of the issuers of municipal securities in which the Fund
invests to meet their obligations for the payment of principal and interest when
due. Municipal securities historically have not been subject to registration
with the Securities and Exchange Commission, although there have been proposals
which would require registration in the future.
The obligations of municipal securities issuers may become subject to laws
enacted in the future by Congress, state legislatures, or referenda extending
the time for payment of principal and/or interest, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. There is also the possibility that, as a result of litigation or
other conditions, the ability of any issuer to pay, when due, the principal of
and interest on its municipal securities may be materially affected.
9
<PAGE>
CERTAIN INFORMATION CONCERNING THE STATE OF MAINE
Material in this section has been compiled from numerous sources including "The
Maine Economy: Year-End Review and Outlook, 1996," and "Maine Counties, Selected
Economic Measures, History and Forecasts - May 1997" prepared and published by
the Economics Division of the Maine State Planning Office. In addition, certain
information was obtained from the Official Statement of the State of Maine
published in connection with the issuance of $42,700,000 general obligation
bonds dated May 1, 1997. Other information concerning Maine budgetary matters
was obtained from official legislative documents, the Office of the Commissioner
of the Maine Department of Administrative and Financial Services, the Office of
the Treasurer of the State of Maine, the Bureau of the Budget of the Maine
Department of Administrative and Financial Services, the Office of Fiscal and
Program Review of the Maine Legislature, the Maine Department of Human Services,
the Maine Department of Labor, and the Maine State Retirement System. The most
recent information concerning credit ratings on debt issued by or on behalf of
the State of Maine and its subordinate agencies was obtained from credit reports
for the State of Maine published by S&P on September 23, 1996 and May 12, 1997,
by Moody's on May 13, 1997, and by Fitch Investors Service, Inc. ("Fitch"), on
May 9, 1997.
Although the information derived from the above sources is believed to be
accurate, none of the information obtained from these sources has been verified
independently. While the following summarizes the most current information
available from the above sources, it does not reflect economic conditions or
developments which may have occurred or trends which may have materialized since
the dates indicated.
The State of Maine, which includes nearly one-half of the total land area of the
six New England states, currently has a population of approximately 1,242,000.
The structure of the Maine economy is similar to that of the nation as a whole,
except that the Maine economy historically has had more activity in
manufacturing, defense-related activities, and tourism, and less activity in
finance and services. Recently, however, the manufacturing and defense-related
sectors of Maine's economy have decreased significantly, and the service
industry, retail, and financial services sectors of Maine's economy have
increased significantly.
During the 1980's, Maine's economy surpassed national averages in virtually all
significant measures of economic growth. During this ten-year period, Maine real
economic growth was 40% as measured by the Maine Economic Growth Index ("EGI"),
a broad-based measure of economic growth which is corrected for inflation. This
economic growth compares to national real economic growth during the 1980's of
26% and 29%, measured by the United States Economic Growth Index and real Gross
National Product respectively. During this time period, resident employment in
Maine increased by 21%, while resident employment nationally increased by 19%.
Inflation-adjusted retail sales in Maine during this period increased by 72%, as
opposed to a 32% increase in such retail sales nationally. During the 1980's,
per capita personal income in Maine rose from 44th in the nation in 1979, to
26th in the nation in 1989, or from 81% to 92% of the national average of per
capita personal income.
Beginning in the fourth quarter of 1989, however, the Maine economy experienced
a substantial temporary decline. For example, the Maine economy sustained only
0.8% real growth in 1989, and experienced real growth of -1.1% in 1990 and -2.6%
in 1991. Data show that the Maine economy began a sustained decline during the
fourth quarter of 1989, and the second quarter of 1991 saw the seventh
consecutive quarterly decline in the Maine EGI. The third and fourth quarters of
1991 showed barely positive economic growth of 0.9% and 0.2% respectively.
Economic recovery in Maine also has been hindered by significant losses in
defense-related jobs, with the State losing since 1990 approximately 20% of its
defense-dependent employment which peaked at 63,000 jobs in 1989. During the
1989-1991 period also, the State lost 6% of its entire job base.
Since 1991 the Maine economy has experienced a modest and sustained recovery,
and this recovery has continued slowly through the end of calendar year 1996. In
the words of the Economics Division of the Maine State Planning Office, "Maine
economic performance in 1996 was mixed, with the major indicators, on balance,
describing continued slow growth." In addition, the growth of Maine's economy in
1996 also continued to lag behind that of the nation as a whole, with real
growth in the Maine economy during 1996 of 2.1% compared to real growth in the
national Gross Domestic Product ("GDP") during 1996 of 2.4%. Of the 17 major
Maine economic indicators tracked by the Maine State Planning Office in calendar
year 1996, eight were positive, eight were negative, and one (building permits)
showed no significant change.
10
<PAGE>
On the positive side, after five full years of slow economic recovery, the Maine
economy in 1996 finally regained its pre-recession job count of 545,000. In
addition, at the end of 1996, Maine's labor participation rate (the number of
persons employed as a percentage of the number of persons in the working age
population, ages 16 through 64) was very close to the record high 69% measured
in 1989, at the peak of the 1980's economic boom. Also, during 1996 unemployment
rates in Maine dropped significantly and consistently throughout the State. In
1996, every county in Maine experienced a significant drop in its unemployment
rate. In November of 1996, seasonally unadjusted unemployment rates in all 16
Maine counties were significantly lower than in November 1995; most counties
experienced a typical 1.2 - 1.5% drop over the previous November's unemployment
rate; five Maine counties recorded seasonally unadjusted unemployment rates well
below 4%; and one county (Cumberland) recorded a seasonally unadjusted
unemployment rate below 3%, at 2.3%. In November 1996, the seasonally unadjusted
unemployment rate for Maine as a whole dropped to 4.4% from 5.7% during November
1995. This trend has continued through the Spring of 1997. The latest seasonally
unadjusted unemployment rates available (May 1997) show Maine's seasonally
unadjusted unemployment rate for May 1997 at 4.6% vs. 5.1% for May 1996. The
unemployment rates in some Maine counties are approaching levels that economists
traditionally have viewed as incompressible. In the words of the Economics
Division of the Maine State Planning Office, currently in Maine "there are few
people left who want jobs and don't have them."
Also, on the positive side, in contrast to calendar year 1995 and the first half
of 1996, numerous Maine employers announced, or are proceeding with, plans for
significant business expansions in the State. For example, National
Semiconductor Corporation is proceeding with construction of a $830 million
wafer chip manufacturing facility in South Portland, which is expected to add
800 new jobs to the greater Portland area. MBNA America Bank, N.A., the second
largest issuer of credit cards in the nation, recently has invested $37 million
in new facilities in five Maine communities and has created 1,700 skilled and
semi-skilled jobs in Maine. In addition, MBNA is expected to add 2,000 more jobs
to its Maine payrolls in the next 2 1/2 years. Guilford of Maine, Inc. has
recently completed construction of a $30 million textile factory, reputed to be
the worlds' most modern, in Piscataquis County, and is actively training new
employees in cooperation with local secondary schools. John J. Nissen Baking
Company has announced plans to invest $40 million to build the world's largest
bakery in Biddeford, Maine. Finally, Tambrands, Inc. is investing $36 million to
consolidate all of its manufacturing activities in Auburn, Maine.
A further positive factor in the growth of Maine's economy is that Maine
employers recently have experienced a substantial decrease in workers'
compensation costs. For many years, Maine possessed the highest workers'
compensation insurance rates in the country. The issue was so devisive that it
caused a shutdown of State government in 1992. Since that time, however, the
Maine Legislature has created the Maine Employers' Mutual Insurance Co. and has
passed numerous reforms in Maine's workers' compensation laws. As a result,
workers' compensation insurance rates in Maine have dropped 34% since 1994.
Another positive step concerning workers' compensation insurance rates in Maine
was taken in May of this year when the Maine Legislature, at the request of the
Governor, refused to accede to a effort by organized labor to roll back many of
the reforms in Maine's workers' compensation laws enacted since 1992.
An additional positive indicator for the Maine economy is that Maine taxable
consumer retail sales were up 5.3% for the first ten months of 1996 compared to
the same period in 1995. This is a noteworthy improvement over 1995, when sales
were only up only 1.7% over 1994. These consumer retail sales data (including
among other items taxable retail sales related to the tourist industry) are
particularly significant for State of Maine credit purposes. Since roughly
one-third of Maine State government general fund revenues are derived from a 6%
retail sales tax, the performance of taxable retail sales in Maine is directly
related to the ability of Maine State government to fund necessary governmental
expenditures. Additionally on the positive side during 1996, unit sales of homes
in Maine increased 5% over 1995, the average sales price of a home in Maine
increased to over $113,000, and the average time on the market prior to sale for
homes in Maine declined.
On the negative side, Maine's economic recovery as a whole continues to lag
behind the national and New England averages. For example, between the second
quarter of 1995 and the second quarter of 1996 personal income in Maine
increased by only 3.5%. By comparison, for the same period national personal
income increased by 5.5% and personal income in New England as a whole increased
by 4.8%. Similarly, during 1996 Maine payroll employment growth (people on
payrolls, not including the self-employed) was very slow. Such Maine payroll
employment growth grew only 0.4% during 1996 compared to 1.9% and 2.3% in 1995
and 1994 respectively. These statistics only underscore the fact that employment
growth at the national level continues to far outpace New England and Maine
employment growth. Since the
11
<PAGE>
trough of the recession in 1991, national employment has increased a full 12%,
or approximately 2% annually. By comparison, New England employment growth for
the same period has been only 7%, and Maine employment growth for the same
period has been only 6%, or 1/2 the national average. In addition, despite very
low unemployment rates and what the Economics Division of the State Planning
Office has alluded to as "tight labor market conditions" in many of the most
populous counties of the State, bankruptcy filings, predominantly filings by
individual debtors rather businesses, have in the words of the State Planning
Office, "skyrocketed through 1996." Such bankruptcy filings reached a level of
2,954 filings in 1996, or 30% higher on an annual basis than was experienced in
the depths of the recent economic recession. In addition, the number of Maine
residents receiving food stamps has remained at very high levels, rising nearly
80% during the economic recession, and dropping only 10% through the present
when virtually all of the jobs lost in the recession have been recovered. In
addition, through most of 1996, construction contract awards in Maine were down
5% from the previous year. These statistics show a very mixed picture for the
performance of the Maine economy during 1996, and in some instances during the
first six months of 1997, and they pose a continuing management challenge for
those legislators and State officials responsible for State fiscal policy.
The fiscal policies of the State of Maine are very conservative, and the State
is required by its Constitution to operate on a balanced budget. The Maine
Constitution does this by prohibiting the Legislature, by itself, from issuing
any debt by or on behalf of the State which exceeds $2,000,000 "except to
suppress insurrection, to repel invasion, or for purposes of war, and except for
temporary loans to be paid out of money raised by taxation during the fiscal
year in which they are made." The Maine Constitution also provides for the
prohibition of debt issued by or on behalf of the State to fund "current
expenditures." The Maine Constitution allows the issuance of long-term debt when
two-thirds of both houses of the Legislature pass a law authorizing the issuance
of such debt, and when the voters of the State ratify and enact such a law at a
general or special statewide election. Amendments to the Maine Constitution also
have been adopted to permit the Legislature to authorize the issuance of bonds
to insure payment of up to: (i) $6,000,000 of revenue bonds of the Maine School
Building Authority; (ii) $4,000,000 of loans to Maine students attending
institutions of higher education; (iii) $1,000,000 of mortgage loans for Indian
housing; (iv) $4,000,000 of mortgage loans to resident Maine veterans including
businesses owned by resident Maine veterans; and (v) $90,000,000 of mortgage
loans for industrial, manufacturing, fishing, agricultural and recreational
enterprises. The Maine Constitution provides that if the Legislature fails to
appropriate sufficient funds to pay principal and interest on general obligation
bonds of the State, the State Treasurer is required to set aside sufficient
funds from the first General Fund revenues received thereafter by the State to
make such payments.
In recent years, Maine State government has skirted the Maine constitutional
balanced budget requirement by annually issuing significant amounts of tax
anticipation notes ("TANs") during the first few days after the July 1 beginning
of each new fiscal year and leaving such TANs outstanding until almost the
beginning of the next fiscal year. For example, on June 26, 1996 the State
issued $150,000,000 in TANs due June 27, 1997. Both the size of these issues and
fiscal legitimacy for them, however, have recently been criticized, and the
State is becoming more conservative with regard to what amounts to a former
practice of maintaining almost permanent TANS of significant size. This has been
made possible largely by the continued imposition of tightly conservative State
fiscal policies that allowed the State to end fiscal year 1997 solidly in the
black with an estimated approximate $50 million surplus. No TAN was issued
immediately following the July 1 start of the 1997 fiscal year, and its issuance
was put off at least until August 1997. Recently, the State has been considering
further putting off the issuance of any TAN for State cash flow purposes,
because the need for such an issuance has not yet legitimately presented itself.
As of March 31, 1997, there were outstanding general obligation bonds of the
State in the principal amount of $444,157,945. On June 5, 1997, the State issued
$42,700,000 general obligation bonds dated May 1, 1997. On June 27, 1997,
$150,000,000 outstanding tax anticipation notes of the State matured, and after
the start of the new fiscal year on July 1, 1997 the State did not issue new
TANs to roll over this debt. Various other Maine governmental agencies and
quasi-governmental agencies including, but not limited to, the Maine Municipal
Bond Bank, the Maine Court Facilities Authority, the Maine Health and Higher
Educational Facilities Authority, Maine Turnpike Authority, the Maine State
Housing Authority, the Maine Public Utility Financing Bank, and the Maine
Educational Loan Authority, issue debt for Maine governmental purposes, but this
debt does not pledge the credit of the State.
The strength of Maine's economy during the 1980's enabled the State to
accumulate relatively large unappropriated surpluses of general fund revenues.
During the economic recession of 1989 through 1992, however, Maine State
government repeatedly reduced its expenditures in order to comply with the
requirement of the Maine Constitution that
12
<PAGE>
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 during the 1996-1997 fiscal biennium. The Task
Force, in fact, completed the identification of $45.28 million in cuts to
General Fund expenditures and passed legislation to implement those cuts during
the 1996-1997 biennium. The work of the Task Force also will result in
additional ongoing cuts of $60.1 million in General Fund expenditures during the
1998-1999 biennium, and the permanent elimination of approximately 1352 State
jobs. Such cuts in General Fund expenditures, other fiscal cost reductions, and
a continuing policy by the Governor not to allow the creation of significant new
State governmental programs or the taxes to fund such programs, allowed the
Governor, on March 26, 1997, to sign a balanced budget for fiscal years 1998 and
1999 which provides: (i) for fiscal year 1998, General Fund expenditures of
$1,825,047,780 and Highway Fund expenditures of $217,416,987; and (ii) for
fiscal year 1999, General Fund Expenditures of $1,984,859,413 and Highway Fund
Expenditures of $218,026,687.
During the First Regular Session of the 118th Maine Legislature which adjourned
on March 27, 1997, and the First Special Session of the 118th Maine Legislature
which adjourned on June 1, 1997, the Governor and the Legislature also took
several steps to improve the State's fiscal condition. First, the Legislature
passed and the Governor signed into law a repeal of an across the board State
income tax cap that was enacted in 1995 and scheduled to go into effect on July
1, 1997. If this State income tax cap had not been repealed, income tax revenues
expendable by the State beginning in fiscal year 1998 would have been restricted
to $676,230,000. Second, the Legislature and the Governor refused to eliminate
prior to its scheduled elimination on June 30, 1998, an excise tax on the value
of gross hospital patient service revenue, and increased this tax for hospital
payment years that end in fiscal year 1998 from 3.56% to 5.27%. Third, the
Legislature and the Governor enacted into law a "Tax Relief Fund for Maine
Residents" which requires, according to a formula, that 75% of General Fund
Revenues which exceed officially accepted estimates be used to increase the
personal exemption amount of the Maine Individual Income Tax up to the personal
exemption amount of the Federal Individual Income Tax. Also according to the
formula provided by the tax-relief statute, 25% of General Fund revenues which
exceed accepted estimates must be used to reduce the unfunded liability of the
Maine State Retirement System. As of the close of State's fiscal year on June
30, 1997, Maine General Fund Revenues exceeded accepted estimates by
approximately $50 million. This means that 75% of such excess General Fund
revenues, or an estimated $37.5 million, will be allocated to tax relief for
Maine residents, and 25% of such excess General Fund revenues, or an estimated
$12.5 million will be allocated to reduce the unfunded liability of the Maine
State Retirement System. The State also maintains a "Rainy Day Fund" to be used
for significant unforeseen capital and operational expenditures. To the extent
that General Fund revenues which exceed accepted estimates are diverted to the
purposes of tax relief for Maine residents and reduction of the unfunded
liability of the Maine State Retirement System, lesser amounts of such excess
General Fund Revenues will be available to fund the Rainy Day Fund. As of July
14, 1997 the balance in the State's Rainy Day Fund was $45,497,470.
There can be no assurance that the budget acts for fiscal years 1998 and 1999,
and the various other statutes passed by the Maine Legislature which affect the
State's fiscal position, will not be amended by the Legislature from time to
time.
The unfunded liability of the Maine State Retirement System is a significant
problem for Maine State government. This unfunded liability currently is
certified by the State's independent actuaries to be approximately $2.9 billion.
Because of this, the State has adopted a constitutional amendment (Me. Const.
art. IX, ss.18-B) that requires the Maine Legislature, beginning in fiscal year
1997, annually to appropriate funds that will retire in 31 years or less the
System's unfunded liability attributable to State employees and teachers. The
State has also adopted a separate constitutional amendment (Me. Const. art. IX,
ss.18-A) that requires the Maine Legislature, beginning in fiscal year 1997,
annually to appropriate monies to fund the System on an actuarily sound basis.
Under Article IX, ss.18-B of the Maine Constitution, unfunded liabilities
henceforth may not be created for the System except those resulting from
experience losses, and such unfunded liabilities resulting from experience
losses must be retired over a period not exceeding 10 years.
Because of Maine's conservative debt policies and its constitutional requirement
that the State government operate under a balanced budget, Maine general
obligation bonds had been rated AAA by S&P and Aa1 by Moody's for many years.
On June 6, 1991, however, S&P lowered its credit rating for Maine general
obligation bonds from AAA to AA+, and at the same time lowered its credit rating
on bonds issued by the Maine Municipal Bond Bank and the Maine Court Facilities
13
<PAGE>
Authority, and on State of Maine Certificates of Participation for highway
equipment, from AA to A+. In taking this action, S&P said, "The rating action is
a result of declines in key financial indicators, and continued softness in the
state economy. The new rating continues to reflect the low debt burden of the
state, an economic base that has gained greater income levels and diversity over
the 1980's, and a legislative history of dealing effectively with financial
difficulties." These ratings have remained unchanged since June 6, 1991. Because
of slow but continuing improvements in the State of Maine economy, S&P currently
views the State's financial outlook as "stable," stating in its most recent May
12, 1997 credit report: "The outlook reflects the state's manageable budget
estimates and careful monitoring of revenues and expenditures. Economic growth
should continue at a slow, sustainable pace."
On August 24, 1993, citing the "effects of protracted economic slowdown and the
expectation that Maine's economy will not soon return to the pattern of robust
growth evident in the mid-1980's," Moody's lowered its State of Maine general
obligation bond rating from Aa1 to Aa. At the same time, Moody's lowered from
Aa1 to Aa the ratings assigned to state-guaranteed bonds of the Maine School
Building Authority and the Finance Authority of Maine, and confirmed at A1 the
ratings assigned to the bonds of the Maine Court Facilities Authority and State
of Maine Certificates of Participation. These ratings remained unchanged until
the current year. In its most recent credit report for the State of Maine, dated
May 13, 1997, Moody's "confirmed and refined from Aa to Aa3" the State's general
obligation bond rating. Moody's refinement of the State's bond rating on May 13,
1997 was part of a general redefinition by Moody's of its bond rating symbols
published on January 13, 1997. In its May 13, 1997 credit report, Moody's said:
"Among the factors contributing to the high grade rating are the state's sound
debt profile, with a moderate level of borrowing scheduled for rapid retirement,
and an improving financial trend, reflecting economic gains of recent years and
a fiscal policy aimed at achieving budgetary balance through steady government
cost-cutting and reduced reliance on one-time measures." In this same credit
report, however, Moody's also recognized specific negative factors which
affected the rating, saying: "The rating also recognizes the state's lagging
recovery from the recession of the early 1990s and continuing, though reduced,
exposure to potential defense contracting cutbacks; its narrow General Fund
position, whether measured on a GAAP or a cash basis; and its substantial
unfunded pension obligation which, by a variety of measures, is several times
the size of its direct debt."
For its June 5, 1997 general obligation bond issue dated May 1, 1997, Maine also
received a credit report from Fitch. In this credit report dated May 9, 1997
Fitch assigned a rating of AA to Maine general obligation bonds, saying:
"Maine's general obligations are well secured, with strength in the low burden
that debt places on resources and in the unusually rapid rate of amortization.
The economy continues to recover from the severity of the recession and
financial operations have regained normality. Institutionalization of financial
reforms, including accounting, the revenue estimation process and debt control
will be of benefit and the reserve is reasonably funded."
CERTAIN INFORMATION CONCERNING THE STATE OF NEW HAMPSHIRE
Material in this section has been abstracted from the State of New Hampshire
Official Statement dated May 28, 1997, which is compiled by the Treasurer of the
State of New Hampshire and which is provided to prospective purchasers of debt
securities offered by the State. While information in the Official Statement is
believed to be accurate, none of that information has been independently
verified. Also, it does not reflect economic conditions or developments that may
have occurred or trends that may have materialized since the date of the
Official Statement. Additionally, economic and fiscal conditions in individual
municipalities within the State may vary from general economic and fiscal
conditions.
New Hampshire is located in the New England Region and is bordered by the states
of Maine, Massachusetts, and Vermont and the Province of Quebec, Canada. New
Hampshire's geographic area is 9,304 square miles and its 1996 population was
1,163,000, representing a 1.3% increase from 1995 levels. New Hampshire's
population had increased by more than 25% in the 1980-1996 period.
New Hampshire's per capita personal income increased by 106.4% between 1980 and
1990. In 1991 it continued to grow faster than the New England region as a whole
and in 1992 and 1993 it grew at a slightly lower rate than the region, resuming
faster growth relative to the region in 1994 and 1995. New Hampshire's per
capita personal income in 1996 was 109% of the national level, ranking 8th in
the United States.
14
<PAGE>
In 1996, New Hampshire's largest employment sector was the service sector (28.8%
of employment), followed by retail and wholesale trade (25.8% of employment).
Manufacturing was the third largest sector (18.9% of employment).
Non-agricultural employment levels have remained fairly stable. The unemployment
rate declined to 4.2% in 1996, less than the national average, and preliminary
data for the month of March 1997 (seasonally adjusted) show New Hampshire's
unemployment rate at 2.1%, compared to a national average of 5.2%.
After a significant growth in residential building activity in the period
1980-86 (data based on residential building permits), New Hampshire's
residential building activity declined beginning in 1987, and declined below
1980 levels in 1990, 1991 and 1992. In 1993, residential building activity
surpassed 1980 levels and activity in 1994, 1995 and 1996 surpassed 1993.
New Hampshire finances the operations of state government through specialized
taxes, user charges and revenues received from the State liquor sales and
distribution system. There is no general tax on sales or earned income. The two
highest revenue-producing taxes are the Meals and Rooms Tax and the Business
Profits Tax. In 1992, State and local taxes amounted to $98.10 per $1,000 of
personal income, which was the fourth lowest in the United States. However,
because local property taxes are the principal source of funding for municipal
operations and primary and secondary education, New Hampshire was highest among
all states in local property tax collections per $1,000 of personal income.
New Hampshire State government's budget is enacted to cover a biennial period
through a series of legislative bills that establish appropriations and
estimated revenues for each sub-unit of State government, along with
supplemental and special legislation. By statute, the budget process is
initiated by the Governor, who is required to submit operating and capital
budget proposals to the Legislature by February 15 in each odd-numbered year.
While the Governor is required to state the means through which all expenditures
will be financed, there is no constitutional or statutory requirement that the
Governor propose or the Legislature adopt a budget without resorting to
borrowing. There is no line item veto.
State government funds include the General Fund, four special purpose funds and
three enterprise funds, as well as certain "fiduciary" funds. All obligations of
the State are paid from the State Treasury, and must be authorized by a warrant
signed by the Governor and approved by the Executive Council, except for
payments of debt obligations, which are paid by the State Treasurer under
statutory authority.
By statute, at the close of each fiscal year, any General Fund operating surplus
up to 5% of General Fund unrestricted revenue must be deposited in a Revenue
Stabilization Reserve Account ("Rainy Day Fund"). With approval of the
Legislative Fiscal Committee, the Governor and the Executive Council, the Rainy
Day Fund is available to defray operating deficits in ensuing years if there is
a shortfall in forecast revenue. By statute, the Rainy Day Fund may not be used
for any other purpose except by special appropriation approved by two-thirds of
each Legislative chamber and the Governor. As of June 30, 1996 there was a
designated balance of $20 million in the Rainy Day Fund.
The Department of Administrative Services is responsible for maintenance of
State government's accounting system, annual reports and general budget
oversight. Expenditures are controlled against appropriations through an
integrated accounting system which compares the amount of an appropriation to
expenditures and encumbrances previously charged against that appropriation
before creating an expenditure. By law, with certain exceptions unexpended and
unencumbered balances of appropriations lapse to surplus in the applicable fund
at the end of each fiscal year, along with unappropriated revenues in excess of
legislative estimates. Legislative financial controls involve the Office of
Legislative Budget Assistant ("LBA") which acts under supervision of the
Legislative Fiscal Committee and Joint Legislative Capital Budget Overview
Committee. LBA conducts overall post-audit and review of the budgetary process.
State government financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") and are independently audited annually.
During the 1992-1993 biennium, State revenues began recovering from the decline
that had characterized the recession years of 1989, 1990 and 1991. The General
Fund undesignated fund balance at June 30, 1992 was $43.1 Million, with
accumulated undesignated fund balance of $18.6 Million; at June 30, 1993, the
General Fund
15
<PAGE>
undesignated fund balance was $31.5 Million and at June 30, 1994, $12.0 Million.
For the fiscal year ended June 30, 1995, the General Fund undesignated fund
balance was zero, after transferring $35.1 Million from the Healthcare
Transition Fund to offset a delay in receipt of federal funds from
disproportionate share expenditures under the Medicaid program. At June 30,
1996, the General Fund undesignated fund balance was ($44.2 Million) after a net
transfer to the Healthcare Transition Fund of $21.9 Million, and is projected at
($25.8 Million) at June 30, 1997.
There is no constitutional limit on the State's power to issue obligations or
incur indebtedness, and no constitutional requirement for referendum to
authorize incurrence of indebtedness by the State. Authorization and issuance of
debt is governed entirely by statute. New Hampshire pursues a debt management
program designed to minimize use of short-term debt for operating purposes and
to coordinate issuance of tax-exempt securities by the State and its agencies.
State-guaranteed bonded indebtedness is authorized not only for general purposes
of State government, but also for the New Hampshire Turnpike System, University
System of New Hampshire, water supply and pollution control, water resources
acquisition and construction, School Building Authority, Pease Development
Authority, Business Finance Authority, Municipal Bond Bank and cleanup of
municipal Super Fund sites and landfills. In addition, the Housing Finance
Authority and Higher Education and Health Facilities Authority are authorized to
issue bonds that do not constitute debts or obligations of the State.
Procedure for incurrence of bonded indebtedness by individual municipalities is
governed by State statutes, which prescribe actions that must be pursued by
municipalities in incurring bonded indebtedness and limitations on the amount of
such indebtedness. In general, incurrence of bonded indebtedness by a
municipality must be for a statutorily authorized purpose and requires a
two-thirds majority vote of the municipality's legislative body.
On December 30, 1993, the New Hampshire Supreme Court reinstated and remanded
for trial a lawsuit challenging the constitutionality of the State's system of
financing public schools primarily through local property taxes. The Court ruled
that the New Hampshire Constitution imposes an enforceable duty on the State to
provide an "adequate" education to every educable child and to guarantee
adequate funding. However, the Court did not determine the adequacy of the
State's current education programs or current funding levels, leaving those
matters to the Legislative and Executive branches to determine in the first
instance. The lawsuit was tried in the Spring of 1996, resulting in a decision
by the trial court denying any relief to the plaintiffs. The decision is
currently under appeal to the New Hampshire Supreme Court. The potential impact,
if any, of this litigation on the State's finances cannot presently be
determined.
3. INVESTMENT LIMITATIONS
Investors High Grade Bond Fund, Investors Bond Fund, TaxSaver Bond Fund and
Maine Municipal Bond Fund have adopted the following fundamental investment
limitations which are in addition to those contained in the Funds' Prospectus
and which may not be changed without shareholder approval. No Fund may:
(1) Borrow money, except for temporary or emergency purposes
(including the meeting of redemption requests) and except for
entering into reverse repurchase agreements, and provided that
borrowings do not exceed 33 1/3% of the Fund's total assets
(computed immediately after the borrowing).
(2) 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.
16
<PAGE>
(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 limitations 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.
(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
limitations 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
limitations concerning investment in securities of issuers in the same industry
and investment in securities having voting rights. The Fund may not:
(1) Purchase securities, other than U.S. Government Securities,
if, immediately after each purchase, more than 25% of the
Fund's total assets taken at market value would be invested in
securities of issuers conducting their principal business
activity in the same industry. For this purpose, consumer
finance companies, industrial finance companies, and gas,
electric, water and telephone utility companies are each
considered to be separate industries.
(2) Purchase securities h aving voting rights except securities of
other investment companies.
17
<PAGE>
Investors Bond Fund, Investors High Grade Bond Fund, TaxSaver Bond Fund and
Maine Municipal Bond Fund have adopted the following nonfundamental investment
limitations that may be changed by the Board without shareholder approval. No
Fund may:
(a) Pledge, mortgage or hypothecate its assets, except to secure
permitted indebtedness. The deposit in escrow of securities in
connection with the writing of put and call options,
collateralized loans of securities and collateral arrangements
with respect to margin for futures contracts are not deemed to
be pledges or hypothecations for this purpose.
(b) Invest in securities of another registered investment company,
except in connection with a merger, consolidation, acquisition
or reorganization; and except that the Fund may invest in
money market funds and privately-issued mortgage related
securities to the extent permitted by the 1940 Act.
(c) Purchase securities on margin, or make short sales of
securities, except for the use of short-term credit necessary
for the clearance of purchases and sales of portfolio
securities, except that the Fund may make margin deposits in
connection with permitted transactions in options, futures
contracts and options on futures contracts.
(d) Invest in securities (other than fully-collateralized debt
obligations) issued by companies that have conducted
continuous operations for less than three years, including the
operations of predecessors, unless guaranteed as to principal
and interest by an issuer in whose securities the Fund could
invest, if as a result, more than 5% of the value of the
Fund's total assets would be so invested.
(e) Invest in or hold securities of any issuer if officers and
directors of the Trust or the Fund's investment adviser,
individually owning beneficially more than 1/2 of 1% of the
securities of the issuer, in the aggregate own more than 5% of
the issuer's securities.
(f) Purchase securities for investment while any borrowing
equaling 10% or more of the Fund's total assets is outstanding
or borrow for purposes other than meeting redemptions in an
amount exceeding 10% of the value of the Fund's total assets.
(g) Acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15%
of the Fund's net assets (taken at current value) would be
invested in repurchase agreements not entitling the holder to
payment of principal within seven days and in securities which
are not readily marketable, including securities that are
illiquid by virtue of restrictions on the sale of such
securities to the public without registration under the
Securities Act of 1933 ("Restricted Securities") or (ii) 10%
of the Fund's total assets would be invested in Restricted
Securities.
(h) Purchase or sell real property leases (including limited
partnership interests, but excluding readily marketable
interests in real estate investment trusts or readily
marketable securities of companies which invest in real
estate.)
In addition to the foregoing, Investors Bond Fund, Investors High Grade Bond
Fund and TaxSaver Bond Fund have adopted the following nonfundamental investment
limitation concerning investment in securities having voting rights. The Funds
may not:
(a) Purchase securities having voting rights except securities of
other investment companies.
Maine Municipal Bond Fund has adopted the following nonfundamental investment
limitation. The Fund may not:
(a) Invest in oil, gas or other mineral exploration or development
programs, or leases, provided that the Fund may invest in
securities issued by companies engaged in such activities.
18
<PAGE>
The New Hampshire Bond Fund has adopted the following fundamental investment
limitations that cannot be changed without the affirmative vote of a majority of
the Fund's outstanding voting securities. The Fund may not:
(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:
(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.
19
<PAGE>
(d) Invest in securities (other than fully-collateralized debt
obligations) issued by companies that have conducted
continuous operations for less than three years, including the
operations of predecessors (unless guaranteed as to principal
and interest by an issuer in whose securities the Fund could
invest) if as a result, more than 5% of the value of the
Fund's total assets would be so invested.
(e) Invest in or hold securities of any issuer other than the Fund
if, to the Fund's knowledge, those directors and officers of
the Trust or the Fund's investment adviser, individually
owning beneficially more than 1/2 of 1% of the securities of
the issuer, in the aggregate own more than 5% of the issuer's
securities.
(f) Invest in oil, gas or other mineral exploration or development
programs, or leases, provided that the Fund may invest in
securities issued by companies engaged in such activities.
(g) Acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15%
of the Fund's net assets (taken at current value) would be
invested in repurchase agreements not entitling the holder to
payment of principal within seven days and in securities which
are not readily marketable or (ii) 10% of the Fund's total
assets would be invested in securities that are illiquid by
virtue of restrictions on the sale of such securities to the
public without registration under the Securities Act of 1933.
(h) Purchase or sell real property (including limited partnership
interests, but excluding readily marketable interests in real
estate investment trusts or readily marketable securities of
companies which invest in real estate.)
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of the
Fund's assets or purchases and redemptions of shares will not be considered a
violation of the limitation.
For purposes of the limitation 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.
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. The Funds' net asset value, yield and total return
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
Standardized SEC yield and total return information as of March 31, 1997 is set
forthin the following tables:
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
30 Day
30 Day Annualized Total Return
Annualized Tax Equivalent Total Return Total Return Since
Yield Yield 1 Year 5 Year Inception
----- ----- ------ ------ ---------
INVESTORS BOND
FUND 7.49% N/A 7.18% 7.91% 8.92%
TAXSAVER BOND FUND
4.74 % 7.85% 5.15% 7.02% 7.38%
MAINE MUNICIPAL
BOND FUND 4.19% 7.58% 4.98% 6.73% 6.64%
NEW HAMPSHIRE
BOND FUND 4.34% 7.57% 4.56% N/A 5.73%
</TABLE>
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%).
Investors Bond Fund and TaxSaver Bond Fund commenced operations on October 2,
1989. Maine Municipal Bond Fund and New Hampshire Bond Fund commenced operations
on December 5, 1991 and December 31, 1992, respectively.
In advertising performance each Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). Each Fund may also compare any of its performance
information with the performance of recognized stock, bond and other indices,
including but not limited to the Municipal Bond Buyers Indices, the Salomon
Brothers Bond Index, the Shearson Lehman Bond Index, the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, U.S. Treasury
bonds, bills or notes and changes in the Consumer Price Index as published by
the U.S. Department of Commerce. The Funds may refer to general market
performances over past time periods such as those published by Ibbotson
Associates (for instance, its "Stocks, Bonds, Bills and Inflation Yearbook"). In
addition, the Funds may refer in such materials to mutual fund performance
rankings and other data published by Fund Tracking Companies. Performance
advertising may also refer to discussions of the Funds and comparative mutual
fund data and ratings reported in independent periodicals, such as newspapers
and financial magazines.
For example, the Funds may advertise the historical advantages, based on assumed
investments made on particular dates, in long term corporate bonds or in the S&P
500 Composite Stock Index against U.S. Treasury bills, as published by the
companies listed above.
YIELD CALCULATIONS
Yields for a Fund used in advertising are computed by dividing the Fund's
interest income for a given 30 days or one-month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. In general, interest income is reduced with
respect to bonds purchased at a premium over their par value by subtracting a
portion of the premium from income on a daily basis, and is increased with
respect to bonds purchased at a discount by adding a portion of the discount to
daily income. Capital gain and loss generally are excluded from these
calculations.
21
<PAGE>
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.
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. 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.
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.
5. MANAGEMENT
The trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer,* Chairman and President (age 55)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), Forum Financial Corp. (a registered transfer agent) and
Forum Advisors, Inc. (a registered investment adviser). Mr. Keffer is a
Trustee and/or officer of various registered investment companies for which
Forum Administrative Services, LLC serves as manager or administrator and
for which Forum Financial Services, Inc. serves as manager, administrator
and/or distributor. His address is Two Portland Square, Portland, Maine
04101.
Costas Azariadis, Trustee (age 53)
Professor of Economics, University of California, Los Angeles, since July
1992. Prior thereto, Dr. Azariadis was Professor of Economics at the
University of Pennsylvania. His address is Department of Economics,
University of California, Los Angeles, 405 Hilgard Avenue, Los Angeles,
California 90024.
James C. Cheng, Trustee (age 54)
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President and
Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is 27 Temple Street, Belmont,
Massachusetts 02178.
J. Michael Parish, Trustee (age 53)
Partner at the law firm of Reid 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 Wall Street,
New York, New York 10005.
Mark D. Kaplan, Vice President, Assistant Treasurer and Assistant Secretary (age
41)
Managing Director at Forum Financial Services, Inc. since September 1995.
Prior thereto, Mr. Kaplan was Managing Director and Director of Research at
H.M. Payson & Co. His address is Two Portland Square, Portland, Maine
04101.
23
<PAGE>
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also Secretary or Assistant
Secretary of various registered investment companies for which Forum
Administrative Services, LLC or Forum Financial Services, Inc. serves as
manager, administrator and/or distributor. His address is Two Portland
Square, Portland, Maine 04101.
Max Berueffy, Assistant Secretary (age 46)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1994. Prior thereto, Mr. Berueffy was on the staff of the U.S.
Securities and Exchange Commission for seven years, first in the appellate
branch of the Office of the General Counsel, then as a counsel to
Commissioner Grundfest and finally as a senior special counsel in the
Division of Investment Management. Mr. Berueffy is also Secretary or
Assistant Secretary of various registered investment companies for which
Forum Administrative Services, LLC or Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. His address is Two Portland
Square, Portland, Maine 04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has been
associated since July 1996. Prior thereto, Ms. Tumlin was on the staff of
the U.S. Securities and Exchange Commission as an attorney in the Division
of Market Regulation and prior thereto Ms. Tumlin was an associate with the
law firm of Robinson Silverman Pearce Aronsohn & Berman in New York, New
York. Ms. Tumlin is also Assistant Secretary of various registered
investment companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. Her address is Two Portland Square, Portland, Maine 04101.
M. Paige Turney, Assistant Secretary (age 28).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Turney was employed from 1992 as a Senior Fund
Accountant with First Data Corporation in Boston, Massachusetts. Prior
thereto she was a student at Montana State University. Ms. Turney is also
Assistant Secretary of various registered investment companies for which
Forum Administrative Services, LLC or Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. Her address is Two Portland
Square, Portland, Maine 04101.
TRUSTEE COMPENSATION. Each Trustee of the Trust (other than John Y. Keffer, who
is an interested person of the Trust) is paid $1,000 for each Board meeting
attended (whether in person or by electronic communication) and is paid $1,000
for each committee meeting attended on a date when a Board meeting is not held.
As of March 31, 1997, in addition to $1,000 for each Board meeting attended,
each Trustee receives $100 per active portfolio of the Trust. To the extent a
meeting relates to only certain portfolios of the Trust, Trustees are paid the
$100 fee only with respect to those portfolios. Trustees are also reimbursed for
travel and related expenses incurred in attending meetings of the Board. No
officer of the Trust is compensated by the Trust.
The following table provides the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
24
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $4,000 None None $4,000
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
</TABLE>
ADVISER
Pursuant to an Advisory Agreement with the Trust (the "Investment Advisory
Agreement"), the Funds' investment adviser, Forum Advisors, Inc. (the "Adviser")
furnishes at its own expense all services, facilities and personnel necessary in
connection with managing each Fund's investments and effecting portfolio
transactions for the respective Fund. The Investment Advisory Agreement provides
for an initial term of two years from its effective date with respect to a Fund
and for its continuance in effect for successive twelve-month periods
thereafter, provided the agreement is specifically approved at least annually by
the Board or by vote of the shareholders of the Fund, and in either case by a
majority of the directors who are not parties to the Investment Advisory
Agreement or interested persons of any such party.
The Investment Advisory Agreement is terminable without penalty by the Trust
with respect to the Fund on 60 days' written notice when authorized either by
vote of its shareholders or by a vote of a majority of the Board, or by the
Adviser on not more than 60 days' nor less than 30 days' written notice, and
will automatically terminate in the event of its assignment. The Investment
Advisory Agreement also provides that, with respect to a Fund, the Adviser shall
not be liable for any error of judgment or mistake of law or for any act or
omission in the performance of its duties to the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of the Adviser's
duties or by reason of reckless disregard of its obligations and duties under
the Investment Advisory Agreement. The Investment Advisory Agreement provides
that the Adviser may render services to others.
For its services under the Investment Advisory Agreement, the Advisor receives
with respect to each Fund a fee at an annual rate of 0.40% of the Fund's average
daily net assets. Fees payable under the Investment Advisory Agreement with
respect to the each Fund are set forth in the following tables:
INVESTORS BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- --------
1997 $100,163 $0 $100,163
1996 $107,061 $48,250 $58,811
1995 $100,098 $9,407 $90,691
TAXSAVER BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $70,634 $0 $70,634
1996 $69,544 $0 $69,544
1995 $65,238 $59,238 $6,000
25
<PAGE>
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $101,549 $0 $101,549
1996 $105,104 $0 105,104
1995 $105,063 $91,930 $13,133
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED
MARCH 31 GROSS FEE WAIVED FEE NET FEE
- -------- --------- ---------- -------
1997 $31,774 $0 $31,774
1996 $23,870 $0 $23,870
1995 $17,826 $17,826 $0
In addition to receiving its advisory fee from the Funds, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in the Funds. In some instances the Adviser may elect
to credit against any investment management fee received from a client who is
also a shareholder in the Fund an amount equal to all or a portion of the fees
received by the Adviser or any affiliate of the Adviser from the Fund with
respect to the client's assets invested in the Fund.
The Adviser has agreed to reimburse the Trust for certain of each Fund's
operating expenses (exclusive of interest, taxes, brokerage, fees and
organization expenses, all to the extent permitted by applicable state law or
regulation) which in any year exceed the limits prescribed by any state in which
a Fund's shares are qualified for sale. The Trust may elect not to qualify its
shares for sale in every state. The manager and distributor believe that
currently the most restrictive expense ratio limitation imposed by any state is
2-1/2% of the first $30 million of each Fund's average net assets, 2% of the
next $70 million of its average net assets and 1-1/2% of its average net assets
in excess of $100 million. For the purpose of this obligation to reimburse
expenses, the Fund's annual expenses are estimated and accrued daily, and any
appropriate estimated payments will be made by the Adviser or the manager and
distributor monthly.
Subject to the above obligations to reimburse the Trust for its excess expenses,
the Trust has confirmed its obligation to pay all its other expenses, including:
interest charges, taxes, brokerage fees and commissions; certain insurance
premiums; fees, interest charges and expenses of the custodian, transfer agent
and dividend disbursing agent; telecommunications expenses; auditing, legal and
compliance expenses; costs of forming the corporation and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information, account application forms and shareholder reports and
delivering them to existing and prospective shareholders; costs of maintaining
books of original entry for portfolio and fund accounting and other required
books and accounts and of calculating the net asset value of shares of the
Trust; costs of reproduction, stationery and supplies; compensation of
directors, officers and employees of the Trust and costs of other personnel
performing services for the Trust who are not officers of the Adviser, the
manager and distributor or their respective affiliates; costs of corporate
meetings; Securities and Exchange Commission registration fees and related
expenses; expenses incurred pursuant to state securities laws; and fees payable
to the Adviser under the Investment Advisory Agreement.
ADMINISTRATION
Pursuant to an Administration Agreement approved by the Board of Trustees on
June 19, 1997 (the "Administration Agreement"), FAS supervises the overall
management of the Trust (which includes, among other responsibilities,
negotiation of contracts and fees with, and monitoring of performance and
billing of, the transfer agent and custodian and arranging for maintenance of
books and records of the Trust) and provides the Trust with general office
facilities. The Administration Agreement may be terminated by either party
without penalty on 60 days' written notice and may not be assigned except upon
written consent by both parties. The Administration Agreement also provides that
FAS shall not be liable for any error of judgment or mistake of law or for any
act or omission in
26
<PAGE>
the administration or management of the Trust, except for willful misfeasance,
bad faith or gross negligence in the performance of FAS's duties or by reason of
reckless disregard of its obligations and duties under the Administration
Agreement. Prior to June 19, 1997, FFSI provided administration and distribution
services to the Trust pursuant to a Managment Agreement (the "Management
Agreement")
FAS provides persons satisfactory to the Board to serve as officers of the
Trust. Those officers, as well as certain other employees and Trustees of the
Trust, may be directors, officers or employees of (and persons providing
services to the Trust may include) FAS, its affiliates or certain affiliates of
the Adviser.
DISTRIBUTION
FFSI was incorporated under the laws of the State of Delaware on February 7,
1986 and serves as distributor of shares of the Portfolio pursuant to a
Distribution Agreement between FFSI and the Trust (the "Distribution
Agreement"). The Distribution Agreement provides, with respect to each Fund, for
an initial term of one year from its effective date and for its continuance in
effect for successive twelve-month periods thereafter, provided the agreement is
specifically approved at least annually by the Board or by the shareholders of
the Fund, and in either case by a majority of the Trustees who are not parties
to the Distribution Agreement or interested persons of any such party.
The Distribution Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to each Fund by vote of the Fund's
shareholders or by either party on 60 days' written notice. The Distribution
Agreement also provides that FFSI shall not be liable for any error of judgment
or mistake of law or for any act or omission in the performances of its services
to the Trust, except for willful misfeasance, bad faith or gross negligence in
the performance of FFSI's duties or by reason of reckless disregard of its
obligations and duties under the Distribution Agreement. Pursuant to the
Distribution Agreement, FFSI receives, and may reallow to certain financial
institutions, the sales charge paid by the purchasers of each Fund's shares. The
aggregate sales charges payable to FFSI with respect to each Fund are outlined
in the following tables:
<TABLE>
INVESTORS BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31 AGGREGATE
SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
1997 $1,951 $274 $1,677
1996 $6,252 $829 $5,423
1995 $1,706 $243 $1,463
TAXSAVER BOND FUND
FISCAL YEAR ENDED MARCH 31 AGGREGATE
SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
1997 $16 $2 $14
1996 $13,336 $1,317 $12,019
1995 $7,701 $1,012 $6,689
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED MARCH 31 AGGREGATE
SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
1997 $117,032 $10,264 $106,768
1996 $106,683 $13,941 $92,742
1995 $133,896 $17,656 $116,239
</TABLE>
27
<PAGE>
<TABLE>
NEW HAMPSHIRE BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31 AGGREGATE
SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
1997 $54,094 $4,557 $49,537
1996 $24,865 $3,309 $21,556
1995 $33,166 $4,429 $28,737
For its services under the Management Agreement, FFSI received with respect to
each Fund a fee at an annual rate of 0.30% of the average daily net assets of
each Fund. Fees payable under the Management Agreement with respect to each Fund
are outlined in the following tables:
INVESTORS BOND FUND
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $75,122 $75,122 $0
1996 $80,296 $80,296 $0
1995 $75,074 $75,074 $0
TAXSAVER BOND FUND
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $52,975 $52,975 $0
1996 $52,158 $52,158 $0
1995 $48,928 $48,928 $0
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $76,162 $76,162 $0
1996 $78,828 $78,828 $0
1995 $78,797 $78,797 $0
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $23,831 $23,831 $0
1996 $17,902 $17,902 $0
1995 $13,369 $13,369 $0
</TABLE>
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent of the Trust
pursuant to a transfer agency agreement (the "Transfer Agency Agreement"). The
Transfer Agency Agreement provides, with respect to each
28
<PAGE>
Fund, for an initial term of two years from its effective date and for its
continuance in effect for successive twelve-month periods thereafter, provided
that the agreement is specifically approved at least annually by the Board or,
with respect to a Fund, by a vote of the shareholders of that Fund, and in
either case by a majority of the directors who are not parties to the Transfer
Agency Agreement or interested persons of any such party at a meeting called for
the purpose of voting on the Transfer Agency Agreement.
Among the responsibilities of the Transfer Agent as agent for the Trust are: (1)
answering customer inquiries regarding account status and history, the manner in
which purchases and redemptions of shares of the Funds may be effected and
certain other matters pertaining to the Funds; (2) assisting shareholders in
initiating and changing account designations and addresses; (3) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, assisting in processing purchase and redemption
transactions and receiving wired funds; (4) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (5) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (6) furnishing periodic statements and confirmations of
purchases and redemptions; (7) arranging for the transmission of proxy
statements, annual reports, prospectuses and other communications from the Trust
to its shareholders; (8) arranging for the receipt, tabulation and transmission
to the Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Funds with
respect to assets invested in the Funds. The Transfer Agent or any sub-transfer
agent or other processing agent may elect to credit against the fees payable to
it by its clients or customers all or a portion of any fee received from the
Trust or from the Transfer Agent with respect to assets of those customers or
clients invested in the Fund. The Transfer Agent, the Manager or sub-transfer
agents or processing agents retained by the Transfer Agent may be Processing
Organizations (as defined in the Prospectus) and, in the case of sub-transfer
agents or processing agents, may also be affiliated persons of the Transfer
Agent or the Manager.
For its services under the Transfer Agency Agreement, the Transfer Agent
receives, with respect to each Fund: (i) a fee at an annual rate of 0.25 percent
of the average daily net assets of each Fund (ii) a fee of $12,000 per year;
such amounts to be computed and paid monthly in arrears by the Fund; and (iii)
Annual Shareholder Account Fees of $18.00 per shareholder account; such fees to
be computed as of the last business day of the prior month. Fees payable under
the Transfer Agency Agreement with respect to each Fund are set forth in the
following tables:
<TABLE>
INVESTORS BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $76,562 $58,271 $18,291
1996 $80,320 $60,882 $19,438
1995 $62,562 $49,813 $12,749
TAXSAVER BOND FUND
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $57,010 $40,248 $16,762
1996 $56,344 $38,888 $17,456
1995 $40,794 $28,091 $12,703
</TABLE>
29
<PAGE>
<TABLE>
MAINE MUNICIPAL BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $82,456 $39,581 $42,875
1996 $84,962 $41,754 $43,208
1995 $65,664 $49,488 $16,176
NEW HAMPSHIRE BOND FUND
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $33,317 $6,539 $26,778
1996 $28,488 $645 $27,843
1995 $11,141 $8,715 $2,426
</TABLE>
The Transfer Agent or any sub-transfer agent or processing agent may also act
and receive compensation for acting as custodian, investment manager, nominee,
agent or fiduciary for its customers or clients who are shareholders of the Fund
with respect to assets invested in the Fund.
Pursuant to a Fund Accounting Agreement, the Transfer Agent also provides the
Fund with portfolio accounting, including the calculation of the Fund's net
asset value. For these services, the Transfer Agent receives an annual fee
ranging from $36,000 to $60,000 depending upon the amount and type of the Fund's
portfolio transactions and positions. Fees payable under the Fund Accounting
Agreement with respect to fund accounting services for the Fund are set forth in
the following table:
<TABLE>
INVESTORS BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $41,000 $0 $41,000
1996 $38,000 $0 $38,000
1995 $36,000 $0 $36,000
TAXSAVER BOND FUND
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $36,000 $0 $36,000
1996 $39,000 $0 $39,000
1995 $36,000 $0 $36,000
MAINE MUNICIPAL BOND FUND
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $48,000 $0 $48,000
1996 $48,000 $0 $48,000
1995 $48,000 $0 $48,000
</TABLE>
30
<PAGE>
<TABLE>
NEW HAMPSHIRE BOND FUND
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31
GROSS FEE WAIVED FEE NET FEE
1997 $37,000 $0 $37,000
1996 $37,000 $0 $37,000
1995 $36,000 $0 $36,000
</TABLE>
6. DETERMINATION OF NET ASSET VALUE
The Trust does not determine net asset value on the following holidays: New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Purchases
and redemptions are effected at the time of the next determination of net asset
value following the receipt of any purchase or redemption order.
7. PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities for the Funds usually are principal
transactions. Portfolio securities for these Funds are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. There usually are no brokerage commissions paid for such purchases.
Purchases from underwriters of portfolio securities include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers include the spread between the bid and asked prices.
The Funds may effect purchases and sales through brokers who charge commissions.
Allocations of transactions to brokers and dealers and the frequency of
transactions are determined by the Adviser in its best judgment and in a manner
deemed to be in the best interest of shareholders of the Funds rather than by
any formula. The primary consideration is prompt execution of orders in an
effective manner and at the most favorable price available to the Funds. For the
fiscal years ended March 31, 1997, 1996, and 1995, the Funds did not pay any
brokerage commissions.
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with Fund transactions, the Adviser 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
31
<PAGE>
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.
8. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor.
Set forth below is an example of the method of computing the offering price of
each Fund's shares. The example assumes a purchase of shares of beneficial
interest aggregating less than $100,000 subject to the schedule of sales charges
set forth in the Prospectuses at a price based on the net asset value per share
of each Fund on March 31, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Investors TaxSaver Maine New Hampshire
Bond Bond Municipal Bond
Fund Fund Bond Fund Fund
Net Asset Value Per Share $ 10.19 $ 10.49 10.73 10.31
Sales Charge, 3.75% of offering
price (3.90% of net asset value
per share) $ 0.40 $ 0.41 N/A N/A
Sales Charge, 2.50% of offering
price (2.56% of net asset value
per share) N/A N/A $ 0.27 $ 0.26
Offering to Public $ 10.59 $ 10.90 $11.00 $10.57
</TABLE>
In addition to the situations described in the Prospectus under "Purchases and
Redemptions of Shares," the Trust may redeem shares involuntarily, from time to
time, to reimburse a portfolio for any loss sustained by reason of the failure
of a shareholder to make full payment for shares purchased by the shareholder or
to collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to the Fund's shares as provided in the
Prospectus.
The Trust has filed an election with the Securities and Exchange Commission
pursuant to which a Fund will only effect a redemption in portfolio securities
if a shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
The Funds may wire proceeds of redemptions to shareholders that have elected
wire redemption privileges only if the wired amount is greater than $5,000. In
addition, the Funds will only wire redemption proceeds to financial institutions
located in the United States.
By use of telephone redemption and exchange privileges, the shareholder
authorizes the Transfer Agent to act upon the instruction of any person
representing himself either to be, or to have the authority to act on behalf of,
the investor and believed by the Transfer Agent to be genuine. The records of
the Transfer Agent of such instructions are binding. Proceeds of an exchange
transaction may be invested in another Participating Fund (as defined below) in
the name of the shareholder.
32
<PAGE>
EXCHANGE PRIVILEGE
The exchange privilege permits shareholders of the Funds to exchange their
shares for shares of any other fund of the Trust or shares of certain other
portfolios of investment companies which retain FAS or its affiliates as
investment adviser or distributor and which participate in the Trust's exchange
privilege program ("Participating Fund"). For Federal income tax purposes,
exchange transactions are treated as sales on which a purchaser will realize a
capital gain or loss depending on whether the value of the shares redeemed is
more or less than his basis in such shares at the time of the transaction.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares are being acquired. Shares of any
Participating Fund may be redeemed and the proceeds used to purchase, without a
sales charge, shares of any other Participating Fund that are offered without a
sales charge. Shares of any Participating Fund purchased with a sales charge may
be redeemed and the proceeds used to purchase, without a sales charge, shares of
any other Participating Fund otherwise sold with a lesser or the same sales
charge. If the Participating Fund purchased in the exchange transaction imposes
a higher sales charge than was paid originally on the exchanged shares, the
shareholder will be responsible for the difference between the two sales
charges. Shares acquired through the reinvestment of dividends and distributions
are deemed to have been acquired with a sales charge rate equal to that paid on
the shares on which the dividend or distribution was paid.
The terms of the exchange privilege are subject to change, and the privilege may
be terminated by any of the Participating Funds or the Trust. However the
privilege will not be terminated, and no material change that restricts the
availability of the privilege to shareholders will be implemented, without
reasonable advance notice to shareholders.
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
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.
9. TAXATION
Qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended, does not involve governmental supervision of management or
investment practices or policies. Investors should consult their own counsel for
a complete understanding of the requirements the Funds must meet to qualify for
such treatment. The information set forth in the 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.
33
<PAGE>
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 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.
10. OTHER INFORMATION
CUSTODIAN
Pursuant to a Custodian Agreement, The First National Bank of Boston, 100
Federal Street, Boston, Massachusetts 02106, acts as the custodian of each
Fund's assets. The custodian's responsibilities include safeguarding and
controlling the Funds' cash and securities, determining income and collecting
interest on Fund investments.
COUNSEL
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, 1200 G Street,
N.W., Washington, D.C. 20005
AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, independent
auditors, act as auditors for the Trust.
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and assumed
the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996, Forum
Funds, Inc. was reorganized as a Delaware business trust. The Trust has an
unlimited number of authorized shares of beneficial interest. The Board may,
without shareholder approval, divide the authorized shares into an unlimited
number of separate portfolios or series (such as the Funds) and may in the
future divide portfolios or series into two or more classes of shares (such as
Investor and Institutional Shares). Currently the authorized shares of the Trust
are divided into 15 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of
34
<PAGE>
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 December 31, 1997, 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 or owned of record more than 5% of either Fund.
From time to time, certain shareholders may own a large percentage of the shares
of a Fund. Accordingly, those shareholders may be able to greatly affect (if not
determine) the outcome of a shareholder vote. As noted, certain of these
shareholders are known to the Trust to hold their shares of record only and have
no beneficial interest, including the right to vote, in the shares.
<TABLE>
INVESTORS BOND FUND
<S> <C>
PERCENTAGE OF FUND
SHARES OWNED
SHAREHOLDERS (OF RECORD) ------------
- -----------------------
SEI Trust Company
c/o Irwin Union Bank & Trust 58.95%
Attn: Mutual Fund Administrator
One Freedom Valley Drive
Oaks, Pennsylvania 19456
Firstrust Company National City Bank Trust Department
227 Main Street 20.04%
Evansville, Indiana 47708
National Financial Services Corp. 5.39%
For the Exclusive Benefit of Custodian
PO Box 3908
Church Street Station
New York, NY 10008-3900
TAXSAVER BOND FUND
PERCENTAGE OF FUND
SHARES OWNED
SHAREHOLDER ------------
- -----------
SEI Trust Company
c/o Irwin Union Bank & Trust 46.73%
Attn: Mutual Fund Administrator
One Freedom Valley Drive
Oaks, Pennsylvania 19456
Leonore Zusman TTEE
Leonore Zusman Living Trust 10.71%
6439 Woodacre Ct.
Englewood, OH 45322
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
Firstrust Company National City Bank Trust Department
227 Main Street
Evansville, Indiana 47708 9.79%%
Lawrence L. Zusman TTEE
Lawrence L. Zusman Living Trust 9.60%
6439 Woodacre Ct.
Englewood, OH 45322
Mitchell Singer
5045 North Main Street
Suite 250 5.55%
Dayton, OH 45415-3637
MAINE MUNICIPAL BOND FUND
PERCENTAGE OF FUND
SHARES OWNED
SHAREHOLDER (OF RECORD) ------------
- ----------------------
Administrative Data Management Corp.
Attn: Sue Needell
581 Main Street 40.79%
Woodbridge, NJ 07095-1198
NEW HAMPSHIRE BOND FUND
PERCENTAGE OF FUND
SHARES OWNED
SHAREHOLDERS (OF RECORD) ------------
- -----------------------
Independence Trust
Attn: Linda Feliciano 44.22%
200 Bedford Street, 5th Floor
Manchester, NH 03105-0119
Administrative Data Management Corp.
Attn: Sue Needell
581 Main Street 33.88%
Woodbridge, NJ 07095-1198
</TABLE>
FINANCIAL STATEMENTS
The financial statements of each Fund for the year ended March 31, 1997 (which
include a statement of assets and liabilities, a statement of operations, a
statement of changes in net assets, notes to financial statements, financial
highlights, a statement of investments and the auditors' report thereon) are
included in the Annual Report to Shareholders delivered along with this SAI and
are incorporated herein by reference.
The unaudited financial statements for each Fund for the semi-annual period
ended September 30, 1997 (which include a statement of assets and liabilities, a
statement of operations, a statement of changes in net assets, notes to
financial statements, financial highlights, a statement of investments and the
auditors' report thereon) are included in the Forum Funds Semi-Annual Report
delivered along with this SAI and are incorporated herein by reference.
36
<PAGE>
INVESTORS HIGH GRADE BOND FUND
INVESTORS BOND FUND
TAXSAVER BOND FUND
MAINE MUNICIPAL BOND FUND
NEW HAMPSHIRE BOND FUND
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE AND MUNICIPAL BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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.
A-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.
A-2
<PAGE>
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial 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.
A-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.
A-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.
A-5
<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 INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 rating.
F-3. Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
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."
A-6
<PAGE>
"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.
A-7
<PAGE>
INVESTORS HIGH GRADE BOND FUND
INVESTORS BOND FUND
TAXSAVER BOND FUND
MAINE MUNICIPAL BOND FUND
NEW HAMPSHIRE BOND FUND
APPENDIX B - DESCRIPTION OF MUNICIPAL SECURITIES
1. MUNICIPAL BONDS
Municipal Bonds which meet longer term capital needs and generally have
maturities of more than one year when issued, have three principal
classifications:
GENERAL OBLIGATION BONDS are issued by such entities as states, counties,
cities, towns, and regional districts. The proceeds of these obligations are
used to fund a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer systems. The
basic security behind General Obligation Bonds is the issuer's pledge of its
full faith and credit and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to the rate or amount of special assessments.
REVENUE BONDS in recent years have come to include an increasingly wide variety
of types of municipal obligations. As with other kinds of municipal obligations,
the issuers of revenue bonds may consist of virtually any form of state or local
governmental entity, including states, state agencies, cities, counties,
authorities of various kinds, such as public housing or redevelopment
authorities, and special districts, such as water, sewer or sanitary districts.
Generally, revenue bonds are secured by the revenues or net revenues derived
from a particular facility, group of facilities, or, in some cases, the proceeds
of a special excise or other specific revenue source. Revenue bonds are issued
to finance a wide variety of capital projects including electric, gas, water and
sewer systems; highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Many of these bonds provide additional
security in the form of a debt service reserve fund to be used to make principal
and interest payments. Various forms of credit enhancement, such as a bank
letter of credit or municipal bond insurance, may also be employed in revenue
bond issues. Housing authorities have a wide range of security, including
partially or fully insured mortgages, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public projects. Some
authorities provide further security in the form of a state's ability (without
obligation) to make up deficiencies in the debt service reserve fund.
In recent years, revenue bonds have been issued in large volumes for projects
that are privately owned and operated as described below.
PRIVATE ACTIVITY BONDS are considered municipal bonds if the interest paid
thereon is exempt from Federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing and health. These bonds are
also used to finance public facilities such as airports, mass transit systems
and 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
B-1
<PAGE>
kinds of other private commercial projects originally financed with tax-exempt
bonds. In future years, the types of projects qualifying under the Code for
tax-exempt financing are expected to become increasingly limited.
Because of terminology formerly used in the Code, virtually any form of private
activity bond may still be referred to as an "industrial development bond," but
more and more frequently revenue bonds have become classified according to the
particular type of facility being financed, such as hospital revenue bonds,
nursing home revenue bonds, multifamily housing revenues bonds, single family
housing revenue bonds, industrial development revenue bonds and solid waste
resource recovery revenue bonds.
Tax-exempt bonds are also categorized according to whether the interest is or is
not includible in the calculation of alternative minimum taxes imposed on
individuals, according to whether the costs of acquiring or carrying the bonds
are or are not deductible in part by banks and other financial institutions, and
according to other criteria relevant for Federal income tax purposes. Due to the
increasing complexity of Code and related requirements governing the issuance of
tax-exempt bonds, industry practice has uniformly required, as a condition to
the issuance of such bonds, but particularly for revenue bonds, an opinion of
nationally recognized bond counsel as to the tax-exempt status of interest on
the bonds.
2. MUNICIPAL NOTES
Municipal Notes generally are used to provide for short-term capital needs and
usually have maturities of one year or less. They include the following:
TAX ANTICIPATION NOTES are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of various seasonal
tax revenues, such as income, sales, use and business taxes, and are payable
from these specific future taxes.
REVENUE ANTICIPATION NOTES are issued in expectation of receipt of other types
of revenues, such as Federal revenues available under the Federal Revenue
Sharing Programs.
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
B-2
<PAGE>
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.
B-3
<PAGE>
INVESTORS BOND FUND
TAXSAVER BOND FUND
APPENDIX C - HEDGING STRATEGIES
As discussed in the Prospectus, the Adviser to each Fund may engage in certain
options and futures strategies to attempt to hedge a Fund's portfolio. The
instruments in which the Fund may invest include (i) options on securities and
stock indexes, (ii) stock index and interest rate futures contracts ("futures
contracts"), and (iii) options on futures contracts. Use of these instruments is
subject to regulation by the Securities and Exchange Commission ("SEC"), the
several options and futures exchanges upon which options and futures are traded,
and the Commodity Futures Trading Commission ("CFTC").
The various hedging and income strategies referred to herein and in each Fund's
Prospectus are intended to illustrate the type of strategies that are available
to, and may be used by, the Adviser in managing a Fund's portfolio. Depending on
prevailing market conditions, use of these strategies may enable the Adviser to
reduce investment risks to which a Fund may be subject. No assurance can be
given, however, that any strategies will succeed.
The Funds will not use leverage in their hedging strategies. In the case of
transactions entered into as a hedge, a Fund will hold securities or other
options or futures positions whose values are expected to offset ("cover") its
obligations thereunder. A Fund will not enter into a hedging strategy that
exposes the Fund to an obligation to another party unless it owns either (1) an
offsetting ("covered") position or (2) cash, U.S. government securities or other
liquid assets with a value sufficient at all times to cover its potential
obligations. Each Fund will comply with guidelines established by the SEC with
respect to coverage and, if the guidelines so require, will set aside cash, U.S.
government securities or other liquid assets in a segregated account with its
custodian in the prescribed amount. Securities, options or futures positions
used for cover and assets held in a segregated account cannot be sold or closed
out while the hedging strategy is outstanding, unless they are replaced with
similar assets. As a result, there is a possibility that the use of cover or
segregation involving a large percentage of a Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
OPTIONS STRATEGIES. The Funds may purchase put and call options written by
others and write (sell) put and call options covering specified securities or
stock index-related amounts. A put option (sometimes called a "standby
commitment") gives the buyer of such option, upon payment of a premium, the
right to deliver a specified amount of a security or specified amount of cash
(on stock-index options) to the writer of the option on or before a fixed date
at a predetermined price. A call option (sometimes called a "reverse standby
commitment") gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified amount of a security or
specified amount of cash (on stock-index options) or before a fixed date, at a
predetermined price. The predetermined prices may be higher or lower than the
market value of the underlying currency or security. A Fund may buy or sell both
exchange-traded and over-the-counter ("OTC") options. A Fund will purchase or
write an option only if that option is traded on a recognized U.S. options
exchange or if the Adviser believes that a liquid secondary market for the
option exists. When a Fund purchases an OTC option, it relies on the dealer from
which it has purchased the OTC option to make or take delivery of the securities
or currency underlying the option. Failure by the dealer to do so would result
in the loss of the premium paid by the Fund as well as the loss of the expected
benefit of the transaction. OTC options and the securities underlying these
options are currently treated as illiquid securities.
A Fund may purchase call options on equity securities that the Adviser intends
to include in the Fund's portfolio in order to fix the cost of a future
purchase. Call options may also be purchased as a means of participating in an
anticipated price increase of a security on a more limited risk basis than would
be possible if the security itself were purchased. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; conversely, if the
market price of the underlying security increases above the exercise price and
the Fund either sells or exercises the option, any profit eventually realized
will be reduced by the premium paid. The Funds may similarly purchase put
options in order to hedge against a
C-1
<PAGE>
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.
C-2
<PAGE>
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
level of the underlying instrument but to the anticipated levels at some point
in the
C-3
<PAGE>
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.
C-4
<PAGE>
MAINE MUNICIPAL BOND FUND
APPENDIX D - HEDGING STRATEGIES
1. BOND INDEX FUTURES
Futures contracts on a municipal bond index (the "Index") are traded on the
Chicago Board of Trade. Maine Municipal Bond Fund may seek to hedge itself
against changes in interest rates by purchasing and selling futures contracts on
the Index or any municipal bond index hereafter approved for trading by the
Commodity Futures Trading Commission. The Index assigns numerical values to the
municipal securities comprising the Index and, based on those values, fluctuates
in accordance with market movements of the municipal bonds comprising the Index.
The purchaser or seller of a futures contract on the Index agrees to take or
make delivery of an amount of cash equal to the difference between a specified
dollar multiple of the value of the Index on the expiration date of the
contract, "current contract value," and the price at which the contract was
originally purchased or sold. No physical delivery of the municipal bonds
underlying the Index is made.
BOND INDEX FUTURES CHARACTERISTICS. Unlike the purchase or sale of a specific
security by the Fund, no price is paid or received by the Fund upon the purchase
or sale of an index futures contract. Initially, the Fund will be required to
deposit with the broker through which such transaction is effected or in a
segregated account with the Fund's custodian an amount of cash or U.S. Treasury
bills equal to a specified dollar amount per contract as of the date thereof.
This amount is known as initial margin. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds to finance
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker will be made on a daily basis as the price of the underlying index
fluctuates, a process known as "marking to the market." For example, when the
Fund has purchased an index futures contract and the price of the futures
contract has risen in response to a rise in the Index, that position will have
increased in value and the Fund will receive from the broker a variation margin
payment equal to that increase in value. Conversely, where the Fund has
purchased an index futures contract and the price of the futures contract has
declined in response to a decrease in the Index, the position would be less
valuable and the Fund would be required to make a variation margin payment to
the broker. At any time prior to expiration of the futures contract, the Adviser
may elect to close the position by taking an opposite position which will
operate to terminate the Fund's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Fund, and the Fund realizes a loss or gain.
RISKS OF TRANSACTIONS IN INDEX FUTURES. There are several risks in connection
with the use of index futures by the Fund as a hedging device. One risk arises
because of the imperfect 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
D-1
<PAGE>
and also experience a decline in the value of its portfolio securities. However,
over time the value of a diversified portfolio should tend to move in the same
direction as the Index, although there may be deviations arising from
differences between the composition of the Fund's portfolios and the securities
comprising the Index.
When index futures are purchased to hedge against possible increases in the
price of municipal bonds before the Fund is able to invest its cash (or cash
equivalents) in municipal bonds in an orderly fashion, it is possible that the
market may decline instead. If the Fund then determines not to invest in
municipal bonds at that time because of concern as to possible further market
decline or for other reasons, the Fund will realize a loss on the index futures
that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the index futures and the portion of
the portfolio being hedged, the price of index futures may not correlate
perfectly with movement in the Index due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the Index and the index futures markets. Secondly, from the
point of view of speculators, deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the index futures market may also
cause temporary price distortions. Due to the possibility of price distortion in
the index futures market, and because of the imperfect correlation between the
movements in the Index and movements in the price of index futures, a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction over a short time frame.
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
D-2
<PAGE>
out of a futures contract is effected by entering into an offsetting purchase or
sale transaction. An offsetting transaction for a futures contract sale is
effected by entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and same delivery date. If
the price in the sale exceeds the price in the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the purchase price
of the offsetting transaction exceeds the sale price, the Fund pays the
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.
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
D-3
<PAGE>
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.
D-4
<PAGE>
APPENDIX E - 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.
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
E-1
<PAGE>
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.
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.
E-2
<PAGE>
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."
E-3
<PAGE>
EQUITY INDEX FUND
INVESTORS EQUITY FUND
INTERNATIONAL EQUITY FUND
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
Account Information and
Shareholder Servicing: Distributor:
Forum Financial Corp. Forum Financial Services, Inc.
P.O. Box 446 Two Portland Square
Portland, Maine 04112 Portland, Maine 04101
207-879-0001 207-879-1900
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 15, 1997,
AS AMENDED JANUARY 21, 1998
Forum Funds (the "Trust") is a registered open-end investment company. This
Statement of Additional Information supplements the Prospectus dated December
15, 1997 offering shares of Equity Index Fund, Investors Equity Fund,
International Equity Fund and Emerging Markets Fund (each a Fund and
collectively the "Funds") 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.
Each Fund, except for Investors Equity Fund currently seeks to achieve its
investment objective by holding, as its only investment securities, the
securities of a separate portfolio of a registered open-end management
investment company.
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. Investment Limitations.......................18
4. Performance Data.............................21
5. Management...................................22
6. Determination of Net Asset Value.............31
7. Portfolio Transactions.......................32
8. Additional Purchase and
Redemption Information....................33
9. Taxation.....................................35
10. Other Information............................37
Appendix A - Description of Securities Ratings
Appendix B - Text of Forum Brochure
<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 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 twenty-three series and has two series that have not commenced
operation as of the date of this SAI. The series of the Trust are as follows:
<TABLE>
<S> <C> <C>
Daily Assets Treasury Fund Austin Global Equity Fund
Daily Assets Treasury Obligations Fund Oak Hall Equity Fund
Daily Assets Government Fund
Daily Assets Cash Fund Quadra Limited Maturity Treasury Fund
Daily Assets Tax-Exempt Fund Quadra Value Equity Fund
Quadra Growth Fund
Investors Bond Fund Quadra International Equity Fund
TaxSaver Bond Fund Quadra Opportunistic Bond Fund
Maine Municipal Bond Fund
New Hampshire Bond Fund Equity Index Fund
Investors Growth Fund
Payson Value Fund Investors Equity Fund
Payson Balanced Fund. International Equity Fund
Emerging Markets Fund
</TABLE>
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.
"Core Trust" means Core Trust (Delaware), a Delaware business trust.
"Core Trust Board" means the Board of Trustees of Core Trust (Delaware).
"FAS" means Forum Administrative Services, LLC.
"FAcS" means Forum Accounting Services, LLC.
"FFC" means Forum Financial Corp.
"FFSI" means Forum Financial Services, Inc.
"Forum Advisors" means Forum Advisors, Inc.
"Fund" means Equity Index Fund, Investors Equity Fund, International Equity Fund
or Emerging Markets Fund.
"Fund Business Day" has the meaning ascribed thereto in the current Prospectus
of the Funds.
"NRSRO" means a nationally recognized statistical rating organization.
"Norwest" means Norwest Investment Management, Inc.
"Portfolio" means Index Portfolio, Schroder International Portfolio or Schroder
EM Core Portfolio.
2
<PAGE>
"SAI" means this Statement of Additional Information.
"SCMI" means Schroder Capital Management International, Inc.
"SEC" means the U.S. Securities and Exchange Commission.
"Schroder Core" means Schroder Capital Funds.
"Schroder Core Board" means the Board of Trustees of Schroder Core.
"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
INTRODUCTION
The following information supplements the discussion found under "Investment
Objective and Policies" in the Prospectus. Each of Equity Index Fund,
International Equity Fund and Emerging Markets Fund currently seeks to achieve
its investment objective by investing all of its investment assets in a
Portfolio, which has the same investment objective and policies. Because each
Fund has the same investment policies as the Portfolio in which it invests and
currently invests all of its assets in that Portfolio, investment policies for
the Funds and Portfolios are generally discussed in reference to the Fund.
International Equity Fund and Emerging Markets Fund will normally invest at
least 65% of its total assets in equity securities of companies domiciled
outside the United States, including common and preferred stock, convertible
securities, depository receipts, and warrants or rights to purchase such equity
securities. Investments also may be made in debt obligations of foreign
governments, corporations and international or supranational organizations (and
their agencies or instrumentalities).
For temporary defensive purposes, to accumulate cash for investments, or to meet
anticipated redemptions, each 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. The Funds may
also hold cash and time deposits in foreign banks, denominated in any major
foreign currency. In anticipation of foreign exchange requirements and to avoid
losses due to adverse movements in foreign currency exchange rates, the
International Equity Fund and Emerging Markets Fund also may enter into forward
contracts to purchase and sell foreign currencies. See "Forward Foreign Currency
Exchange Contracts" below.
ILLIQUID AND RESTRICTED SECURITIES
"Illiquid Securities" under "Additional Investment Policies" in the Prospectus
sets forth the circumstances in which a Fund may invest in "restricted
securities". In connection with the Funds' 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, a Fund may not be
able to obtain as favorable a price as that prevailing at the time of the
decision to sell.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its portfolio securities subject to the restrictions stated
in the Prospectus. See "Additional Investment Policies -- Repurchase Agreements
and Lending of Portfolio Securities." 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. A 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 a Fund's loans must meet certain tests under the Internal Revenue Code
and
4
<PAGE>
permit the Fund to reacquire loaned securities on five business days' notice or
in time to vote on any important matter.
U.S. GOVERNMENT SECURITIES
Each 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.
BANK OBLIGATIONS
Each 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.
Each Fund also may invest in certificates of deposit issued by foreign banks,
denominated in any major foreign currency. Each Fund will invest in instruments
issued by foreign banks which, in the view of its investment adviser and the
Trustees of the Trust, Core Trust or Schroder Core, 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.
SHORT-TERM DEBT SECURITIES
The Funds 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 a 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
Each 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. Each 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, a Fund may have difficulties in
exercising its rights to the underlying securities and may incur costs and
experience time delays in connection with 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.
5
<PAGE>
CONVERTIBLE SECURITIES
The Funds 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).
DEBT-TO-EQUITY CONVERSIONS
Emerging Markets Fund may invest up to 5% of its net assets in debt-to-equity
conversions. Debt-to-equity conversion programs are sponsored in varying degrees
by certain emerging market countries, particularly in Latin America, and permit
investors to use external debt of a country to make equity investments in local
companies. Many conversion programs relate primarily to investments in
transportation, communication, utilities and similar infrastructure-related
areas. The terms of the programs vary from country to country, but include
significant restrictions on the application of proceeds received in the
conversion and on the repatriation of investment profits and capital. When
inviting conversion applications by holders of eligible debt, a government
usually specifies the minimum discount from par value that it will accept for
conversion. SCMI believes that debt-to-equity conversion programs may offer
investors opportunities to invest in otherwise restricted equity securities that
have a potential for significant capital appreciation and intends to invest
assets of the Portfolio to a limited extent in such programs under appropriate
circumstances. There can be no assurance that debt-to-equity conversion programs
will continue or be successful or that the Portfolio will be able to convert all
or any of its emerging market debt portfolio into equity investments.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To hedge against adverse price movements in the securities held in its portfolio
and the currencies in which they are denominated (as well as in the securities
it might wish to purchase and their denominated currencies) International Equity
Fund and Emerging Markets Fund may engage in transactions in forward foreign
currency contracts.
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell a currency at a future date (which may be any
fixed number of days from the date of the contract agreed upon by the parties)
at a price set at the time of the contract. International Equity Fund and
Emerging Markets Fund may enter into forward contracts as a hedge against
fluctuations in future foreign exchange rates.
Currently, only a limited market, if any, exists for hedging transactions
relating to currencies in many emerging market countries or to securities of
issuers domiciled or principally engaged in business in emerging market
countries. This may limit a Fund's ability to effectively hedge its investments
in those emerging markets. Hedging against a decline in the value of a currency
does not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. Such transactions also limit
the opportunity for gain if the value of the hedged currencies should rise. In
addition, it may not be possible for a Fund to hedge against a devaluation that
is so generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
A Fund will enter into forward contracts under certain instances. When a Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may, for example, wish to secure the price of the security
in U.S. dollars or some other foreign currency which the Portfolio is
temporarily holding in its portfolio. By entering into a forward contract for
the purchase or sale (for a fixed amount of dollars or other currency) of the
amount of foreign currency involved in the underlying security transactions, a
Fund will be able to protect itself against possible loss (resulting from
adverse changes in the relationship between the U.S. dollar or other currency
being used for the security purchase and the foreign currency in which the
security is denominated) during the
6
<PAGE>
period between the date on which the security is purchased or sold and the date
on which payment is made or received.
In addition, when a Fund anticipates purchasing securities at some future date,
and wishes to secure the current exchange rate of the currency in which those
securities are denominated against the U.S. dollar or some other foreign
currency, it may enter into a forward contract to purchase an amount of currency
equal to part or all of the value of the anticipated purchase, for a fixed
amount of U.S. dollars or other currency.
In all of the above instances, if the currency in which a Fund's portfolio
securities (or anticipated portfolio securities) are denominated rises in value
with respect to the currency which is being purchased, then the Fund will have
realized fewer gains than if the Fund had not entered into the forward
contracts. Furthermore, 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.
To the extent that a Fund enters into forward foreign currency contracts to
hedge against a decline in the value of portfolio holdings denominated in a
particular foreign currency resulting from currency fluctuations, there is a
risk that the Fund may nevertheless realize a gain or loss as a result of
currency fluctuations after such portfolio holdings are sold should the Fund be
unable to enter into an "offsetting" forward foreign currency contract with the
same party or another party. A Fund may be limited in its ability to enter into
hedging transactions involving forward contracts by the Internal Revenue Code
requirements relating to qualifications as a regulated investment company (see
"Taxation").
A Fund is not required to enter into such transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Adviser. Generally, a Fund will not enter into a forward
contract with a term of greater than one year.
OPTIONS AND HEDGING
As discussed in the Prospectus, although the Funds (except Index Fund as
described in the Prospectus) do not presently intend to so, the Funds may write
covered call options against securities held in its portfolio and covered put
options on eligible portfolio securities and may purchase options of the same
series to effect closing transactions; purchase stock index futures and options
on stock index futures; and may hedge against potential changes in the market
value of its investments (or anticipated investments) by purchasing put and call
options on portfolio (or eligible portfolio) securities (and the currencies in
which they are denominated) and engaging in transactions involving futures
contracts and options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and on various
foreign currencies are listed on several U.S. and foreign securities exchanges
and are written in over-the-counter transactions ("OTC Options"). Listed options
are issued or guaranteed by the exchange on which they trade or by a clearing
corporation such as the Options Clearing Corporation ("OCC"). Ownership of a
listed call option gives a Fund the right to buy from the OCC (in the U.S.) or
other clearing corporation or exchange, the underlying security or currency
covered by the option at the stated exercise price (the price per unit of the
underlying security or currency) by filing an exercise notice prior to the
expiration date of the option. The writer (seller) of the option would then have
the obligation to sell, to the OCC (in the U.S.) or other clearing corporation
or exchange, the underlying security or currency at that exercise price prior to
the expiration date of the option, regardless of its then current market price.
Ownership of a listed put option would give a Fund the right to sell the
underlying security or currency to the OCC (in the U.S.) or other clearing
corporation or exchange at the stated exercise price. Upon notice of exercise of
the put option, the writer of the option would have the obligation to purchase
the underlying security or currency from the OCC (in the U.S.) or other clearing
corporation or exchange at the exercise price.
The OCC or other clearing corporation or exchange that issues listed options
ensures that all transactions in such options are properly executed. OTC options
are purchased from or sold (written) to dealers or financial institutions which
have entered into direct agreements with a Fund. With OTC options, variables
such as expiration date,
7
<PAGE>
exercise price and premium will be agreed between a Fund and the transacting
dealer. If the transacting dealer fails to make or take delivery of the
securities or amount of foreign currency underlying an option it has written, a
Fund would lose the premium paid for the option as well as any anticipated
benefit of the transaction. A Fund will engage in OTC option transactions only
with member banks of the Federal Reserve System or primary dealers in U.S.
Government securities or with affiliates of such banks or dealers which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million.
OPTIONS ON FOREIGN CURRENCIES. International Equity Fund and Emerging Markets
Fund may purchase and write options on foreign currencies for purposes similar
to those involved with investing in forward foreign currency exchange contracts.
For example, in order to protect against declines in the dollar value of
portfolio securities which are denominated in a foreign currency, a Fund may
purchase put options on an amount of such foreign currency equivalent to the
current value of the portfolio securities involved. As a result, a Fund would be
able to sell the foreign currency for a fixed amount of U.S. dollars, thereby
securing the dollar value of the portfolio securities (less the amount of the
premiums paid for the options). Conversely, a Fund may purchase call options on
foreign currencies in which securities it anticipates purchasing are denominated
to secure a set U.S. dollar price for such securities and protect against a
decline in the value of the U.S. dollar against such foreign currency. A Fund
may also purchase call and put options to close out written option positions.
A Fund may also write covered call options on foreign currency to protect
against potential declines in its portfolio securities which are denominated in
foreign currencies. If the U.S. dollar value of the portfolio securities falls
as a result of a decline in the exchange rate between the foreign currency in
which it is denominated and the U.S. dollar, then a loss to a Fund occasioned by
such value decline would be ameliorated by receipt of the premium on the option
sold. At the same time, however, a Fund gives up the benefit of any rise in
value of the relevant portfolio securities above the exercise price of the
option and, in fact, only receives a benefit from the writing of the option to
the extent that the value of the portfolio securities falls below the price of
the premium received. A Fund may also write options to close out long call
option positions. A covered put option on a foreign currency would be written by
the Fund for the same reason it would purchase a call option, namely, to hedge
against an increase in the U.S. dollar value of a foreign security which the
Fund anticipates purchasing. Here, the receipt of the premium would offset, to
the extent of the size of the premium, any increased cost to a Fund resulting
from an increase in the U.S. dollar value of the foreign security. However, a
Fund could not benefit from any decline in the cost of the foreign security
which is greater than the price of the premium received. A Fund may also write
options to close out long put option positions.
Markets in foreign currency options are relatively new and a Fund's ability to
establish and close out positions on such options is subject to the maintenance
of a liquid secondary market. Although a Fund will not purchase or write such
options unless and until, in the opinion of the Adviser, the market for them has
developed sufficiently to ensure that their risks are not greater than the risks
in connection with the underlying currency, there can be no assurance that a
liquid secondary market will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by all of those factors
that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the underlying
currency relative to the U.S. dollar: as a result, the price of the option
position may vary with changes in the value of either or both currencies and may
have no relationship to the investment merits of a foreign security, including
foreign securities held in a "hedged" investment portfolio. 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, investors 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.
There is no systematic reporting of last sale information for foreign currencies
or any 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 and thus may not reflect relatively smaller transactions (i.e.,
less than $1 million) where rates may be less favorable. The interbank market in
foreign currencies is a global, around-the-clock market. To the extent that the
U.S. options markets are
8
<PAGE>
closed while the markets for the underlying currencies remain open, significant
price and rate movements may take place in the underlying markets that are not
reflected in the options market.
COVERED CALL WRITING. Generally, a call option is "covered" if a Fund owns (or
has the right to acquire without additional cash consideration (or for
additional cash consideration held for the Fund by its Custodian in a segregated
account) the underlying security (currency) subject to the option. In the case
of call options on U.S. Treasury Bills, however, the Fund might own U.S.
Treasury Bills of a different series from those underlying the call option, but
with a principal amount and value corresponding to the exercise price and a
maturity date no later than that of the security (currency) deliverable under
the call option. A call option is also covered if a Fund holds a call on the
same security as the underlying security (currency) of the written option, where
the exercise price of the call used for coverage is equal to or less than the
exercise price of the call or greater than the exercise price of the call
written if the mark to market difference is maintained by a Fund in cash, U.S.
Government securities or other high grade debt obligations which the Portfolio
holds in a segregated account maintained with its custodian.
A Fund will receive a premium from the purchaser in return for a call it has
written. Receipt of such premiums may enable a Fund to earn a higher level of
current income than it would earn from holding the underlying securities
(currencies) alone. Moreover, the premium received will offset a portion of the
potential loss incurred by a Fund if the securities (currencies) underlying the
option are ultimately sold (exchanged) by the Fund at a loss. Furthermore, a
premium received on a call written on a foreign currency will ameliorate any
potential loss of value on the portfolio security due to a decline in the value
of the currency. However, during the option period, the covered call writer has,
in return for the premium, given up the opportunity for capital appreciation
above the exercise price should the market price of the underlying security (or
the exchange rate of the currency in which it is denominated) increase, but has
retained the risk of loss should the price of the underlying security (or the
exchange rate of the currency in which it is denominated) decline. The premium
received will fluctuate with varying economic market conditions. If the market
value of the portfolio securities (or the currencies in which they are
denominated) upon which call options have been written increases, a Fund may
receive a lower total return from the portion of its portfolio upon which calls
have been written than it would have had such calls not been written.
With respect to listed options and certain OTC options, during the option period
a Fund may be required, at any time, to deliver the underlying security
(currency) against payment of the exercise price on any calls it has written
(exercise of certain listed and OTC options may be limited to specific
expiration dates). This obligation is terminated upon the expiration of the
option period or at such earlier time when the writer effects a closing purchase
transaction. A closing purchase transaction is accomplished by purchasing an
option of the same series as the option previously written. However, once a Fund
has been assigned an exercise notice, the Fund will be unable to effect a
closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on an
outstanding call option, to prevent an underlying security (currency) from being
called, to permit the sale of an underlying security (or the exchange of the
underlying currency) or to enable a Fund to write another call option on the
underlying security (currency) with either a different exercise price or
expiration date or both. A Fund may realize a net gain or loss from a closing
purchase transaction depending upon whether the amount of the premium received
on the call option is more or less than the cost of effecting the closing
purchase transaction. Any loss incurred in a closing purchase transaction may be
wholly or partially offset by unrealized appreciation in the market value of the
underlying security (currency). Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part or exceeded by a
decline in the market value of the underlying security (currency).
If a call option expires unexercised, a Fund realizes a gain in the amount of
the premium on the option less the commission paid. Such a gain, however, may be
offset by depreciation in the market value of the underlying security (currency)
during the option period. If a call option is exercised, a Fund realizes a gain
or loss from the sale of the underlying security (currency) equal to the
difference between the purchase price of the underlying security (currency) and
the proceeds of the sale of the security (currency) plus the premium received on
the option less the commission paid.
9
<PAGE>
Options written by a Fund will normally have expiration dates of up to eighteen
months from the date written. The exercised price of a call option may be below,
equal to or above the current market value of the underlying security at the
time the option is written.
COVERED PUT WRITING. As a writer of a covered put option, a Fund would incur an
obligation to buy the security underlying the option from the purchaser of the
put, at the option's exercise price at any time during the option period, at the
purchaser's election (certain listed and OTC put options written by a Fund will
be exercisable by the purchaser only on a specific date). A put is "covered" if
at all times a Fund maintains with its custodian (in a segregated account) cash,
U.S. Government securities or other high grade obligations in an amount equal to
at least the exercise price of the option. Similarly, a short put position could
be covered by a Fund by its purchase of a put option on the same security
(currency) as the underlying security of the written option, where the exercise
price of the purchased option is equal to or more than the exercise price of the
put written or less than the exercise price of the put written if the marked to
market difference is maintained by a Fund in cash, U.S. Government securities or
other high grade debt obligations which the Fund holds in a segregated account
maintained at its custodian. In writing puts, a Fund assumes the risk of loss
should the market value of the underlying security (currency) decline below the
exercise price of the option (any loss being decreased by the receipt of the
premium on the option written). In the case of listed options, during the option
period a Fund may be required, at any time, to make payment of the exercise
price against delivery of the underlying security (currency). The operation of
and limitations on covered put options in other respects are substantially
identical to those of call options.
A Fund will write put options for three purposes: (1) to receive the income
derived from the premiums paid by purchasers; (2) when the investment adviser
wishes to purchase the security (or a security denominated in the currency
underlying the option) underlying the option at a price lower than its current
market price (in which case it will write the covered put at an exercise price
reflecting the lower purchase price sought); and (3) to close out a long put
option position. The potential gain on a covered put option is limited to the
premium received on the option (less the commissions paid on the transaction)
while the potential loss equals the differences between the exercise price of
the option and the current market price of the underlying securities
(currencies) when the put is exercised, offset by the premium received (less the
commissions paid on the transaction).
PURCHASING CALL AND PUT OPTIONS. The Funds may purchase put options ("puts")
that relate to: (i) securities it holds, (ii) Stock Index Futures (whether or
not it holds such Stock Index Futures in its portfolio), or (iii) broadly-based
stock indices. The Fund may not sell puts other than those it previously
purchased, nor purchase puts on securities it does not hold. The fund may
purchase calls: (a) as to securities, broadly-based stock indices or Stock Index
Futures, or (b) to effect a "closing purchase transaction" to terminate its
obligation on a call it has previously written. A call or put may be purchased
only if, after such purchase, the value of all put and call options held by the
Fund would not exceed 5% of the Fund's total assets. Emerging Markets Fund may
purchase listed and OTC call and put options in amounts equaling up to 5% of its
total assets. A Fund may purchase a call option in order to close out a covered
call position (see "Covered Call Writing" above), to protect against an increase
in price of a security it anticipates purchasing or, in the case of a call
option on foreign currency, to hedge against an adverse exchange rate move of
the currency in which the security it anticipates purchasing is denominated
vis-a-vis the currency in which the exercise price is denominated. The purchase
of the call option to effect a closing transaction on a call written
over-the-counter may be a listed or an OTC option. In either case, the call
purchased is likely to be on the same securities (currencies) and have the same
terms as the written option. If purchased over-the-counter, the option would
generally be acquired from the dealer or financial institution which purchased
the call written by a Fund.
A Fund may purchase put options on securities (currencies) which it holds in its
portfolio to protect itself against a decline in the value of the security and
to close out written put option positions. If the value of the underlying
security (currency) were to fall below the exercise price of the put purchased
in an amount greater then the premium paid for the option, a Fund would incur no
additional loss. In addition, a Fund may sell a put option it has previously
purchased prior to the sale of the securities (currencies) underlying such
option. Such a sale would result in a net gain or loss depending upon whether
the amount received on the sale is more or less than the premium and other
transaction costs paid on the put option that is sold. Any such gain or loss
could be offset in whole or in part
10
<PAGE>
by a change in the market value of the underlying security (currency). If a put
option purchased by a Fund expired without being sold or exercised, the premium
would be lost.
RISKS OF OPTIONS TRANSACTIONS. During the option period, the covered call writer
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price if the market price of the
underlying security (or the value of its denominated currency) increases, but
has retained the risk of loss if the price of the underlying security (or the
value of its denominated currency) declines. The writer has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price.
Prior to exercise or expiration, an option position can only be terminated by
entering into a closing purchase or sale transaction. If a covered call option
writer is unable to effect a closing purchase transaction or to purchase an
offsetting OTC option, it cannot sell the underlying security until the option
expires or the option is exercised. Accordingly, a covered call option writer
may not be able to sell an underlying security at a time when it might otherwise
be advantageous to do so. A covered put option writer who is unable to effect a
closing purchase transaction or to purchase an offsetting OTC option would
continue to bear the risk of decline in the market price of the underlying
security until the option expires or is exercised. In addition, a covered put
writer would be unable to utilize the amount held in cash or U.S. Government or
other high grade short-term obligations as security for the put option for other
investment purposes until the exercise or expiration of the option.
A Fund's ability to close out its position as a writer of an option is dependent
upon the existence of a liquid secondary market on option exchanges. There is no
assurance that such a market will exist, particularly in the case of OTC
options, since such options will generally only be closed out by entering into a
closing purchase transaction with the purchasing dealer. However, a Fund may be
able to purchase an offsetting option that does not close out its position as a
writer but constitutes an asset of equal value to the obligation under the
option written. If a Fund is not able to either enter into a closing purchase
transaction or purchase an offsetting position, it will be required to maintain
the securities subject to the call, or the collateral underlying the put, even
though it might not be advantageous to do so, until a closing transaction can be
entered into (or the option is exercised or expires).
Among the possible reasons for the absence of a liquid secondary market on an
exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an exchange; (v) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in options, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by a Fund, the
Fund could experience a loss of all or part of the value of the option.
Transactions will be entered into by a Fund only with brokers or financial
institutions deemed creditworthy by SCMI.
Exchanges have established limitations governing the maximum number of options
on the same underlying security or futures contract (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which a Fund may write.
11
<PAGE>
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. If the option markets close before the markets
for the underlying securities, significant price and rate movements can take
place in the underlying markets that cannot be reflected in the option markets.
The extent to which a Fund may enter into transactions involving options may be
limited by the Internal Revenue Code's requirements for qualification as a
regulated investment company and a Fund's intention to qualify as such (see
"Taxation").
FUTURES CONTRACTS. The Funds may purchase and sell interest rate, currency, and
index futures contracts ("futures contracts") that are traded on U.S. and
foreign commodity exchanges, on such underlying securities as U.S. Treasury
bonds, notes and bills, and/or any foreign government fixed-income security
("interest rate" futures), on various currencies ("currency futures") and on
such indices of U.S. and foreign securities as may exist or come into being
("index futures").
A Fund will purchase or sell interest rate futures contracts for the purpose of
hedging some or all of the value of its portfolio securities (or anticipated
portfolio securities) against changes in prevailing interest rates. If the
investment adviser anticipates that interest rates may rise and, concomitantly,
the price of certain of its portfolio securities fall, a Fund may sell an
interest rate futures contract. If declining interest rates are anticipated, a
Fund may purchase an interest rate futures contract to protect against a
potential increase in the price of securities the Fund intends to purchase.
Subsequently, appropriate securities may be purchased by a Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts.
A Fund will purchase or sell index futures contracts for the purpose of hedging
some or all of its portfolio (or anticipated portfolio) securities against
changes in their prices. If it anticipates that the prices of securities it
holds may fall, a Fund may sell an index futures contract. Conversely, if a Fund
wishes to hedge against anticipated price rises in those securities which it
intends to purchase, the Fund may purchase an index futures contract.
A Fund will purchase or sell currency futures on currencies in which its
portfolio securities (or anticipated portfolio securities) are denominated for
the purposes of hedging against anticipated changes in currency exchange rates.
A Fund will enter into currency futures contracts for the same reasons as set
forth above for entering into forward foreign currency exchange contracts;
namely, to secure the value of a security purchased or sold in a given currency
vis-a-vis a different currency or to hedge against an adverse currency exchange
rate movement of a portfolio security's (or anticipated portfolio security's)
denominated currency vis-a-vis a different currency.
In addition to the above, interest rate, index and currency futures will be
bought or sold in order to close out short or long positions maintained by a
Fund in corresponding futures contracts.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without making or taking delivery. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures contract sale for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that a Fund will be able to enter into a closing
transaction.
INTEREST RATE FUTURES CONTRACTS. When a Fund enters into an interest rate
futures contract, it is initially required to deposit with its custodian (in a
segregated account in the name of the broker performing the transaction) an
"initial margin" of cash or U.S. Government securities or other high grade
short-term obligations equal to approximately 2% of the contract amount. Initial
margin requirements are established by the exchanges on which futures contracts
trade and may change. In addition, brokers may establish margin deposit
requirements in excess of those required by the exchanges.
12
<PAGE>
Initial margin in futures transactions is different from margin in securities
transactions in that initial margin does not involve the borrowing of money by a
brokers' client but is, rather, a good faith deposit on the futures contract
that will be returned to a Fund upon the proper termination of the futures
contract. The margin deposits made are marked to market daily and a Fund may be
required to make subsequent deposits of cash or U.S. Government securities
(called "variation margin") with the Fund's futures contract clearing broker,
which are reflective of price fluctuations in the futures contract.
CURRENCY FUTURES. Generally, foreign currency futures provide for the delivery
of a specified amount of a given currency, on the exercise date, for a set
exercise price denominated in U.S. dollars or other currency. Foreign currency
futures contracts would be entered into for the same reason and under the same
circumstances as forward foreign currency exchange contracts. The Adviser will
assess such factors as cost spreads, liquidity and transaction costs in
determining whether to use futures contracts or forward contracts in its foreign
currency transactions and hedging strategy.
Purchasers and sellers of foreign currency futures contracts are subject to the
same risks that apply generally to the buying and selling of futures. 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. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, a Fund must accept or make delivery of the underlying foreign currency in
accordance with any U.S. or foreign restrictions or regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and may be
required to pay any fees, taxes or charges associated with such delivery which
are assessed in the issuing country.
INDEX FUTURES CONTRACTS. Each Fund, except International Equity Fund, may invest
in index futures contracts. An index futures contract sale creates an obligation
by a Fund, as seller, to deliver cash at a specified future time. An index
futures contract purchase would create an obligation by a Fund, as purchaser, to
take delivery of cash at a specified future time. Futures contracts on indices
do not require the physical delivery of securities, but provide for a final cash
settlement on the expiration date that reflects accumulated profits and losses
credited or debited to each party's account.
A Fund is required to maintain margin deposits with brokerage firms through
which it effects index futures contracts in a manner similar to that described
above for interest rate futures contracts. In addition, due to current industry
practice, daily variations in gains and losses on open contracts are required to
be reflected in cash in the form of variation margin payments. A Fund may be
required to make additional margin payments during the term of the contract.
At any time prior to expiration of the futures contract, a Fund 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 a Fund and the Fund realizes a loss or gain.
OPTIONS ON FUTURES CONTRACTS. A Fund may purchase and write call and put options
on futures contracts traded on an exchange and may enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option is accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of exercise exceeds, in case of
a call, or is less than, in the case of a put, the exercise price of the option
on the futures contract.
A Fund will purchase and write options on futures contracts for purposes
identical to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract
13
<PAGE>
(purchase of a put option or sale of a call option), or to close out a long or
short position in futures contracts. If, for example, the investment adviser
wished to protect against an increase in interest rates and the resulting
negative impact on the value of a portion of its fixed-income portfolio, it
might write a call option on an interest rate futures contract, the underlying
security of which correlates with the portion of the portfolio the Adviser seeks
to hedge. Any premiums received in the writing of options on futures contracts
may provide a further hedge against losses resulting from price declines in
portions of a Fund's investment portfolio.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, a Fund will
not purchase or write options on foreign currency futures contracts unless and
until, in the Adviser's opinion, the market for such options has developed
sufficiently that the risks in connection with them are not greater than the
risks in connection with transactions in the underlying foreign currency futures
contracts.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. A Fund may not enter
into futures contracts or purchase related options thereon if, immediately
thereafter, the amount committed to margin plus the amount paid for premiums for
unexpired options on futures contracts exceeds 5% of the value of a Fund's total
assets, after taking into account unrealized gains and unrealized losses on such
contracts it has entered into, provided, however, that in the case of an option
that is in-the-money (the exercise price of the call (put) option is less (more)
than the market price of the underlying security) at the time of purchase, the
in-the-money amount may be excluded in calculating the 5%. However, there is no
overall limitation on the percentage of a Fund's assets which may be subject to
a hedge position. In addition, in accordance with the regulations of the
Commodity Futures Trading Commission ("CFTC") under which a Fund is exempted
from registration as a commodity pool operator, the Fund may only enter into
futures contracts and options on futures contracts transactions for purposes of
hedging a part or all of its portfolio. Except as described above, there are no
other limitations on the use of futures and options thereon by a Fund.
The writer of an option on a futures contract is required to deposit initial and
variation margin pursuant to requirements similar to those applicable to futures
contracts. Premiums received from the writing of an option on a futures contract
are included in initial margin deposits.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A Fund may sell
a futures contract to protect against the decline in the value of securities (or
the currency in which they are denominated) held by a Fund. However, it is
possible that the futures market may advance and the value of a Fund's
securities (or the currency in which they are denominated) may decline. If this
occurs, a Fund will lose money on the futures contract and also experience a
decline in value of its portfolio securities. While this might occur for only a
very brief period or to a very small degree, over time the value of a
diversified portfolio will tend to move in the same direction as the futures
contracts.
If a Fund purchases a futures contract to hedge against the increase in value of
securities it intends to buy (or the currency in which they are denominated),
and the value of such securities (currencies) decreases, then a Fund may
determine not to invest in the securities as planned and will realize a loss on
the futures contract that is not offset by a reduction in the price of the
securities.
If a Fund has sold a call option on a futures contract, it will cover this
position by holding (in a segregated account maintained at its Custodian) cash,
U.S. Government Securities or other high grade debt obligations equal in value
(when added to any initial or variation margin on deposit) to the market value
of the securities (currencies) underlying the futures contract or the exercise
price of the option. Such a position may also be covered by owning the
securities (currencies) underlying the futures contract, or by holding a call
option permitting a Fund to purchase the same contract at a price no higher than
the price at which the short position was established.
In addition, if a Fund holds a long position in a futures contract it will hold
cash, U.S. Government Securities or other high grade debt obligations equal to
the purchase price of the contract (less the amount of initial or variation
margin on deposit) in a segregated account maintained for a Fund by its
Custodian. Alternatively, a Fund could
14
<PAGE>
cover its long position by purchasing a put option on the same futures contract
with an exercise price as high or higher than the price of the contract held by
the Fund.
Exchanges limit the amount by which the price of a futures contract may move on
any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, a Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if a Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, a Fund may be required to
take or make delivery of the instruments underlying interest rate futures
contracts it holds at a time when it is disadvantageous to do so. The inability
to close out options and futures positions could also have an adverse impact on
a Fund's ability to effectively hedge its portfolio.
Futures contracts and options thereon that are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges and brokerage
commissions, clearing costs and other transaction costs may be higher. Greater
margin requirements may limit a Fund's ability to enter into certain commodity
transactions on foreign exchanges. Moreover, differences in clearance and
delivery requirements on foreign exchanges may cause delays in the settlement of
a Fund's foreign exchange transactions.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Similarly, in the event of the bankruptcy of the writer of an OTC option
purchased by a Fund, the Fund could experience a loss of all or part of the
value of the option. Transactions are entered into by a Fund only with brokers
or financial institutions deemed creditworthy by the Adviser.
While the futures contracts and options transactions to be engaged in by a Fund
for the purpose of hedging its portfolio securities are not speculative in
nature, there are risks inherent in the use of such instruments. One such risk
which may arise in employing futures contracts to protect against the price
volatility of portfolio securities (and the currencies in which they are
denominated) is that the prices of securities and indices subject to futures
contracts (and thereby the futures contract prices) may correlate imperfectly
with the behavior of the cash prices of a Fund's portfolio securities (and the
currencies in which they are denominated). Another such risk is that prices of
interest rate futures contracts may not move in tandem with the changes in
prevailing interest rates against which a Fund seeks a hedge. A correlation may
also be distorted by the fact that the futures market is dominated by short-term
traders seeking to profit from the difference between a contract or security
price objective and their cost of borrowed funds. Such distortions are generally
minor and would diminish as the contract approached maturity.
There may exist an imperfect correlation between the price movements of futures
contracts purchased by a Fund and the movements in the prices of the securities
(currencies) which are the subject of the hedge. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin deposit requirements, distortions in the normal relationship
between the debt securities or currency markets and futures markets could
result. Price distortions could also result if investors in futures contracts
choose to make or take delivery of underlying securities rather than engage in
closing transactions due to the resultant reduction in the liquidity of the
futures market. In addition, because the deposit requirements in the futures
markets are less onerous than margin requirements in the cash market, increased
participation by speculators in the futures market can be anticipated with the
resulting speculation causing temporary price distortions. Due to the
possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate trends may still not result in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which a Fund may invest. In the event a liquid
market does not exist, it may not be possible to close out a futures position,
and in the event of adverse price movements, a Fund would continue to be
required to make daily cash payments of
15
<PAGE>
variation margin. In addition, limitations imposed by an exchange or board of
trade on which futures contracts are traded may compel or prevent a Fund from
closing out a contract, which may result in reduced gain or increased loss to
the Fund. The absence of a liquid market in futures contracts might cause a Fund
to make or take delivery of the underlying securities (currencies) at a time
when it may be disadvantageous to do so.
The extent to which a Fund may enter into transactions involving futures
contracts and options thereon may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the Fund's
intention to qualify as such.
TAX ASPECTS OF HEDGING INSTRUMENTS. The Fund intends to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986 (the "Code"). One of
the tests for such qualification is that less than 30% of its gross income must
be derived from gains realized on the sale of securities held for less than
three months. Due to this limitation, the Fund will limit the extent to which it
engages in the following activities, but will not be precluded from them: (i)
selling investments, including Stock Index Futures, held for less than three
months, whether or not they were purchased on the exercise of a call held by the
Fund; (ii) purchasing calls or puts that expire in less than three months; (iii)
effecting closing transactions with respect to calls or puts purchased less than
three months previously; (iv) exercising puts held by the Fund for less than
three months; and (v) writing calls on investments held for less than three
months.
WARRANTS AND STOCK RIGHTS. A Fund may invest in warrants, which are options to
purchase an equity security at a specified price (usually representing a premium
over the applicable market value of the underlying equity security at the time
of the warrant's issuance). 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 a 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 a 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.
In addition, a 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.
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 Funds' 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 Portfolio assets.
DEPOSITORY RECEIPTS
Investments in securities of foreign issuers may on occasion be in the form of
sponsored or unsponsored American Depository Receipts ("ADRs") or European
Depository 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
16
<PAGE>
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.
USE OF FORWARD CONTRACTS IN FOREIGN EXCHANGE TRANSACTIONS
To protect or "hedge" against adverse movements in foreign currency exchange
rates, International Equity Fund and Emerging Markets Fund may invest in forward
contracts to purchase or sell an agreed-upon amount of a specified currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. Such
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. Although such contracts tend to minimize the risk of loss due
to a decline in the value of the currency which is sold, they expose a Fund to
the risk that the counterparty is unable to perform and they tend to limit
commensurately any potential gain which might result should the value of such
currency increase during the contract period.
HIGH YIELD/JUNK BONDS
Emerging Markets Fund may invest up to 35% of its assets in such high yield/high
risk securities. Securities rated lower than Baa by Moody's or BBB by S&P are
classified as non-investment grade securities and are considered speculative.
Junk bonds may be issued as a consequence of corporate restructurings (such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events) or by smaller or highly leveraged companies. Although the growth of the
high yield securities market in the 1980's paralleled a long economic expansion,
recently many issuers have been affected by adverse economic and market
conditions. It should be recognized that an economic downturn or increase in
interest rates is likely to have a negative effect on (i) the high yield bond
market, (ii) the value of high yield securities and (iii) the ability of the
securities' issuers to service their principal and interest payment obligations,
to meet their projected business goal, or to obtain additional financing. In
addition, the market for high yield securities, which is concentrated in
relatively few market makers, may not be as liquid as the market for investment
grade securities. Under adverse market or economic conditions, the market for
high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the Fund
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the Fund's
net asset value.
In periods of reduced market liquidity, junk bond prices may become more
volatile and may experience sudden and substantial price declines. Also, there
may be significant disparities in the prices quoted for junk bonds by various
dealers. Under such conditions, a Fund may have to use subjective rather than
objective criteria to value its junk bond investments accurately and rely more
heavily on the judgment of the Fund's investment adviser.
Prices for junk bonds also may be affected by legislative and regulatory
developments. For example, new federal laws require the divestiture by federally
insured savings and loans associations of their investments in high yield bonds.
Also, from time to time, Congress has considered legislation to restrict or
eliminate the corporate tax deduction for interest payments or to regulate
corporate restructurings such as takeovers, mergers or leveraged buyouts. These
laws could adversely affect the Fund's net asset value and investment practices,
the market for high yield securities, the financial condition of issuers of
these securities, and the value of outstanding high yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
17
<PAGE>
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.
SHORT SALES AGAINST-THE-BOX
After the Fund makes a short sale against-the-box, while the short position is
open, the Fund must own an equal amount of the securities sold short; or by
virtue of ownership of securities have the right, without payment of further
consideration, to obtain an equal amount of the securities sold short. If a Fund
has unrealized gain with respect to a long position and enters into a short-sale
against-the-box, the Fund generally will be deemed to have sold the long
position for tax purposes and thus will recognize gain.
3. INVESTMENT LIMITATIONS
The following investment restrictions restate or are in addition to those
described under "Investment Objective and Policies" and "Additional Investment
Policies and Risk Considerations" in the Prospectus. Each Fund has adopted the
following investment limitations which are fundamental policies of the Funds,
unless otherwise stated. Each Fund that invests in a Portfolio has the same
fundamental investment policies as the Portfolio in which it invests. Thus,
reference to any Fund that invests in a Portfolio includes reference to the
Portfolio in which that Fund invests:
(a) DIVERSIFICATION
NO FUND (other than EMERGING MARKETS FUND) may, 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.
As a nonfundamental policy, EMERGING MARKET FUND and SCHRODER EM CORE
PORTFOLIO are each "non-diversified" as that term is defined in the
1940 Act. To the extent required to qualify as a regulated investment
company under the Code, the Fund or Portfolio may not purchase a
security (other than a U.S. government security or a security of an
investment company) if, as a result: (1) with respect to 50% of its
assets, more than 5% of the Fund's or Portfolio's total assets would be
invested in the securities of any single issuer; (2) with respect to
50% of its assets, the Fund or Portfolio would own more than 10% of the
outstanding securities of any single issuer; or (3) more than 25% of
the Fund's or Portfolio's total assets would be invested in the
securities of any single issuer.
(b) CONCENTRATION
Neither EQUITY INDEX FUND or INVESTORS EQUITY FUND may purchase a
security if, as a result, more than 25% of the Fund's total assets
would be invested in securities of issuers conducting their principal
business activities in the same industry; provided, however, that there
is no limit on investments in U.S. Government Securities, repurchase
agreements covering U.S. Government Securities, securities,
mortgage-related or housing-related securities, municipal securities
and issuers domiciled in a single country; that financial service
companies are classified according to the end users of their services
(for example, automobile finance, bank finance and diversified
finance); and that utility companies are classified according to their
services (for example, gas, gas transmission, electric and gas,
electric and telephone. Notwithstanding anything to the contrary, to
the extent permitted by the 1940 Act, the Fund may invest in one or
more investment companies; provided that, except to the extent the Fund
invests in other investment companies pursuant to Section 12(d)(1)(A)
of the 1940 Act, the Fund treats the assets of the investment companies
in which it invests as its own for purposes of this policy.
INTERNATIONAL EQUITY FUND may not purchase a security if, as a result,
more than 25% of the Fund's total assets would be invested in
securities of issuers conducting their principal business activities in
the same industry; provided: (1) there is no limit on investments in
U.S. Government Securities, or in repurchase
18
<PAGE>
agreements covering U.S. Government Securities; (2) there is no limit
on investment in issuers domiciled in a single country; (3) financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance and
diversified finance); and (4) utility companies are classified
according to their services (for example, gas, gas transmission,
electric and gas, electric and telephone). Notwithstanding anything to
the contrary, to the extent permitted by the 1940 Act, the Fund may
invest in one or more investment companies; provided that, except to
the extent the Fund invests in other investment companies pursuant to
Section 12(d)(1)(A) of the 1940 Act, the Fund treats the assets of the
investment companies in which it invests as its own for purposes of
this policy.
EMERGING MARKETS FUND will not purchase a security if, as a result,
more than 25% of the Fund's or Portfolio's total assets would be
invested in securities of issuers conducting their principal business
activities in the same industry. For purposes of this limitation, there
is no limit on: (1) investments in U.S. government securities, in
repurchase agreements covering U.S. government securities, in
securities issued by the states, territories or possessions of the
United States ("municipal securities") or in foreign government
securities; or (2) investment in issuers domiciled in a single
jurisdiction. Notwithstanding anything to the contrary, to the extent
permitted by the 1940 Act, the Fund or Portfolio may invest in one or
more investment companies; provided that, except to the extent the it
invests in other investment companies pursuant to Section 12(d)(1)(A)
of the 1940 Act, the Fund or Portfolio treats the assets of the
investment companies in which it invests as its own for purposes of
this policy.
(c) BORROWING
EQUITY INDEX FUND, INVESTORS EQUITY FUND and INTERNATIONAL EQUITY FUND
may borrow money for temporary or emergency purposes, including the
meeting of redemption requests, but no in excess of 33 13% of the value
of the Fund's total assets (computed immediately after the borrowing).
As a nonfundamental policy, each of these Funds' borrowings for other
than temporary or emergency purposes or meeting redemption request may
not exceed an amount equal to 5% of the value of the Fund's net assets.
When a Fund establishes a segregated account to limit the amount of
leveraging with respect to certain investment techniques, they do not
treat those techniques as involving borrowings for purposes of this or
other borrowing limitations.
EMERGING MARKETS FUND will not borrow money if, as a result,
outstanding borrowings would exceed an amount equal to one third of the
Fund's or Portfolio's total assets.
As a nonfundamental policy, for purposes of EMERGING MARKETS FUND'S
limitation on borrowing, the following are not treated as borrowings to
the extent they are fully collateralized: (1) the delayed delivery of
purchased securities (such as the purchase of when-issued securities);
(2) reverse repurchase agreements; (3) dollar-roll transactions; and
(5) the lending of securities ("leverage transactions").
(d) ILLIQUID SECURITIES
As a nonfundamental policy, EQUITY INDEX FUND, INVESTORS EQUITY FUND
and INTERNATIONAL EQUITY FUND will not invest more than 15% of its
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.
As a nonfundamental policy, EMERGING MARKETS FUND will not invest more
than 15% of its net assets in: (1) securities that cannot be disposed
of within seven days at their then-current value; (2) repurchase
agreements not entitling the holder to payment of principal within
seven days; and (3) securities subject to restrictions on the sale of
the securities to the public without registration under the 1933 Act
("restricted
19
<PAGE>
securities") that are not readily marketable. The Fund or Portfolio
may treat certain restricted securities as liquid pursuant to
guidelines adopted by the Board or Schroder Core Board, as the case
may be.
(e) UNDERWRITING ACTIVITIES
NO FUND will 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.
(f) PLEDGING
As a nonfundamental policy, NO FUND may pledge, mortgage, hypothecate
or encumber any of its assets except to secure permitted borrowings or
to secure other permitted transactions.
(g) SENIOR SECURITIES
NO FUND may issue any class of senior securities except to the extent
consistent with the 1940 Act.
(h) MARGIN AND SHORT SALES
As a nonfundamental policy EQUITY INDEX FUND, INVESTORS EQUITY FUND and
INTERNATIONAL EQUITY FUND 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. Each of these Funds may
make margin deposits in connection with permitted transactions in
options, futures contracts and options on futures contracts; the Funds
may not enter short sales if, as a result, more that 25% of the value
of the Fund's total assets would be so invested, or such a position
would represent more than 2% of the outstanding voting securities of
any single issuer or class of an issuer.
As a nonfundamental policy, EMERGING MARKETS FUND may not sell
securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short (short sales
"against the box"), and provided that transactions in futures contracts
and options are not deemed to constitute selling securities short. The
Fund may not purchase securities on margin, except that the Fund or
Portfolio may use short-term credit for the clearance of its
portfolio's transactions, and provided that initial and variation
margin payments in connection with futures contracts and options on
futures contracts shall not constitute purchasing securities on margin.
(i) INVESTING FOR CONTROL
As a nonfundamental policy, EMERGING MARKETS FUND may not make
investments for the purpose of exercising control of an issuer.
Investments by the Fund or Portfolio in entities created under the laws
of foreign countries solely to facilitate investment in securities in
that country will not be deemed the making of investments for the
purpose of exercising control
(j) REAL ESTATE
EQUITY INDEX FUND, INVESTORS EQUITY FUND and INTERNATIONAL EQUITY FUND
may not purchase or sell real estate or any interest therein, except
that the Funds may invest in debt obligations secured by real estate or
interests therein or securities issued by companies that invest in real
estate or interests therein.
As a nonfundamental policy, EQUITY INDEX FUND and INTERNATIONAL EQUITY
FUND may not invest in real estate limited partnerships.
EMERGING MARKETS FUND may not purchase or sell real estate unless
acquired as a result of ownership of securities or other instruments
(but this shall not prevent the Fund or Portfolio from investing in
securities or other instruments backed by real estate or securities of
companies engaged in the real estate business).
20
<PAGE>
(k) LENDING
NO FUND may make loans, except a Fund may enter into repurchase
agreements, purchase debt securities that are otherwise permitted
investments and lend portfolio securities.
As a nonfundamental policy, NO FUND may lend portfolio securities if
the total value of all loaned securities would exceed 33 1/3% of the
Fund's total assets.
(l) PURCHASES AND SALES OF COMMODITIES
EQUITY INDEX FUND, INVESTORS EQUITY FUND and INTERNATIONAL EQUITY FUND
may not purchase or sell physical commodities or contracts, options or
options on contracts to purchase or sell physical commodities; provided
that currency and currency-related contracts and contracts on indices
will not be deemed to be physical commodities.
EMERGING MARKETS FUND may not purchase or sell physical commodities
unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Fund or Portfolio from
purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
(m) OTHER INVESTMENT COMPANIES
As a nonfundamental policy, NO FUND may invest securities of another
investment company, except to the extent permitted by the 1940 Act
(n) OPTIONS AND FUTURES CONTRACTS
As a nonfundamental policy, no Fund may purchase an option if, as a
result, more that 5% of the Fund's total assets would be so invested.
(o) WARRANTS
As a nonfundamental policy, no Fund may invest in warrants if: (1) more
than 5% of the value of the Fund's net assets would 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; provided, that warrants acquired by a Fund attached to
securities are deemed to have no value.
4. PERFORMANCE DATA
The Funds 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 a 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).
21
<PAGE>
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 a Fund during the particular time period shown. Total return for a
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, a 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.
Investors who purchase and redeem shares of a 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.
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,* Chairman and President (age 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), Forum Financial Corp. (a registered transfer agent) and
Forum Advisors, Inc. (a registered investment adviser). Mr. Keffer is a
Trustee and/or officer of various registered investment companies for which
Forum Administrative Services, LLC serves as manager or administrator and
for which Forum Financial Services, Inc. serves as distributor. His address
is Two Portland Square, Portland, Maine 04101.
Costas Azariadis, Trustee (age 53)
Professor of Economics, University of California, Los Angeles, since July
1992. Prior thereto, Dr. Azariadis was Professor of Economics at the
University of Pennsylvania. His address is Department of Economics,
University of California, Los Angeles, 405 Hilgard Avenue, Los Angeles,
California 90024.
James C. Cheng, Trustee (age 54)
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President and
Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is 27 Temple Street, Belmont,
Massachusetts 02178.
22
<PAGE>
J. Michael Parish, Trustee (age 53)
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 Wall Street,
New York, New York 10005.
Mark D. Kaplan, Vice President, Assistant Treasurer and Assistant Secretary (age
41)
Managing Director at Forum Financial Services, Inc. since September 1995.
Prior thereto, Mr. Kaplan was Managing Director and Director of Research at
H.M. Payson & Co. His address is Two Portland Square, Portland, Maine
04101.
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also Secretary or Assistant
Secretary of various registered investment companies for which Forum
Administrative Services, LLC or Forum Financial Services, Inc. serves as
manager, administrator and/or distributor. His address is Two Portland
Square, Portland, Maine 04101.
Max Berueffy, Assistant Secretary (age 44)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1994. Prior thereto, Mr. Berueffy was on the staff of the U.S.
Securities and Exchange Commission for seven years, first in the appellate
branch of the Office of the General Counsel, then as a counsel to
Commissioner Grundfest and finally as a senior special counsel in the
Division of Investment Management. Mr. Berueffy is also Secretary or
Assistant Secretary of various registered investment companies for which
Forum Administrative Services, LLC or Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. His address is Two Portland
Square, Portland, Maine 04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has been
associated since July 1996. Prior thereto, Ms. Tumlin was on the staff of
the U.S. Securities and Exchange Commission as an attorney in the Division
of Market Regulation and prior thereto Ms. Tumlin was an associate with the
law firm of Robinson Silverman Pearce Aronsohn & Berman in New York, New
York. Ms. Tumlin is also Assistant Secretary of various registered
investment companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. Her address is Two Portland Square, Portland, Maine 04101.
M. Paige Turney, Assistant Secretary (age 28).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Turney was employed from 1992 as a Senior Fund
Accountant with First Data Corporation in Boston,
23
<PAGE>
Massachusetts. Ms. Turney is also Assistant Secretary of various registered
investment companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. Prior thereto she was a student at Montana State University
Her address is Two Portland Square, Portland, Maine 04101.
TRUSTEE COMPENSATION. Each Trustee of the Trust (other than John Y. Keffer, who
is an interested person of the Trust) is paid $1,000 for each Board meeting
attended (whether in person or by electronic communication) and is paid $1,000
for each committee meeting attended on a date when a Board meeting is not held.
As of March 31, 1997, in addition to $1,000 for each Board meeting attended,
each Trustee receives $100 per active portfolio of the Trust. To the extent a
meeting relates to only certain portfolios of the Trust, Trustees are paid the
$100 fee only with respect to those portfolios. Trustees are also reimbursed for
travel and related expenses incurred in attending meetings of the Board. No
officer of the Trust is compensated by the Trust.
The following table provides the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $4,000 None None $4,000
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
</TABLE>
Each of the Trustees of the Trust is also a Trustee of Core Trust. Each Trustee
of Core Trust (other than John Y. Keffer, who is an interested person of Core
Trust) is paid $1,000 for each Core Trust Board meeting attended (whether in
person or by electronic communication) plus $100 per active portfolio of Core
Trust and is paid $1,000 for each committee meeting attended on a date when a
Core Trust Board meeting is not held. To the extent a meeting relates to only
certain portfolios of Core Trust, trustees are paid the $100 fee only with
respect to those portfolios. Core Trust trustees are also reimbursed for travel
and related expenses incurred in attending meetings of the Core Trust Board.
THE PORTFOLIOS
TRUSTEES AND OFFICERS OF CORE TRUST. The Trustees and officers of Core Trust and
their principal occupations during the past five years and ages are set forth
below. Each Trustee who is an "interested person" (as defined by the 1940 Act)
of Core Trust is indicated by an asterisk. Messrs. Keffer, Azariadis, Cheng and
Parish, Trustees of Core Trust, and Mr. Goldstein, Secretary of Core Trust, all
currently serve as Trustees and/or officers of the Trust. Accordingly, for
background information pertaining to these Trustees, see "Management Trustees
and Officers -The Trust."
John Y. Keffer,* Chairman and President.
Costas Azariadis, Trustee, Age 53.
James C. Cheng, Trustee, Age 54.
J. Michael Parish, Trustee, Age 53.
Richard C. Butt, Treasurer
CPA, Managing Director, Operations, Forum Financial Corp. since 1996. Prior
thereto, Mr. Butt was a consultant in the financial services division of KPMG
Peat Marwick LLP ("KPMG"). Prior to his employment at KPMG, Mr. Butt was
President of 440 Financial
24
<PAGE>
Distributors, Inc., the distribution subsidiary of 440 Financial Group, and
Senior Vice President of the parent company. Prior thereto, he was a Vice
President at Fidelity Services Company. Mr. Butt is also treasurer of various
registered investment companies for which Forum Administrative Services, LLC
serves as administrator. His address is Two Portland Square, Portland, Maine
04101.
David I. Goldstein, Secretary (age 35)
Sara M. Clark, Vice President, Assistant Secretary and Assistant Treasurer., Age
33.
Managing Director, Forum Financial Services, Inc., with which she has been
associated since 1994. Prior thereto, from 1991 to 1994 Ms. Clark was
Controller of Wright Express Corporation (a national credit card company)
and for six years prior thereto was employed at Deloitte & Touche LLP as an
accountant. Ms. Clark is also an officer of various registered investment
companies for which Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
Thomas G. Sheehan, Assistant Secretary, Age 42.
Managing Director and Counsel, Forum Financial Services, Inc., with which
he has been associated since 1993. Prior thereto, Mr. Sheehan was Special
Counsel to the Division of Investment Management of the SEC. Mr. Sheehan is
also an officer of various registered investment companies for which Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine 04101.
TRUSTEES AND OFFICERS OF SCHRODER CORE. The following information relates to the
principal occupations of each Trustee and executive officer of the Schroder Core
during the past five years and shows the nature of any affiliation with SCMI.
Messrs. Keffer, Goldstein and Sheehan, officers of Schroder Core, all currently
serve as officers of the Trust or Core Trust. Accordingly, for background
information pertaining to these officers, see "Trustees and Officers -- The
Trust" and "Trustees and Officers -- The Portfolios -- Trustees and Officers of
Core Trust above.
Peter E. Guernsey, Oyster Bay, New York - Trustee of the Trust - Insurance
Consultant since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
John I. Howell, Greenwich, Connecticut - Trustee of the Trust - Private
Consultant since February 1987; Honorary Director, American International Group,
Inc.; Director, American International Life Assurance Company of New York.
Clarence F. Michalis, 44 East 64th Street, New York, New York - Trustee of the
Trust - Chairman of the Board of Directors, Josiah Macy, Jr. Foundation
(charitable foundation).
Hermann C. Schwab, 787 Seventh Avenue, New York, New York - Chairman (Honorary)
and Trustee of the Trust retired since March, 1988; prior thereto, consultant to
SCMI since February 1, 1984.
Mark J. Smith (b), 33 Gutter Lane, London, England - President and Trustee of
the Trust - First Vice President of SCMI since April 1990; Director and Vice
President, Schroder Advisors.
25
<PAGE>
Robert G. Davy, 787 Seventh Avenue, New York, New York - a Vice President of the
Trust - Director of SCMI and Schroder Capital Management International Ltd.
since 1994; First Vice President of SCMI since July, 1992; prior thereto,
employed by various affiliates of Schroders plc in various positions in the
investment research and portfolio management areas since 1986.
Margaret H. Douglas-Hamilton (b)(c), 787 Seventh Avenue, New York, New York -
Vice President of the Trust Secretary of SCM since July 1995; Secretary of
Schroder Advisors since April 1990; First Vice President and General Counsel of
Schroders Incorporated(b) since May 1987; prior thereto, partner of Sullivan &
Worcester, a law firm.
Richard R. Foulkes, 787 Seventh Avenue, New York, New York - a Vice President of
the Trust; Deputy Chairman of SCMI since October 1995; Director and Executive
Vice President of Schroder Capital Management International Ltd.
since 1989.
Catherine S. Wooledge, Two Portland Square, Portland, Maine 04101 - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. since November 1996. Prior thereto, associate at Morrison &
Foerster, Washington, D.C. from October 1994 to November 1996, associate
corporate counsel at Franklin Resources, Inc. from September 1993 to September
1994, and prior thereto associate at Drinker Biddle & Reath, Philadelphia, PA.
Barbara Gottlieb(c), 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995 prior
thereto held various positions with SWIS affiliates.
Robert Jackowitz(b)(c), 787 Seventh Avenue, New York, New York - Treasurer of
the Trust - Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisors since July 1995; Vice President of SCMI since June 1995; and
Assistant Treasurer of Schroders Incorporated since January 1993.
John Y. Keffer, Vice President of the Schroder Core.
Jane P. Lucas(c), 787 Seventh Avenue, New York, New York - Vice President of the
Trust - Director and Senior Vice President SCMI; Director of SCM since September
1995; Assistant Director Schroder Investment Management Ltd.
since June 1991.
Gerardo Machado, 787 Seventh Avenue, New York, New York - Assistant Secretary of
the Trust - Associate, SCMI.
Catherine A. Mazza, 787 Seventh Avenue, New York, New York - Vice President of
the Trust - President of Schroder Advisors since 1997; First Vice President of
SCMI and SCM since 1996; prior thereto, held various marketing positions at
Alliance Capital, an investment adviser, since July 1985.
Thomas G. Sheehan, Assistant Treasurer and Assistant Secretary of the Trust.
Fariba Talebi, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - First Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987.
John A. Troiano(b), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Managing Director and Senior Vice President of SCMI since October
1995; Director of Schroder Advisors since October 1992; Director of SCMI since
1991; prior thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1981.
Ira L. Unschuld, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - Vice President of SCMI since April, 1993 and an Associate from July,
1990 to April, 1993; prior to July, 1990, employed by various financial
institutions as a securities or financial analyst.
26
<PAGE>
Alexandra Poe, 787 Seventh Avenue, New York, New York - Secretary and Vice
President of the Trust - Vice President of SCMI since August 1996; Fund Counsel
and Senior Vice President of Schroder Advisors since August 1996; prior thereto
an investment management attorney with Gordon Altman Butowsky Weitzen Shalov &
Wein since July 1994; prior thereto counsel and Vice President of Citibank, N.A.
since 1989.
Mary Kunkemueller, 787 Seventh Avenue, New York, New York - Assistant Secretary
of the Trust.
(a) Interested Trustee of the Trust within the meaning of the 1940 Act.
(b) Schroder Advisors is a wholly owned subsidiary of SCMI, which is a wholly
owned subsidiary of Schroders Incorporated, which in turn is an indirect, wholly
owned U.S. subsidiary of Schroders plc. (c) Schroder Capital Management, Inc.
("SCMI") is a wholly owned subsidiary of Schroder Wertheim Holdings Incorporated
which is a wholly owned subsidiary of Schroders, Incorporated, which in turn is
an indirect wholly owned U.S. subsidiary of Schroders plc.
INVESTMENT ADVISERS
H.M. Payson, Inc. ("Payson") serves as investment adviser to Investors Equity
Fund pursuant to an investment advisory agreement with the Trust. Subject to the
general control of the Board, Forum Advisors is responsible for among other
things, developing a continuing investment program for the Fund in accordance
with its investment objective and reviewing the investment strategies and
policies of the Fund. Payson, founded in 1854, was incorporated under the laws
of Maine in 1987 and is registered under the Investment Advisers Act of 1940.
For its services, an advisory fee at an annual rate of 0.65% of Investor Equity
Fund's average daily net assets.
Payson entered into an investment sub-advisory agreement with Peoples Heritage
to exercise certain investment discretion over the assets (or a portion of
assets) of the Fund. Although Peoples Heritage has certain advisory
responsibility for the Fund it does not make daily investment decisions for the
Fund and does not receive an advisory fee. Peoples Heritage, located at One
Portland Square, Portland, Maine 04101, is a subsidiary of Peoples Heritage
Financial Group, a multi-bank holding company. As of December 1, 1997, Peoples
Heritage Financial Group had assets of $6.5 billion and Peoples Heritage and its
affiliates managed assets with a value of approximately $932 million.
Subject to the general supervision of the Core Trust Board, Norwest provides
investment advisory services to Index Portfolio. Norwest manages the investment
and reinvestment of the assets of Index Portfolio and continuously reviews,
supervises and administers the Portfolio's investments. In this regard, it is
the responsibility of Norwest to make decisions relating to Index Portfolio's
investments and to place purchase and sale orders regarding investments with
brokers or dealers selected by it in its discretion. For its services with
respect to the Portfolio, Norwest receives a monthly advisory fee equal on an
annual basis to 0.15% of the Portfolio's average daily net assets, which Index
Fund indirectly bears through investment in the Portfolio. Norwest, which is
located at Norwest Center, Sixth Street and Marquette, Minneapolis, Minnesota
55479, is an indirect subsidiary of Norwest Corporation, a multi-bank holding
company that was incorporated under the laws of Delaware in 1929. As of
September 30, 1997, Norwest Corporation had assets of $85.3 billion, which made
it the 11th largest bank holding company in the United States, and Norwest and
its affiliates managed assets with a value of approximately $53 billion.
SCMI, 787 Seventh Avenue, New York, New York, 10019, serves as Adviser to
Schroder EM Core Portfolio pursuant to an investment advisory agreement with
Schroder Capital Funds and SCMI serves as Adviser to International Portfolio
pursuant to an investment advisory agreement with Core Trust (Delaware). SCMI is
a wholly-owned U.S. subsidiary of Schroders Incorporated, the wholly-owned U.S.
holding company subsidiary of Schroders plc. Schroders plc is the holding
company parent of a large worldwide group of banks and financial service
companies (referred to as the "Schroder Group"), with associated companies and
branch and representative offices located in seventeen countries worldwide. The
Schroder Group specializes in providing investment management services, with
Group funds under management currently in excess of $175 billion.
27
<PAGE>
Pursuant to the investment advisory agreements, SCMI is responsible for managing
the investment and reinvestment of the assets included in each of Schroder EM
Core Portfolio and International Portfolio and for continuously reviewing,
supervising and administering the Portfolio's investments. In this regard, it is
the responsibility of SCMI to make decisions relating to the Portfolios'
investments and to place purchase and sale orders regarding such investments
with brokers or dealers selected by it in its discretion. SCMI also furnishes to
the Board, which has overall responsibility for the business and affairs of
Schroder Core, periodic reports on the investment performance of the Portfolio.
Under the terms of the investment advisory agreements, SCMI is required to
manage the Portfolios' investment portfolios in accordance with applicable laws
and regulations. In making its investment decisions, SCMI does not use material
information that may be in its possession or in the possession of its
affiliates.
Each investment advisory agreement will continue in effect provided such
continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the respective Portfolio (as defined by the
1940 Act) or by the Schroder Core Board or Core Trust Board, as applicable, and
(ii) by a majority of the Schroder Core Trustees or Core Trust Trustees, as
applicable, who are not parties to such agreement or "interested persons" (as
defined in the 1940 Act) of any such party. Each investment advisory agreement
may be terminated without penalty by vote of the Trustees of Schroder Core or
Core Trust, as applicable, or the interestholders of the Portfolio on 60 days'
written notice to the Adviser, or by the Adviser on 60 days' written notice to
Schroder Core or Core Trust, as applicable, and it will terminate automatically
if assigned. The investment advisory agreements also provides that, with respect
to each Portfolio, neither SCMI nor its personnel shall be liable for any error
of judgment or mistake of law or for any act or omission in the performance of
its or their duties to the Portfolio, except for willful misfeasance, bad faith
or gross negligence in the performance of the SCMI's or their duties or by
reason of reckless disregard of its or their obligations and duties under the
investment advisory agreement.
For its services, each of International Portfolio and Schroder EM Core Portfolio
pay SCMI a fee at an annual rate of 0.45% and 1.00% of its average daily net
assets, respectively.
ADMINISTRATIVE SERVICES
THE FUNDS
Forum Administrative Services, LLC ("FAS") acts as administrator to the Trust on
behalf of the Fund pursuant to an Administration Agreement with the Trust. As
administrator, FAS provides management and administrative services necessary to
the operation of the Trust (which include, among other responsibilities,
negotiation of contracts and fees with, and monitoring of performance and
billing of, the transfer agent and custodian and arranging for maintenance of
books and records of the Trust), and provides the Trust with general office
facilities. The Administration Agreement will remain in effect for a period of
twelve months with respect to the Fund and thereafter is automatically renewed
each year for an additional term of one year.
The Administration Agreement terminates automatically if it is assigned and may
be terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party on not more than 60 days' written notice. The
Administration Agreement also provides that FAS shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Trust, except for willful misfeasance, bad
faith or gross negligence in the performance of Forum's duties or by reason of
reckless disregard of its obligations and duties under the Administration
Agreement.
At the request of the Board, FAS provides persons satisfactory to the Board to
serve as officers of the Trust. Those officers, as well as certain other
employees and Trustees of the Trust, may be directors, officers or employees of
FAS, the Adviser or their affiliates.
28
<PAGE>
THE PORTFOLIOS
On behalf of Index Portfolio and International Portfolio, Core Trust has entered
into an administration agreement with Forum Financial Services, Inc. For its
administrative services, FFSI receives from the portfolios a fee at an annual
rate of 0.05% of Index Portfolio's average daily net assets and 0.15% of
International Portfolio's average daily net assets.
On behalf of Schroder EM Core Portfolio, the Schroder Core has entered into an
administrative services agreement with Schroder Fund Advisors Inc. ("Schroder
Advisors"), 787 Seventh Avenue, New York, New York 10019. Schroder Core and
Schroder Advisors have entered into a Sub-Administration Agreement with Forum
Financial Services, Inc. ("Forum"). Pursuant to their agreements, Schroder
Advisors and Forum provide certain management and administrative services
necessary for the Portfolio's operations, other than the investment management
and administrative services provided to the Portfolio by SCMI pursuant to the
investment advisory agreement, including among other things, (i) preparation of
shareholder reports and communications, (ii) regulatory compliance, such as
reports to and filings with the Securities and Exchange Commission and state
securities commissions, and (iii) general supervision of the operation of the
Portfolio, including coordination of the services performed by the Portfolio's
investment adviser, transfer agent, custodian, independent accountants, legal
counsel and others. Schroder Advisors is a wholly-owned subsidiary of SCMI, and
is a registered broker-dealer organized to act as administrator and distributor
of mutual funds. Effective July 5, 1995, Schroder Advisors changed its name from
Schroder Capital Distributors Inc.
For these services, Schroder Advisors receives from Schroder EM Core Portfolio a
fee at the annual rate of 0.15% of the Portfolio's average daily net assets.
Payment for FAS's services is made by Schroder Advisors and is not a separate
expense of the Portfolio.
The administrative services agreement and sub-administration agreement are
terminable with respect to the Schroder EM Core Portfolio without penalty, at
any time, by vote of a majority of the Schroder Core Trustees who are not
"interested persons" of Schroder Core and who have no direct or indirect
financial interest in the operation of the Portfolio's Distribution Plan or in
the administrative services agreement or sub-administration agreement, upon not
more than 60 days' written notice to Schroder Advisors or Forum, as appropriate,
or by vote of the holders of a majority of the shares of the Portfolio, or, upon
60 days' notice, by Schroder Advisors or Forum. The administrative services
agreement will terminate automatically in the event of its assignment.
The sub-administration agreement is terminable with respect to the Portfolio
without penalty, at any time, by the Board of Schroder Core, Schroder Advisors
and the investment adviser upon 60 days' written notice to Forum or by Forum
upon 60 days' written notice to the Portfolio and Schroder Advisors, and the
investment adviser, as appropriate.
CUSTODIAN
The Chase Manhattan Bank, N.A., through its Global Securities Services division
located in London, England, acts as custodian of the Schroder EM Core
Portfolio's assets, but plays no role in making decisions as to the purchase or
sale of portfolio securities for the Portfolios. Pursuant to rules adopted under
the 1940 Act, the Schroder EM Core Portfolio may maintain its foreign securities
and cash in the custody of certain eligible foreign banks and securities
depositories. Selection of these foreign custodial institutions is made by the
Board following a consideration of a number of factors, including (but not
limited to) the reliability and financial stability of the institution; the
ability of the institution to perform capably custodial services for the
Portfolios; the reputation of the institution in its national market; the
political and economic stability of the country in which the institution is
located; and further risks of potential nationalization or expropriation of
Portfolio assets.
DISTRIBUTOR
Forum Financial Services, Inc. ("Forum"), an affiliate of FAS, is the Trust's
distributor and acts as the agent of the Trust in connection with the offering
of shares of the Fund pursuant to a Distribution Agreement. The Distribution
29
<PAGE>
Agreement will continue in effect for twelve months and will continue in effect
thereafter only if its continuance is specifically approved at least annually by
the Board or by vote of the shareholders entitled to vote thereon, and in either
case, by a majority of the Trustees who (i) are not parties to the Distribution
Agreement, (ii) are not interested persons of any such party or of the Trust and
(iii) with respect to any class for which the Trust has adopted a distribution
plan, have no direct or indirect financial interest in the operation of that
distribution plan or in the Distribution Agreement, at a meeting called for the
purpose of voting on the Distribution Agreement. All subscriptions for shares
obtained by Forum are directed to the Trust for acceptance and are not binding
on the Trust until accepted by it. Forum receives no compensation or
reimbursement of expenses for the distribution services provided pursuant to the
Distribution Agreement and is under no obligation to sell any specific amount of
Fund shares.
The Distribution Agreement provides that Forum shall not be liable for any error
of judgment or mistake of law or in any event whatsoever, except for willful
misfeasance, bad faith or gross negligence in the performance of Forum's duties
or by reason of reckless disregard of its obligations and duties under the
Distribution Agreement.
The Distribution Agreement is terminable with respect to the Fund without
penalty by the Trust on 60 days' written notice when authorized either by vote
of the Fund's shareholders or by a vote of a majority of the Board, or by Forum
on 60 days' written notice. The Distribution Agreement will automatically
terminate in the event of its assignment.
Forum may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of the Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Fund are sold without sales charges or
distribution fees. These financial institutions may otherwise act as processing
agents, and will be responsible for promptly transmitting purchase, redemption
and other requests to the Fund.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition to, or
different from, those listed herein. Information concerning any charges or
services will be provided to customers by the financial institution. Investors
purchasing shares of the Fund in this manner should acquaint themselves with
their institution's procedures and should read this Prospectus in conjunction
with any materials and information provided by their institution. The financial
institution and not its customers will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
TRANSFER AGENT
Forum Financial Corp. ("FFC") acts as transfer agent of the Trust pursuant to a
transfer agency agreement (the "Transfer Agency Agreement"). The Transfer Agency
Agreement provided, with respect to each Fund, for an initial term of one year
from its effective date and for its continuance in effect for successive
twelve-month periods thereafter, provided that the agreement is specifically
approved at least annually by the Board or, with respect to either Fund, by a
vote of the shareholders of that Fund, and in either case by a majority of the
directors who are not parties to the Transfer Agency Agreement or interested
persons of any such party at a meeting called for the purpose of voting on the
Transfer Agency Agreement.
Among the responsibilities of FFC as agent for the Trust are: (1) answering
customer inquiries regarding account status and history, the manner in which
purchases and redemptions of shares of the Fund may be effected and certain
other matters pertaining to the Fund; (2) assisting shareholders in initiating
and changing account designations and addresses; (3) providing necessary
personnel and facilities to establish and maintain shareholder accounts and
records, assisting in processing purchase and redemption transactions and
receiving wired funds; (4) transmitting and receiving funds in connection with
customer orders to purchase or redeem shares; (5) verifying shareholder
signatures in connection with changes in the registration of shareholder
accounts; (6) furnishing periodic statements and confirmations of purchases and
redemptions; (7) arranging for the transmission of proxy statements, annual
reports, prospectuses and other communications from the Trust to its
shareholders; (8) arranging for the receipt, tabulation and transmission to the
Trust of proxies executed by shareholders with respect to meetings
30
<PAGE>
of shareholders of the Trust; and (9) providing such other related services as
the Trust or a shareholder may reasonably request.
FFC or any sub-transfer agent or processing agent may also act and receive
compensation as custodian, investment manager, nominee, agent or fiduciary for
its customers or clients who are shareholders of the Fund with respect to assets
invested in the Fund. FFC or any sub-transfer agent or other processing agent
may elect to credit against the fees payable to it by its clients or customers
all or a portion of any fee received from the Trust or from FFC with respect to
assets of those customers or clients invested in the Fund. FFC, FAS or
sub-transfer agents or processing agents retained by FFC may be Processing
Organizations (as defined in the Prospectus) and, in the case of sub- transfer
agents or processing agents, may also be affiliated persons of FFC or Forum.
For its services under the Transfer Agency Agreement, FFC receives a fee at
annual rate of 0.25% of the average daily net assets of each Fund plus $12,000
per year and annual shareholder account fees of $18.00 per shareholder account;
such fees to be computed as of the last business day of the prior month.
FFC or any sub-transfer agent or processing agent may also act and receive
compensation for acting as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Fund with
respect to assets invested in the Fund.
FFC also is the Portfolios' transfer agent pursuant to Transfer Agency
Agreements between Schroder Core and FFC and Core Trust and FFC. FFC is
compensated for those services in the amount of $12,000 per year plus certain
interestholder account fees for each Portfolio.
FUND ACCOUNTING
Forum Accounting Services, LLC ("FAcS") performs portfolio accounting services
for the Funds pursuant to a Fund Accounting Agreement with the Trust. The Fund
Accounting Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board of Trustees or by a vote of
the shareholders of the Trust and in either case by a majority of the Trustees
who are not parties to the Fund Accounting Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Fund
Accounting Agreement. Under its agreement, FAcS prepares and maintains books and
records 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 each Fund and dividends and capital gain distributions and prepares periodic
reports to shareholders and the Securities and Exchange Commission. For its
services, FAcS receives from the Trust with respect to each of Equity Index
Fund, International Fund and Emerging Markets Fund a fee of $12,000 per year.
FAcS receive an annual fee of $36,000 with respect to Investors Equity Fund.
FAcS also performs portfolio accounting services for Index Portfolio and
International Portfolio pursuant to a Fund Accounting Agreement between Core
Trust and FAcS. For its services, FAcS receives a fee of $48,000 per year, plus
additional surcharges based upon total assets or security positions.
FFC performs portfolio accounting services for Schroder EM Core Portfolio
pursuant to a Fund Accounting Agreement between Schroder Core and FFC. For its
services, FFC is receives a fee of $48,000 per year, plus additional surcharges
based upon total assets or security positions.
6. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of each Fund as of
4:00 p.m., Eastern Time, on each Fund Business Day by dividing the value of the
Fund's net assets (I.E., the value of its portfolio securities and other assets
less its liabilities) by the number of that Fund's shares outstanding at the
time the determination is made. Securities owned by a Fund or Portfolio 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
31
<PAGE>
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 a Portfolio'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
Schroder Core Board or the Board.
All assets and liabilities of a Portfolio or 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 Portfolio is calculated.
7. PORTFOLIO TRANSACTIONS
INVESTMENT DECISIONS
Investment decisions for each Portfolio and 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.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Portfolio 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. Since most brokerage transactions for the Schroder International
Portfolio and Schroder Emerging Markets Fund Institutional Portfolio will be
placed with foreign broker-dealers, certain portfolio transaction costs for the
Portfolios may be higher than fees for similar transactions executed on U.S.
securities exchanges. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid by the
Portfolios usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Portfolios includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
The Investment Advisory Agreements authorize and direct the investment advisers
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 a Portfolio through a substantial number of brokers and dealers.
In so doing, the investment adviser uses its best efforts to obtain for the
Portfolio the most favorable price and execution available. The Portfolio 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 Portfolio's best interests, considers all factors it
deems relevant, including, by way of
32
<PAGE>
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, and investment adviser
may receive research services from broker-dealers with which it places the
Fund's or Portfolio'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 or Portfolio), although not all of these services
are necessarily useful and of value in managing the Portfolio. The investment
advisory fee paid by a Portfolio 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 a Fund or Portfolio 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.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Schroder Core Board and Core Trust Board have authorized
SCMI to employ Schroder Securities Limited and its affiliates (collectively,
"Schroder Securities"), which are affiliated with SCMI, to effect securities
transactions of the Portfolios managed by SCMI ("SCMI Portfolios") on various
foreign securities exchanges on which Schroder Securities has trading
privileges, provided certain other conditions are satisfied as described below.
Payment of brokerage commissions to Schroder Securities for effecting such
transactions is subject to Section 17(e) of the 1940 Act, which requires, among
other things, that commissions for transactions on securities exchanges paid by
a registered investment company to a broker which is an affiliated person of
such investment company or an affiliated person of another person so affiliated
not exceed the usual and customary broker's commissions for such transactions.
It is the SCMI Portfolios' policy that commissions paid to Schroder Securities
will in the judgment of the officers of SCMI responsible for making portfolio
decisions and selecting brokers, be (i) at least as favorable as commissions
contemporaneously charged by Schroder Securities on comparable transactions for
its most favored unaffiliated customers and (ii) at least as favorable as those
which would be charged on comparable transactions by other qualified brokers
having comparable execution capability. The Board of Trustees of Schroder Core
and Core Trust, including a majority of the non-interested Trustees, each have
adopted procedures pursuant to Rule 17e-1 promulgated by the Securities and
Exchange Commission under Section 17(e) to ensure that commissions paid to
Schroder Securities by the SCMI Portfolios satisfy the foregoing standards. The
Board will review all transactions at least quarterly for compliance with these
procedures.
The Funds have no understanding or arrangement to direct any specific portion of
its brokerage to Schroder Securities and will not direct brokerage to Schroder
Securities in recognition of research services. Schroder Securities commenced
operations in 1990.
The annual portfolio turnover rate of a Fund (or Portfolio) may exceed 50% but
will not ordinarily exceed 100%.
8. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Detailed information pertaining to the purchase of shares of each 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 each Fund are sold on a continuous basis by the distributor.
33
<PAGE>
Set forth below is an example of the method of computing the offering price of a
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 _________.
Net Asset Value Per Share $ X.XX
Sales Charge, 4.00% of offering
price (4.17% of net asset value
per share) $ X.XX
Offering to Public $ X.XX
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.
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 a 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 each 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 FAS or its affiliates as
investment adviser or distributor and which participate in the Trust's exchange
privilege program ("Participating Fund"). For Federal income tax purposes,
exchange transactions are treated as sales on which a purchaser will realize a
capital gain or loss depending on whether the value of the shares redeemed is
more or less than his basis in such shares at the time of the transaction.
By use of the exchange privilege, the shareholder authorizes the Transfer Agent
to act upon the instruction of any person representing himself to either be, or
to have the authority to act on behalf of, the investor and believed by the
Transfer Agent to be genuine. The records of the Transfer Agent of such
instructions are binding. Proceeds of an exchange transaction may be invested in
another Participating Fund in the name of the shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares are being acquired. Shares of any
Participating Fund may be redeemed and the proceeds used to purchase, without a
sales charge, shares of any other Participating Fund that are offered 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
34
<PAGE>
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.
9. TAXATION
The Funds intend 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, a 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 a 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, a 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.
Under the Code, gains or 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 receivable or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, gains or
losses on disposition of debt securities denominated in a foreign currency
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition as well as gains
or losses from certain foreign currency transactions and options on certain
foreign currency transactions, generally are treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "Section 988" gains or
losses, may increase or decrease the amount of the Fund's net investment income
to be distributed to its shareholders as ordinary income.
Generally, the hedging transactions undertaken by the Fund may be deemed
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
A Fund may make one or more of the elections available under the Code which are
applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
35
<PAGE>
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
The requirements applicable to regulated investment companies such as the Fund
may limit the extent to which the Fund will be able to engage in transactions in
options and forward contracts.
Distributions of net investment income (including realized net short-term
capital gain) are taxable to shareholders as ordinary income. It is not expected
that such distributions will be eligible for the dividends received deduction
available to corporations.
Distributions of net long-term capital gain are taxable to shareholders as
long-term capital gain, regardless of the length of time the Fund shares have
been held by a shareholder, and 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 capital gain dividends have been paid will, to the extent
of such capital gain dividends, 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 or 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.
Distributions by a 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 Funds intend to minimize foreign income and withholding taxes by investing
in obligations the payments with respect to which will be subject to minimal or
no such taxes insofar as this objective is consistent with the Funds' income
objective. However, since a Fund may incur foreign taxes, it intends, if it is
eligible to do so, to elect under Section 853 of the Code to treat each
shareholder as having received an additional distribution from the Fund, in the
amount indicated in a notice furnished to him, as his pro rata portion of income
taxes paid to or withheld by foreign governments with respect to interest,
dividends and gain on the Fund's foreign portfolio investments. The shareholder
then may take the amount of such foreign taxes paid or withheld as a credit
against his Federal income tax, subject to certain limitations. If the
shareholder finds it more to his advantage to do so, he may, in the alternative,
deduct the foreign tax withheld as an itemized deduction, in computing his
taxable income. Each shareholder is referred to his tax adviser with respect to
the availability of the foreign tax credit.
The Funds 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
36
<PAGE>
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
ORGANIZATION
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and assumed
the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996, Forum
Funds, Inc. was reorganized as a Delaware business trust. The Trust has an
unlimited number of authorized shares of beneficial interest. The Board may,
without shareholder approval, divide the authorized shares into an unlimited
number of separate portfolios or series (such as the Fund) and may in the future
divide portfolios or series into two or more classes of shares (such as Investor
and Institutional Shares). Currently the authorized shares of the Trust are
divided into 16 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal or state law. Shareholders
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares when issued in accordance with the terms of the offering will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. A shareholder in a portfolio is entitled to the shareholder's pro rata
share of all dividends and distributions arising from that portfolio's assets
and, upon redeeming shares, will receive the portion of the portfolio's net
assets represented by the redeemed shares.
CORE TRUST AND SCHRODER CORE
Core Trust is a business trust organized under the laws of the State of Delaware
in September 1994. Schroder Core is a business trust organized under the laws of
the State of Delaware in September 1995. Each of Core Trust and Schroder Core is
registered under the Act as an open-end management investment company.
Currently, Core Trust has twenty-two separate portfolios and Schroder Core has
four separate portfolios. The assets of each Portfolio, a diversified portfolio,
belong only to, and the liabilities of the Portfolio are borne solely by, the
Portfolio and no other Portfolio of the respective trust.
37
<PAGE>
Under each of Core Trust's and Schroder Core's Trust Instrument, the Trustees
are authorized to issue beneficial interest in one or more separate and distinct
series. Investments in a Portfolio have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Each investor in a Portfolio is entitled to a vote in proportion to the amount
of its investment therein. Investors in a Portfolio and other series
(collectively, the "portfolios") of Core Trust or Schroder Core will all vote
together in certain circumstances (e.g., election of the Trustees and
ratification of auditors, as required by the 1940 Act and the rules thereunder).
One or more portfolios could control the outcome of these votes. Investors do
not have cumulative voting rights, and investors holding more than 50% of the
aggregate interests in Core Trust or in Schroder Core or in a Portfolio, as the
case may be, may control the outcome of votes. The Trust is not required and has
no current intention to hold annual meetings of investors, but Core Trust and
Schroder Core each will hold special meetings of investors when (1) a majority
of the Trustees determines to do so or (2) investors holding at least 10% of the
interests in Core Trust or Schroder Core (or a Portfolio) request in writing a
meeting of investors in Core Trust or Schroder Core (or Portfolio). Except for
certain matters specifically described in the Trust Instruments, the Trustees
may amend the Trust's Trust Instrument without the vote of investors.
Core Trust and Schroder Core, with respect to a Portfolio, may enter into a
merger or consolidation, or sell all or substantially all of its assets, if
approved by the respective Board (without approval of the interestholders of the
Portfolio. A Portfolio may be terminated (1) upon liquidation and distribution
of its assets, if approved by the vote of a majority of the Portfolio's
outstanding voting securities (as defined in the 1940 Act) or (2) by the
Trustees of Core Trust or Schroder Core on written notice to the Portfolio's
investors. Upon liquidation or dissolution of any Portfolio, the investors
therein would be entitled to share pro rata in its net assets available for
distribution to investors.
Each of Core Trust and Schroder Core are organized as business trusts under the
laws of the State of Delaware. Each trust's interestholders are not personally
liable for the obligations of the trust under Delaware law. The Delaware
Business Trust Act provides that an interestholder of a Delaware business trust
shall be entitled to the same limitation of liability extended to shareholders
of private corporations for profit. However, no similar statutory or other
authority limiting business trust interestholder liability exists in many other
states, including Texas. As a result, to the extent that Core Trust or Schroder
Core or an interestholder is subject to the jurisdiction of courts in those
states, the courts may not apply Delaware law, and may thereby subject Core
Trust or Schroder Core to liability. To guard against this risk, the Trust
Instruments of Core Trust and Schroder Core disclaims liability for acts or
obligations of the trust and requires that notice of such disclaimer be given in
each agreement, obligation and instrument entered into by Core Trust, Schroder
Core or their respective Trustees, and provides for indemnification out of Trust
property of any interestholder held personally liable for the obligations of
Core Trust and Schroder Core. Thus, the risk of an interestholder incurring
financial loss beyond his investment because of shareholder liability is limited
to circumstances in which (1) a court refuses to apply Delaware law, (2) no
contractual limitation of liability is in effect, and (3) Core Trust or Schroder
Core, as applicable, itself is unable to meet its obligations. In light of
Delaware law, the nature of the trusts' business, and the nature of its assets,
the Board believes that the risk of personal liability to a Trust interestholder
is remote.
CUSTODY OF PORTFOLIO ASSETS
Pursuant to a Custodian Agreement with the Trust, BankBoston, 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. No Fund will pay custodian fees to the extent the Fund invests
in shares of another registered investment company. Each Fund so invested
incurs, however, its proportionate share of the custodial fees of the
Portfolio(s) in which it invests.
Pursuant to a Custodian Agreement, Norwest Bank, Sixth Street and Marquette,
Minneapolis, Minnesota 55479 serves as each of Index Portfolio's and
International Portfolio's custodian (in this capacity the "Custodian"). The
Custodian's responsibilities include safeguarding and controlling the Trust's
cash and securities, determining income and collecting interest on Portfolio
investments. The fee is computed and paid monthly, based on the average daily
net assets of the Portfolio, the number of portfolio transactions and the number
of securities in the portfolio.
38
<PAGE>
Pursuant to rules adopted under the 1940 Act, a Portfolio may maintain its
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Core Trust Board upon consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Portfolio; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and possible risks of potential nationalization or
expropriation of Portfolio assets. The Custodian employs qualified foreign
subcustodians to provide custody of the Portfolios foreign assets in accordance
with applicable regulations.
The Chase Manhattan Bank, N.A., through its Global Custody Division located in
London, England, acts as custodian of Schroder EM Core Portfolio's assets, but
plays no role in making decisions as to the purchase or sale of portfolio
securities for the Schroder EM Core Portfolio. Pursuant to rules adopted under
the 1940 Act, the Schroder EM Core Portfolio may maintain its foreign securities
and cash in the custody of certain eligible foreign banks and securities
depositories. Selection of these foreign custodial institutions is made by the
Schroder Core Board of Trustees following a consideration of a number of
factors, including (but not limited to) the reliability and financial stability
of the institution; the ability of the institution to perform capably custodial
services for the Portfolio; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and further risks of potential nationalization or
expropriation of Portfolio assets.
PLACEMENT AGENT
Forum Financial Services, Inc., Two Portland Square, Portland, Maine 04101,
serves as Core Trust's and Schroder Core's placement agent. FFSI receives no
compensation for such placement agent services.
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.
Kirkpatrick & Lockhart, 1800 Massachusetts Avenue, N.W., Washington D.C. 20036,
counsel to Index Portfolio, passes upon certain legal matters in connection with
the interest in Index Portfolio.
Jacobs Persinger & Parker, 77 Water Street, New York, New York 10005, counsel to
Schroder EM Core Portfolio, passes upon certain legal matters in connection with
the interests in the Portfolio.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110, independent
auditors, acts as auditors for the Funds and as auditors for the Equity Index
Fund and International Equity Fund and their respective Portfolios.
Coopers & Lybrand LLP ("Coopers & Lybrand") serves as independent accountants
for the Emerging Markets Fund and Schroder EM Core Portfolio. Coopers &
Lybrand's address is One Post Office Square, Boston, Massachusetts 02109.
Coopers & Lybrand provides audit services and consultation in connection with
review of U.S. Securities and Exchange Commission filings.
39
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
1. CORPORATE BONDS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Note: Those bonds in the Aa and A groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa1 and A1.
STANDARD AND POOR'S CORPORATION ("S&P")
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Note: The ratings for AA and A may be modified by the addition of a plus (+) or
minus (-) sign to show the relative standing within the rating category.
FITCH INVESTORS SERVICE, INC. ("FITCH")
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.
A-1
<PAGE>
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA categories.
2. COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
o -- Leading market positions in well-established industries.
o -- High rates of return on funds employed.
o -- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
o -- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o -- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
A-2
<PAGE>
APPENDIX B -.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.
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
B-1
<PAGE>
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.
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.
B-2
<PAGE>
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."
B-3
<PAGE>
INVESTORS GROWTH FUND
- --------------------------------------------------------------------------------
Account Information and
Shareholder Servicing: Distributor:
Forum Financial Corp. Forum Financial Services, Inc.
P.O. Box 446 Two Portland Square
Portland, Maine 04112 Portland, Maine 04101
207-879-0001 207-879-1900
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 1, 1997,
AS AMENDED JANUARY 21, 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 December 1, 1997 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......................... 3
3. Investment Limitations...................... 5
4. Performance Data............................ 7
5. Management.................................. 8
6. Determination of Net Asset Value............ 13
7. Portfolio Transactions...................... 13
8. Additional Purchase and
Redemption Information................... 14
9. Taxation.................................... 15
10. Other Information........................... 17
Appendix A - Description of Securities Ratings
Appendix B - Text of Forum Brochure
<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 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 eighteen series and has two series that have not commenced
operation as of the date of this SAI. The series of the Trust are as follows:
Investors Bond Fund Maine Municipal Bond Fund
TaxSaver Bond Fund New Hampshire Bond Fund
Daily Assets Treasury Fund Austin Global Equity Fund
Daily Assets Treasury Obligations Fund Oak Hall Equity Fund
Daily Assets Cash Fund Quadra Limited Maturity Treasury Fund
Daily Assets Government Fund Quadra Value Equity Fund
Daily Assets Tax Exempt Fund Quadra Growth Fund
Payson Value Fund Quadra International Equity Fund
Payson Balanced Fund Quadra Opportunistic Bond Fund
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.
"FAS" means Forum Administrative Services, LLC.
"FAcS" means Forum Accounting Services, LLC.
"FFC" means Forum Financial Corp.
"Forum" means Forum Financial Services, Inc.
"Forum Advisors" means Forum Advisors, Inc.
"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.
2
<PAGE>
2. INVESTMENT POLICIES
INTRODUCTION
The following information supplements the discussion found under "Investment
Objective and Policies" and "Additional Investment Policies" in the Prospectus.
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.
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.
3
<PAGE>
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 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).
4
<PAGE>
DEPOSITORY RECEIPTS
Investments in securities of foreign issuers may be in the form of sponsored or
unsponsored American Depository Receipts ("ADRs") or European Depository
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.
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. INVESTMENT LIMITATIONS
The following investment restrictions restate or are in addition to those
described under "Investment Objective and Policies" and "Additional Investment
Policies and Risk Considerations" in the Prospectus. The Fund has adopted the
following investment limitations which are fundamental policies of the Fund,
unless otherwise stated.
(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%
5
<PAGE>
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 10% 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
13% 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
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
6
<PAGE>
"Investment Objective" and "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, 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.
7
<PAGE>
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.
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,* Chairman and President (age 54)
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, LLC (a mutual fund
administrator), Forum Financial Corp. (a registered transfer agent) and
Forum Advisors, Inc. (a registered investment adviser). Mr. Keffer is a
Trustee and/or officer of various registered investment companies for which
Forum Administrative Services, LLC serves as manager or administrator and
for which Forum Financial Services, Inc. serves as distributor. His address
is Two Portland Square, Portland, Maine 04101.
Costas Azariadis, Trustee (age 53)
Professor of Economics, University of California, Los Angeles, since July
1992. Prior thereto, Dr. Azariadis was Professor of Economics at the
University of Pennsylvania. His address is Department of Economics,
University of California, Los Angeles, 405 Hilgard Avenue, Los Angeles,
California 90024.
James C. Cheng, Trustee (age 54)
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President and
Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is 27 Temple Street, Belmont,
Massachusetts 02178.
J. Michael Parish, Trustee (age 53)
Partner at the law firm of 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 Wall Street,
New York, New York 10005.
Mark D. Kaplan, Vice President, Assistant Treasurer and Assistant Secretary (age
41)
Managing Director at Forum Financial Services, Inc. since September 1995.
Prior thereto, Mr. Kaplan was Managing Director and Director of Research at
H.M. Payson & Co. His address is Two Portland Square, Portland, Maine
04101.
8
<PAGE>
David I. Goldstein, Secretary (age 35)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also Secretary or Assistant
Secretary of various registered investment companies for which Forum
Administrative Services, LLC or Forum Financial Services, Inc. serves as
manager, administrator and/or distributor. His address is Two Portland
Square, Portland, Maine 04101.
Max Berueffy, Assistant Secretary (age 44)
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1994. Prior thereto, Mr. Berueffy was on the staff of the U.S.
Securities and Exchange Commission for seven years, first in the appellate
branch of the Office of the General Counsel, then as a counsel to
Commissioner Grundfest and finally as a senior special counsel in the
Division of Investment Management. Mr. Berueffy is also Secretary or
Assistant Secretary of various registered investment companies for which
Forum Administrative Services, LLC or Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. His address is Two Portland
Square, Portland, Maine 04101.
Cheryl O. Tumlin, Assistant Secretary (age 31)
Assistant Counsel, Forum Financial Services, Inc., with which she has been
associated since July 1996. Prior thereto, Ms. Tumlin was on the staff of
the U.S. Securities and Exchange Commission as an attorney in the Division
of Market Regulation and prior thereto Ms. Tumlin was an associate with the
law firm of Robinson Silverman Pearce Aronsohn & Berman in New York, New
York. Ms. Tumlin is also Assistant Secretary of various registered
investment companies for which Forum Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. Her address is Two Portland Square, Portland, Maine 04101.
M. Paige Turney, Assistant Secretary (age 28).
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1995. Ms. Turney was employed from 1992 as a Senior Fund
Accountant with First Data Corporation in Boston, Massachusetts. Ms. Turney
is also Assistant Secretary of various registered investment companies for
which Forum Administrative Services, LLC or Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. Prior thereto she was
a student at Montana State University Her address is Two Portland Square,
Portland, Maine 04101.
TRUSTEE COMPENSATION
Each Trustee of the Trust (other than John Y. Keffer, who is an interested
person of the Trust) is paid $1,000 for each Board meeting attended (whether in
person or by electronic communication) and is paid $1,000 for each committee
meeting attended on a date when a Board meeting is not held. As of March 31,
1997, in addition to $1,000 for each Board meeting attended, each Trustee
receives $100 per active portfolio of the Trust. To the extent a meeting relates
to only certain portfolios of the Trust, Trustees are paid the $100 fee only
with respect to those
9
<PAGE>
portfolios. Trustees are also reimbursed for travel and related expenses
incurred in attending meetings of the Board. No officer of the Trust is
compensated by the Trust.
The following table provides the aggregate compensation paid to each Trustee.
The Trust has not adopted any form of retirement plan covering Trustees or
officers. Information is presented for the fiscal year ended March 31, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Accrued Annual
Aggregate Pension Benefits Upon Total
Trustee Compensation Benefits Retirement Compensation
------- ------------ -------- ---------- ------------
Mr. Keffer None None None None
Mr. Azariadis $4,000 None None $4,000
Mr. Cheng $4,000 None None $4,000
Mr. Parish $4,000 None None $4,000
</TABLE>
TRUSTEE COMPENSATION FOR CORE TRUST (DELWARE). 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 totalling $7,200.
INVESTMENT ADVISER
Forum Advisors, Inc. serves as investment adviser to Investors Growth Fund
pursuant to an investment advisory agreement with the Trust. Subject to the
general control of the Board, Forum Advisors is responsible for among other
things, developing a continuing investment program for the Fund in accordance
with its investment objective and reviewing the investment strategies and
policies of the Fund. Forum Advisors was incorporated under the laws of Delaware
in 1987 and is registered under the Investment Advisers Act of 1940. For its
services, Forum Advisors receives an advisory fee at an annual rate of 0.65% of
Investor Growth Fund's average daily net assets.
Pursuant to the investment advisory agreement, Forum Advisors is responsible for
managing the investment and reinvestment of the assets included in the Fund and
for continuously reviewing, supervising and administering the Fund's
investments. In this regard, it is the responsibility of Forum Advisors 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. Forum Advisors 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, Forum Advisors is required
to manage the Fund's investment portfolio in accordance with applicable laws and
regulations. In making its investment decisions, Forum Advisors does not use
material information that may be in its possession or in the possession of its
affiliates.
The investment advisory agreement will continue in effect provided such
continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act) or by the
Board and (ii) 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 or the shareholders of the Fund on 60 days' written notice to the
Adviser, or by the Adviser on 60 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, neither Forum Advisors nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission in the performance of its or their duties to the Fund, except
for willful misfeasance, bad faith or gross negligence in the performance of
Forum Advisors or their duties or by reason of reckless disregard of its or
their obligations and duties under the investment advisory agreement.
10
<PAGE>
ADMINISTRATIVE SERVICES
Forum Administrative Services, LLC ("FAS") acts as administrator to the Trust on
behalf of the Fund pursuant to an Administration Agreement with the Trust. As
administrator, FAS provides management and administrative services necessary to
the operation of the Trust (which include, among other responsibilities,
negotiation of contracts and fees with, and monitoring of performance and
billing of, the transfer agent and custodian and arranging for maintenance of
books and records of the Trust), and provides the Trust with general office
facilities. The Administration Agreement will remain in effect for a period of
twelve months with respect to the Fund and thereafter is automatically renewed
each year for an additional term of one year.
The Administration Agreement terminates automatically if it is assigned and may
be terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party on not more than 60 days' written notice. The
Administration Agreement also provides that FAS shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Trust, except for willful misfeasance, bad
faith or gross negligence in the performance of FAS's duties or by reason of
reckless disregard of its obligations and duties under the Administration
Agreement.
At the request of the Board, FAS provides persons satisfactory to the Board to
serve as officers of the Trust. Those officers, as well as certain other
employees and Trustees of the Trust, may be directors, officers or employees of
FAS, the Adviser or their affiliates.
DISTRIBUTOR
Forum Financial Services, Inc. ("Forum"), an affiliate of FAS, is the Trust's
distributor and acts as the agent of the Trust in connection with the offering
of shares of the Fund pursuant to a Distribution Agreement. The Distribution
Agreement will continue in effect for twelve months and will continue in effect
thereafter only if its continuance is specifically approved at least annually by
the Board or by vote of the shareholders entitled to vote thereon, and in either
case, by a majority of the Trustees who (i) are not parties to the Distribution
Agreement, (ii) are not interested persons of any such party or of the Trust and
(iii) with respect to any class for which the Trust has adopted a distribution
plan, have no direct or indirect financial interest in the operation of that
distribution plan or in the Distribution Agreement, at a meeting called for the
purpose of voting on the Distribution Agreement. All subscriptions for shares
obtained by Forum are directed to the Trust for acceptance and are not binding
on the Trust until accepted by it. Forum receives no compensation or
reimbursement of expenses for the distribution services provided pursuant to the
Distribution Agreement and is under no obligation to sell any specific amount of
Fund shares.
The Distribution Agreement provides that Forum shall not be liable for any error
of judgment or mistake of law or in any event whatsoever, except for willful
misfeasance, bad faith or gross negligence in the performance of Forum's duties
or by reason of reckless disregard of its obligations and duties under the
Distribution Agreement.
The Distribution Agreement is terminable with respect to the Fund without
penalty by the Trust on 60 days' written notice when authorized either by vote
of the Fund's shareholders or by a vote of a majority of the Board, or by Forum
on 60 days' written notice. The Distribution Agreement will automatically
terminate in the event of its assignment.
Forum may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of the Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Fund are sold without sales charges or
distribution fees. These financial institutions may otherwise act as processing
agents, and will be responsible for promptly transmitting purchase, redemption
and other requests to the Fund.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition
11
<PAGE>
to, or different from, those listed herein. Information concerning any charges
or services will be provided to customers by the financial institution.
Investors purchasing shares of the Fund in this manner should acquaint
themselves with their institution's procedures and should read this Prospectus
in conjunction with any materials and information provided by their institution.
The financial institution and not its customers will be the shareholder of
record, although customers may have the right to vote shares depending upon
their arrangement with the institution.
TRANSFER AGENT
Forum Financial Corp. ("FFC") acts as transfer agent of the Trust pursuant to a
transfer agency agreement (the "Transfer Agency Agreement"). The Transfer Agency
Agreement provided, with respect to 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.
Among the responsibilities of FFC as agent for the Trust are: (1) answering
customer inquiries regarding account status and history, the manner in which
purchases and redemptions of shares of the Fund may be effected and certain
other matters pertaining to the Fund; (2) assisting shareholders in initiating
and changing account designations and addresses; (3) providing necessary
personnel and facilities to establish and maintain shareholder accounts and
records, assisting in processing purchase and redemption transactions and
receiving wired funds; (4) transmitting and receiving funds in connection with
customer orders to purchase or redeem shares; (5) verifying shareholder
signatures in connection with changes in the registration of shareholder
accounts; (6) furnishing periodic statements and confirmations of purchases and
redemptions; (7) arranging for the transmission of proxy statements, annual
reports, prospectuses and other communications from the Trust to its
shareholders; (8) arranging for the receipt, tabulation and transmission to the
Trust of proxies executed by shareholders with respect to meetings of
shareholders of the Trust; and (9) providing such other related services as the
Trust or a shareholder may reasonably request.
FFC or any sub-transfer agent or processing agent may also act and receive
compensation as custodian, investment manager, nominee, agent or fiduciary for
its customers or clients who are shareholders of the Fund with respect to assets
invested in the Fund. FFC or any sub-transfer agent or other processing agent
may elect to credit against the fees payable to it by its clients or customers
all or a portion of any fee received from the Trust or from FFC with respect to
assets of those customers or clients invested in the Fund. FFC, FAS or
sub-transfer agents or processing agents retained by FFC may be Processing
Organizations (as defined in the Prospectus) and, in the case of sub- transfer
agents or processing agents, may also be affiliated persons of FFC or FAS.
For its services under the Transfer Agency Agreement, FFC 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 $24,000 per year; such amounts to be computed and paid monthly in
arrears by the Fund; and (iii) Annual Shareholder Account Fees of $25.00 for a
retail and $125.00 for an institutional shareholder account; such fees to be
computed as of the last business day of the prior month.
FFC or any sub-transfer agent or processing agent may also act and receive
compensation for acting as custodian, investment manager, nominee, agent or
fiduciary for its customers or clients who are shareholders of the Fund with
respect to assets invested in the Fund.
FUND ACCOUNTING
Forum Accounting Services, LLC ("FAcS") performs portfolio accounting services
for the Fund pursuant to the Fund Accounting Agreement with the Trust. The Fund
Accounting Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board of Trustees or by a vote of
the shareholders of the Trust and in either case by a majority of the Trustees
who are not parties to the Fund Accounting Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Fund
Accounting Agreement. Under its agreement, FAcS prepares and maintains books and
records prepares and maintains books
12
<PAGE>
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. For its services, FAcS receives from the
Trust with respect to the Fund a fee of $12,000.
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 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 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.
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.
13
<PAGE>
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, and 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.
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 ________.
Net Asset Value Per Share $ X.XX
Sales Charge, 4.00% of offering
price (4.17% of net asset value
per share) $ X.XX
Offering to Public $ X.XX
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
14
<PAGE>
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 FAS or its affiliates as investment adviser
or distributor and which participate in the Trust's exchange privilege program
("Participating Fund"). For Federal income tax purposes, exchange transactions
are treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares redeemed is more or less than his
basis in such shares at the time of the transaction.
By use of the exchange privilege, the shareholder authorizes the Transfer Agent
to act upon the instruction of any person representing himself to either be, or
to have the authority to act on behalf of, the investor and believed by the
Transfer Agent to be genuine. The records of the Transfer Agent of such
instructions are binding. Proceeds of an exchange transaction may be invested in
another Participating Fund in the name of the shareholder.
Exchange transactions will be made on the basis of relative net asset values per
share at the time of the exchange transaction plus any sales charge applicable
to the Participating Fund whose shares are being acquired. Shares of any
Participating Fund may be redeemed and the proceeds used to purchase, without a
sales charge, shares of any other Participating Fund that are offered 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 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. TAXATION
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
15
<PAGE>
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 (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) 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 not expected
that such distributions will be eligible for the dividends received deduction
available to corporations.
Distributions of net long-term capital gain are taxable to shareholders as
long-term capital gain, regardless of the length of time the Fund shares have
been held by a shareholder, and 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 capital gain dividends have been paid will, to the extent
of such capital gain dividends, 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 or 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.
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.
16
<PAGE>
The Fund intends to minimize foreign income and withholding taxes by investing
in obligations the payments with respect to which will be subject to minimal or
no such taxes insofar as this objective is consistent with the Fund's income
objective. However, since the Fund may incur foreign taxes, it intends, if it is
eligible to do so, to elect under Section 853 of the Code to treat each
shareholder as having received an additional distribution from the Fund, in the
amount indicated in a notice furnished to him, as his pro rata portion of income
taxes paid to or withheld by foreign governments with respect to interest,
dividends and gain on the Fund's foreign portfolio investments. The shareholder
then may take the amount of such foreign taxes paid or withheld as a credit
against his Federal income tax, subject to certain limitations. If the
shareholder finds it more to his advantage to do so, he may, in the alternative,
deduct the foreign tax withheld as an itemized deduction, in computing his
taxable income. Each shareholder is referred to his tax adviser with respect to
the availability of the foreign tax credit.
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
ORGANIZATION
THE TRUST AND ITS SHARES
The Trust was originally incorporated in Maryland on March 24, 1980 and assumed
the name of Forum Funds, Inc. on March 16, 1987. On January 5, 1996, Forum
Funds, Inc. was reorganized as a Delaware business trust. The Trust has an
unlimited number of authorized shares of beneficial interest. The Board may,
without shareholder approval, divide the authorized shares into an unlimited
number of separate portfolios or series (such as the Fund) and may in the future
divide portfolios or series into two or more classes of shares (such as Investor
and Institutional Shares). Currently the authorized shares of the Trust are
divided into 16 separate series.
Each share of each fund of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertain to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular portfolio or class, except if
the matter affects only one portfolio or class or voting by portfolio or class
is required by law, in which case shares will be voted separately by portfolio
or class, as appropriate. Delaware law does not require the Trust to hold annual
meetings of shareholders, and it is anticipated that shareholder meetings will
be held only when specifically required by Federal
17
<PAGE>
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.
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 ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts, 02110,
independent auditors, act as auditors for the Trust.
18
<PAGE>
APPENDIX A - 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.
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.
A-1
<PAGE>
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.
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.
A-2
<PAGE>
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 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.
A-3
<PAGE>
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 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:
o -- Leading market positions in well-established industries.
o -- High rates of return on funds employed.
o -- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
o -- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o -- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A and B. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated B are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 ratings.
A-4
<PAGE>
APPENDIX B - 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.
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
B-1
<PAGE>
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.
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.
B-2
<PAGE>
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."
B-3