----------------------------------------
PROSPECTUS
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August 1, 1999
INVESTORS HIGH GRADE BOND INVESTORS HIGH GRADE BOND FUND
FUND AND INVESTORS BOND FUND
SEEK HIGH CURRENT INCOME CONSISTENT INVESTORS BOND FUND
WITH CAPITAL PRESERVATION AND
PRUDENT INVESTMENT RISK. TAXSAVER BOND TAXSAVER BOND FUND
FUND SEEKS HIGH CURRENT INCOME EXEMPT
FROM FEDERAL INCOME TAX.
THE FUNDS DO NOT PAY RULE 12B-1
(DISTRIBUTION) FEES.
The Securities and Exchange Commission
has not approved or disapproved any Fund's
shares or determined whether this Prospectus
is accurate or complete. Any representation
to the contrary is a criminal offense.
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[Picture graphics]
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TABLE OF CONTENTS
RISK/RETURN SUMMARY 2
PERFORMANCE 6
FEE TABLES 9
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS 11
MANAGEMENT 15
YOUR ACCOUNT 18
How to Contact the Funds 18
General Information 18
Buying Shares 19
Selling Shares 22
Sales Charges 25
Exchange Privileges 26
Retirement Accounts 27
OTHER INFORMATION 28
FINANCIAL HIGHLIGHTS 30
<PAGE>
RISK/RETURN SUMMARY
INVESTORS HIGH GRADE BOND FUND
[Margin callout: CONCEPTS TO UNDERSTAND
DEBT SECURITY means a security such as a bond or note that obligates
the issuer to pay the security owner a specified sum of money
(interest) at set intervals as well as to repay the principal amount of
the security at its maturity
MATURITY means the date on which a debt security is (or may be) due and
payable
BOND means a debt security with a long-term maturity of usually 5 years
or longer
NOTE means a debt security with a short-term maturity, usually less
than 5 years (less than 1 year for municipal securities)
NRSRO means a "nationally recognized statistical rating organization"
such as Standard & Poor's that rates debt securities by relative credit
risk
INVESTMENT GRADE SECURITY means a debt security rated in one of the
four highest long-term or two highest short-term ratings categories by
an NRSRO or unrated and determined to be of comparable quality
MUNICIPAL SECURITY means a debt security issued by or on behalf of the
states, their local governments and public financing authorities and
U.S. territories and possessions, the interest on which is exempt from
Federal income tax
U.S. GOVERNMENT SECURITIES means debt securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities]
INVESTMENT OBJECTIVE Investors High Grade Bond Fund (a "Fund") seeks a high
level of current income consistent with capital preservation and prudent
investment risk.
PRINCIPAL INVESTMENT STRATEGY The Fund invests primarily in U.S. Government
Securities and debt securities rated in one of the three highest rating
categories by an NRSRO. Generally, the average weighted maturity of the Fund's
portfolio securities is 7 years or less.
INVESTORS BOND FUND
INVESTMENT OBJECTIVE Investors Bond Fund (a "Fund") seeks a high level of
current income consistent with capital preservation and prudent investment risk.
PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in investment grade
debt securities. Generally, the average weighted maturity of the Fund's
portfolio securities is between 5 and 20 years.
TAXSAVER BOND FUND
INVESTMENT OBJECTIVE TaxSaver Bond Fund (a "Fund") seeks high current income
exempt from Federal income tax.
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PRINCIPAL INVESTMENT STRATEGIES TaxSaver Bond Fund invests primarily in
investment grade municipal securities. Generally, the average weighted maturity
of the Fund's portfolio securities is between 5 and 15 years.
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
An investment in a Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money on your investment in a Fund or the Fund could
underperform other investments. The principal risks of an investment in a Fund
include:
o A Fund's share price, yield and total return will fluctuate in
response to price movements in the fixed income securities markets
o The value of most debt securities fall when interest rates rise; the
longer a debt security's maturity and the lower its credit quality,
the more its value typically falls in response to an increase in
interest rates
o A Fund can not collect interest and principal payments on a debt
security if the issuer defaults
o The Fund's investment adviser (the "Adviser") may make poor investment
decisions
o Investors High Brade Bond Fund's and Investors Bond Fund's investment
in mortgage-backed and asset-backed securities has prepayment risk. A
decline in interest rates may result in losses in these securities'
values and a reduction in their yields as the holders of the assets
backing the securities may prepay their debts. Conversely, a rise in
interest rates may result in an increase in the average maturities of
these debt securities because fewer holders of the assets backing the
securities may prepay their debt. Issuers may also prepay (or call)
fixed rate securities when interest rates fall, forcing the Fund to
sell such securities and invest the proceeds in securities with lower
interest rates.
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The prices of debt securities with longer maturities are more volatile
o Investors Bond Fund and TaxSaver Bond Fund are each non-diversified.
Each Fund may focus its investment assets in the securities of a
comparatively small number of issuers. Concentration of a Fund in
securities of a limited number of issuers exposes it to greater market
risk and potential monetary losses than if its assets were diversified
among the securities of a greater number of issuers
WHO MAY WANT TO INVEST IN THE FUNDS
Investors High Grade Bond Fund and Investors Bond Fund may be appropriate for
you if you:
o Seek income and more price stability than stocks offer
o Seek capital preservation
o Are pursuing a long-term goal
TaxSaver Bond Fund may be appropriate for you if you:
o Are an income-oriented investor in a high tax bracket and desire
tax-exempt income Seek income and more price stability than stocks
offer
o Seek capital preservation
o Are pursuing a long-term goal
Investors High Grade Bond Fund and Investors Bond Fund may NOT be appropriate
for you if you:
o Are pursuing a short-term goal or are investing emergency reserves
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TaxSaver Fund may NOT be appropriate for you if you:
o Are pursuing a short-term goal or are investing emergency reserves
o Are investing funds in a tax-deferred or tax-exempt account (such as
an IRA)
o Do not require tax-exempt income
5
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PERFORMANCE
The following charts illustrate the variability of a Fund's returns. The charts
and the following tables provide some indication of the risks of investing in
Investors Bond Fund and TaxSaver Bond Fund by showing changes in each Fund's
performance from year to year and how each Fund's returns compare to a broad
measure of market performance. Information for Investors High Grade Bond Fund is
not included as it did not have a full calendar year of performance as of
December 31, 1998. PERFORMANCE INFORMATION REPRESENTS ONLY PAST PERFORMANCE AND
DOES NOT NECESSARILY INDICATE FUTURE RESULTS.
INVESTORS BOND FUND
The following chart shows the annual total returns for each full calendar year
that the Fund has operated. The chart does not reflect sales charges and, if
reflected, the returns would be less than shown.
[EDGAR REPRESENTATION OF GRAPH CHART]
PAST PERFORMANCE CHART
Year Average Annual Total Return
- ---- ---------------------------
1990 9.54%
1991 16.12%
1992 7.46%
1993 12.53%
1994 -2.23%
1995 13.73%
1996 6.87%
1997 10.97%
1998 6.13%
The calendar year-to-date total return as of June 30, 1999 was -1.57%.
During the periods shown in the chart, the highest quarterly return was 6.09%
(for the quarter ended September 30, 1991) and the lowest quarterly return was
- -2.32% (for the quarter ended March 31, 1994).
The following table compares the Fund's average annual total returns as of
December 31, 1998 to the Lehman Government/Corporate Intermediate Index.
6
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<TABLE>
<S> <C> <C>
LEHMAN GOVERNMENT/CORPORATE
INVESTORS INTERMEDIATE INDEX
YEAR(S) BOND FUND
- -------------------------------------------------------------------------------------------------------------------
1 Year 2.15% 8.42%
5 Years 6.10% 6.59%
Since Inception (10/2/89) 8.48% 8.20%(1)
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</TABLE>
(1) For the period 9/30/89 - 12/31/98
The Lehman Government/Corporate Intermediate Index is a market index of
fixed-rate government and investment grade securities with maturities of up to
10 years. The index is unmanaged and reflects the reinvestment of interest and
principal payments. Unlike the performance figures of the Fund, the index's
performance does not reflect the effect of expenses.
TAXSAVER BOND FUND
The following chart shows the annual total returns for each full calendar year
that the Fund has operated. The chart does not reflect sales charges and, if
reflected, the returns would be less than shown.
[EDGAR REPRESENTATION OF GRAPH CHART]
PAST PERFORMANCE CHART
Year Average Annual Total Return
- ---- ---------------------------
1990 7.07%
1991 10.55%
1992 8.89%
1993 10.51%
1994 -0.85%
1995 13.29%
1996 4.29%
1997 7.39%
1998 5.09%
The calendar year-to-date total return as of June 30, 1999 was -1.08%.
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During the periods shown in the chart, the highest quarterly return was 4.93%
(for the quarter ended March 31, 1995) and the lowest quarterly return was
- -2.02% (for the quarter ended March 31, 1994).
The following table compares the Fund's average annual total returns as of
December 31, 1998 to the Lehman 10-Year Municipal Bond Index.
<TABLE>
<S> <C> <C>
LEHMAN 10-YEAR MUNICIPAL BOND INDEX
YEAR(S) TAXSAVER BOND FUND
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1 Year 1.14% 6.76%
5 Years 4.93% 6.63%
Since Inception (10/2/89) 6.86% 8.59% (1)
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</TABLE>
(1) For the period 9/30/89 - 12/31/98.
The Lehman 10-Year Municipal Bond Index is a market index of investment grade
fixed-rate municipal securities with an average maturity of 10 years. The index
is unmanaged and reflects the reinvestment of interest and principal payments.
Unlike the performance figures of the Fund, the index's performance does not
reflect the effect of expenses.
8
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FEE TABLES
The following tables describe the various fees and expenses that you will bear
if you invest in a Fund.
<TABLE>
<S> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
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Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of the offering 3.75%
price)
Maximum Sales Charge (Load) Imposed on Reinvested Distributions None
Maximum Deferred Sales Charge (Load) 1.00%(1)
Redemption Fee None
Exchange Fee None
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(1) Applicable only on purchases of $1 million or more.
</TABLE>
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES(1) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- --------------------------------------------------------------------------------------------------------------
INVESTORS HIGH GRADE BOND FUND
Management Fees 0.40%
Distribution (12b-1) Fees None
Other Expenses 0.72%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.12%
Fee Waiver and Expense Reimbursement(2) 0.42%
Net Expenses 0.70%
INVESTORS BOND FUND
Management Fees 0.40%
Distribution (12b-1) Fees None
Other Expenses 0.62%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.02%
Fee Waiver and Expense Reimbursement(2) 0.32%
Net Expenses 0.70%
TAXSAVER BOND FUND
Management Fees 0.40%
Distribution (12b-1) Fees None
Other Expenses 0.71%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.11%
Fee Waiver and Expense Reimbursement(2) 0.51%
Net Expenses 0.60%
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</TABLE>
(1) Based on amounts incurred during each Fund's fiscal year ended March 31,
1999 stated as a percentage of assets.
(2) Based on certain contractual fee waivers and expense reimbursments that may
increase after July 31, 2000.
9
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EXAMPLE
The following is a hypothetical example intended to help you compare the cost of
investing in a Fund to the cost of investing in other mutual funds. This example
assumes that you invest $10,000 in a Fund for the time periods indicated, you
pay the maximum sales charge and then redeem all of your shares at the end of
those periods. The example also assumes that your investment has a 5% annual
return, that the Fund's operating expenses remain the same as stated in the
above table and that distributions are reinvested. Although your actual costs
may be higher or lower, under these assumptions your costs would be:
<TABLE>
<S> <C> <C> <C>
INVESTORS HIGH GRADE BOND INVESTORS TAXSAVER
FUND BOND FUND BOND FUND
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After 1 year $485 $475 $484
After 3 years $718 $688 $715
After 5 years $969 $917 $964
After 10 years $1,687 $1,576 $1,676
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</TABLE>
10
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INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
INVESTMENT OBJECTIVES
INVESTORS HIGH GRADE BOND FUND seeks to provide as high a level of current
income as is consistent with capital preservation and prudent investment risk.
INVESTORS BOND FUND seeks to provide as high a level of current income as is
consistent with capital preservation and prudent investment risk.
TAXSAVER BOND FUND seeks to provide a high level of current income exempt from
Federal income tax.
INVESTMENT STRATEGIES
THE ADVISER'S PROCESS
[Margin callout: CONCEPTS TO UNDERSTAND
YIELD CURVE means a graph that plots the yield of all bonds of similar
quality and with maturities ranging from the shortest to the longest
available
The Adviser continuously monitors economic factors such as interest rate
outlooks and technical factors such as the shape of the yield curve in
combination with the stated objective of a Fund to determine an appropriate
maturity profile for the Fund's investment portfolio. The Adviser then
principally searches for securities that satisfy the maturity profile of a Fund
and that provide the greatest potential return relative to the risk of the
security. The Adviser may sell a debt security if:
o Revised economic forecasts or interest rate outlook requires a
repositioning of the portfolio
o The security subsequently fails to meet the Adviser's investment
criteria
o A more attractive security is found or funds are needed for another
purpose
o The Adviser believes that the security has reached its appreciation
potential
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INVESTMENT POLICIES
[Margin callout: CONCEPTS TO UNDERSTAND
MORTGAGE-BACKED SECURITIES means debt securities whose principal and
interest payments come from a pool of mortgages created by various
lenders
ASSET-BACKED SECURITIES means debt securities whose principal and
interest payments come from a pool of assets such as car loans, leases
of real and personal property and credit card loans created by various
lenders
PRIVATE ACTIVITY BOND means a debt security that is issued by or on
behalf of public authorities to finance privately operated facilities.
Private Activity Bonds are primarily revenue securities]
GENERAL OBLIGATION SECURITY means a security whose principal and
interest payment is secured by a municipality's full faith and credit
and taxing power
REVENUE SECURITY means a security whose principal and interest is
payable from revenues of a particular facility, class of facilities or
from the proceeds of a special excise or other tax
INVESTORS HIGH GRADE BOND FUND The Fund invests primarily in U.S. Government
Securities or debt securities that are rated in one of the three highest rating
categories by an NRSRO. The Fund normally invests at least 70% of its total
assets in U.S. Government Securities and at least 40% of those assets in
obligations of the U. S. Treasury, such as Treasury bonds, bills and notes. The
Fund may invest up to 30% of its total assets in mortgage-backed and
asset-backed securities. The Fund only invests in mortgage-backed securities
that are U.S. Government Securities or are rated in the two highest rating
categories of an NRSRO. The Fund may invest up to 10% of its total assets in
adjustable rate mortgage-backed securities and up to 10% of its total assets in
asset-backed securities. These securities must be rated in the highest rating
category by an NRSRO. The Fund invests in securities with varying maturities
from overnight to more than 30 years, but will not invest more than 25% of its
total assets in securities with maturities greater than 10 years. Generally, the
average weighted maturity of the Fund's portfolio securities will be 7 years or
less.
INVESTORS BOND FUND The Fund invests primarily in investment grade debt
securities, U.S. Government Securities and mortgage-backed and asset-backed
securities rated in the two highest rating categories by an NRSRO or considered
by the Adviser to be of comparable quality. The Fund may invest up to 50% of its
total assets in mortgage-backed securities and up to 15% of its total assets in
asset-backed securities. The Fund invests in securities with varying maturities
ranging from overnight to 30 years. Generally, the average weighted maturity of
the Fund's portfolio securities will be between 5 and 20 years.
TAXSAVER BOND FUND The Fund invests primarily in investment grade municipal
securities. The Fund may, however, invest up to 20% of its total assets in
securities whose interest income is subject to Federal income tax. Municipal
securities include municipal bonds, notes and
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leases. Municipal leases are securities that permit government issuers to
acquire property and equipment without the security being subject to the
constitutional and statutory requirements for the issuance of long-term debt.
The Fund invests in general obligation securities and revenue securities,
including private activity bonds. The Fund may invest over 25% of its total
assets in private activity bonds. Generally, the average weighted maturity of
the Fund's portfolio securities is between 5 and 15 years. PORTFOLIO TURNOVER
The frequency of portfolio transactions of each Fund (the portfolio turnover
rate) will vary from year to year depending on market conditions. From time to
time, a Fund may engage in active short-term trading to benefit from yield
disparities among different issues of debt securities, to seek short-term
profits during periods of fluctuating interest rates, or for other reasons. This
type of trading will increase a Fund's portfolio turnover rate and transaction
costs and may negatively impact the Fund's performance. Such trading may also
increase a Fund's capital gain. The Adviser weighs the anticipated benefits of
short-term investments against these consequences. Each Fund's turnover rate is
reported under "Financial Highlights."
TEMPORARY DEFENSIVE MEASURES In order to respond to adverse market, economic or
other conditions, a Fund may assume a temporary defensive position and invest
without limit in cash and prime quality cash equivalents such as commercial
paper and money market instruments. As a result, a Fund may be unable to achieve
its investment objective.
INVESTMENT RISKS
GENERAL A Fund's net asset value and total return will fluctuate based upon
changes in the value of its portfolio securities. The market value of securities
in which the Funds invest are based upon the market's perception of value and is
not necessarily an objective measure of a security's value. There is no
assurance that any Fund will achieve its investment objective. An investment in
a Fund is not by itself a complete or balanced investment program.
The value of your investment in a Fund may change in response to changes in
interest rates. An increase in interest rates typically causes a fall in the
value of the fixed income securities in which the Funds invest. Your investment
in a Fund is also subject to the risk that the financial condition of an issuer
of a security held by the Fund may cause it to default or become unable to pay
interest or principal due on the security. This risk generally increases as
security credit ratings decrease. Your investment in a Fund is subject to the
risk that the Adviser may make poor investment decisions.
13
<PAGE>
An additional risk is that issuers may prepay fixed rate securities when
interest rates fall, forcing a Fund to invest in securities with lower interest
rates. For Investors Bond Fund's and Investors High Grade Bond Fund's investment
in mortgage-backed and asset-backed securities, there is also the risk that a
decline in interest rates may result in holders of the assets backing the
securities prepaying their debts. This could result in potential losses on these
securities and a reduction in their yields. Alternatively, a rise in interest
rates may reduce the amount of prepayments. This may cause a Fund's average
maturity to rise as fewer holders of assets backing the securities may prepay
their debt.
Investors Bond Fund and TaxSaver Bond Fund are also non-diversified. Each Fund
may focus its investments in the securities of a comparatively small number of
issuers. Concentration of a Fund in securities of a limited number of issuers
exposes it to greater market risk and potential monetary losses than if its
assets were diversified among the securities of a greater number of issuers.
YEAR 2000 Certain computer systems may not process date-related information
properly on and after January 1, 2000. The Adviser is addressing this matter for
its systems. Each Fund's other service providers have informed the Fund that
they are taking similar measures. This matter, if not corrected, could adversely
affect the services provided to each Fund or the issuers in which the Fund
invests and, therefore, could lower the value of your shares.
14
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MANAGEMENT
Each Fund is a series of Forum Funds (the "Trust"), an open-end, management
investment company (mutual fund). The business of the Trust and of each Fund is
managed under the direction of the Board of Trustees (the "Board"). The Board
formulates the general policies of each Fund and meets periodically to review
the Fund's performance, monitor investment activities and practices and discuss
other matters affecting the Fund. Additional information regarding the Board, as
well as the Trust's executive officers, may be found in the Statement of
Additional Information ("SAI").
THE ADVISER
Forum Investment Advisors, LLC, Two Portland Square, Portland, Maine 04101,
serves as investment adviser to each Fund. The Adviser is a privately owned
company controlled by John Y. Keffer, who is Chairman of the Board of the Trust.
Subject to the general control of the Board, the Adviser makes investment
decisions for each Fund. For the fiscal year ended March 31, 1999, each Fund
paid the Adviser an advisory fee of 0.40% of the average daily net assets of the
Fund.
As of June 30, 1999, the Adviser had approximately $2.3 billion of assets under
management.
PORTFOLIO MANAGER
LES C. BERTHY, Senior Portfolio Manager of the Adviser, has been primarily
responsible for the day-to-day management of each Fund since their inception.
Mr. Berthy has over 27 years of experience in the investment industry and prior
to his association with the Adviser in January 1991,
15
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was Managing Director and Co-Chief Executive Officer of Irwin Union Capital
Corp., an affiliate of Irwin Union Bank & Trust Co.
OTHER SERVICE PROVIDERS
The Forum Financial Group ("Forum") of companies provide services to each Fund.
As of June 30, 1999, Forum provided administration and distribution services to
investment companies and collective investment funds with assets of
approximately $73 billion.
Forum Fund Services, LLC, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., is the distributor (principal
underwriter) of each Fund's shares. The distributor acts as the representative
of the Trust in connection with the offering of each Fund's shares. The
distributor may enter into arrangements with banks, broker-dealers or other
financial institutions through which investors may purchase or redeem shares and
may, at its own expense, compensate persons who provide services in connection
with the sale or expected sale of each Fund's shares.
Forum Administrative Services, LLC provides administrative services to each
Fund, Forum Accounting Services, LLC is each Fund's fund accountant, Forum
Shareholder Services, LLC (the "Transfer Agent") is each Fund's transfer agent
and Forum Trust, LLC is each Fund's custodian.
16
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FUND EXPENSES
Each Fund pays for all of its expenses. Each Fund's expenses are comprised of
its own expenses as well as Trust expenses that are allocated among the Fund and
the other funds of the Trust. The Adviser or other service providers may
voluntarily waive all or any portion of their fees and/or reimburse certain
expenses of a Fund. Any fee waiver or expense reimbursement increases a Fund's
performance for the period during which the waiver is in effect.
Certain service providers have undertaken to waive a portion of their fees
and/or reimburse certain expenses in order to limit expenses (excluding taxes,
interest, portfolio transaction expenses and extraordinary expenses) to 0.70% or
less of the average daily net assets of Investors High Grade Bond Fund and
Investors Bond Fund and 0.60% or less of the average daily net assets of
TaxSaver Bond Fund.
17
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YOUR ACCOUNT
[Margin call out: HOW TO CONTACT THE FUNDS
Write to us at:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
Telephone us at:
(800) 94FORUM or (800) 943-6786 (Toll Free)
(207) 879-0001
Wire investments (or ACH payments) to us at:
Bankers Trust Company
New York, New York
ABA #021001033 For Credit to:
Forum Shareholder Services, LLC
Account # 01-465-547
Re: (Name of Your Fund)
(Your Name)
(Your Account Number)]
GENERAL INFORMATION
You may purchase or sell (redeem) shares at the net asset value of a share (NAV)
plus any applicable sales charge (or minus any applicable sales charge in the
case of redemptions) next calculated after the Transfer Agent receives your
request in proper form. For instance, if the Transfer Agent receives your
purchase request in proper form after 4:00 p.m., Eastern time, your transaction
will be priced at the next business day's NAV plus or minus the applicable sales
charge. A Fund cannot accept orders that request a particular day or price for
the transaction or any other special conditions.
The Funds do not issue share certificates.
If you purchase shares directly from a Fund, you will receive monthly statements
and a confirmation of each transaction. You should verify the accuracy of all
transactions in your account as soon as you receive your confirmations.
Each Fund reserves the right to waive minimum investment amounts and may
temporarily suspend (during unusual market conditions) or discontinue any
service or privilege.
WHEN AND HOW NAV IS DETERMINED Each Fund calculates its NAV as of the close of
the New York Stock Exchange (normally 4:00 p.m., Eastern time) on each weekday
except days when the New York Stock Exchange is closed. The time at which NAV is
calculated may change in case of an emergency. A Fund's NAV is determined by
taking the market value of all securities owned by the Fund (plus all other
assets such as cash), subtracting all liabilities and then dividing the result
(net assets) by the number of shares outstanding. A Fund values securities for
which market quotations are readily available at current market value. If market
quotations are not readily available, a Fund values securities at fair value.
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TRANSACTIONS THROUGH THIRD PARTIES If you invest through a broker or other
financial institution, the policies and fees (other than sales charges) charged
by that institution may be different than those of a Fund. Financial
institutions may charge transaction fees and may set different minimum
investments or limitations on buying or selling shares. These institutions may
also provide you with certain shareholder services such as periodic account
statements and trade confirmations summarizing your investment activity. Consult
a representative of your financial institution for more information.
BUYING SHARES
HOW TO MAKE PAYMENTS All investments must be in U.S. dollars and checks must be
drawn on U.S. banks.
CHECKS For individual, Uniform Gift to Minors Act ("UGMA") or Uniform
Transfers to Minors Act ("UTMA") accounts, the check must be made
payable to "Forum Funds" or to one or more owners of the account and
endorsed to "Forum Funds." For all other accounts, the check must be
made payable on its face to "Forum Funds." No other method of check
payment is acceptable (for instance, you may not pay by travelers
check).
ACH PAYMENT Instruct your financial institution to make an ACH
(automated clearinghouse) payment to us. These payments typically take
two days to settle. Your financial institution may charge you a fee for
this service.
WIRES Instruct your financial institution to make a Federal Funds wire
payment to us. Your financial institution may charge you a fee for this
service.
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MINIMUM INVESTMENTS Each Fund accepts investments in the following minimum
amounts:
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENT
Standard Account $2,000 $250
Traditional and Roth IRA Accounts $1,000 $250
Accounts With Systematic Investment Plans $250 $250
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
You can not invest in TaxSaver Bond Fund through an IRA account.
<TABLE>
<S> <C>
ACCOUNT REQUIREMENTS
- ----------------------------------------------------------------------------------------------------------------------------
TYPE OF ACCOUNT REQUIREMENT
- ----------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL, SOLE PROPRIETORSHIP AND JOINT ACCOUNTS: o Instructions must be signed by all persons
Individual accounts are owned by one person, as are sole required to sign exactly as their names appear on
proprietorship accounts. Joint accounts can have two or the account
more owners (tenants)
GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA): o Depending on state laws, you can set up a
These custodial accounts provide a way to give money to a custodial account under the Uniform Gift to Minors
child and obtain tax benefits. An individual can give up Act or the Uniform Transfers to Minors Act
to $10,000 a year per child without paying Federal gift tax o The trustee must sign instructions in a manner
indicating trustee capacity
BUSINESS ENTITIES o For entities with officers, provide an
original or certified copy of a resolution that
identifies the authorized signers for the account
o For entities with partners or other interested
parties, provide a certified partnership agreement or
organizational document, or certified pages from the
partnership agreement or organizational document, that
identify the partners or interested parties
TRUSTS o The trust must be established before an
account can be opened
o Provide a certified trust document, or the
pages from the trust document, that identify the
trustees
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
INVESTMENT PROCEDURES
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO YOUR ACCOUNT
- --------------------------------------------------------------------------------------------------------------------------------
BY CHECK BY CHECK
o Call or write us for an account application o Fill out an investment slip from a
o Complete the application confirmation or write us a letter
o Mail us your application and a check o Write your account number on your check
o Mail us the slip (or your letter) and the check
BY WIRE BY WIRE
o Call or write us for an account application o Call to notify us of your incoming wire
o Complete the application o Instruct your bank to wire your money to us
o Call us and we will assign you an account number
o Mail us your application
o Instruct your bank to wire your money to us
BY ACH PAYMENT BY SYSTEMATIC INVESTMENT
o Call or write us for an account application o Complete the systematic investment section of the
o Complete the application application
o Call us and we will assign you an account number o Attach a voided check to your application
o Mail us your application o Mail us the completed application
o Make an ACH payment
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SYSTEMATIC INVESTMENTS You may invest a specified amount of money in a Fund once
or twice a month on specified dates. These payments are taken from your bank
account by ACH payment. Systematic investments must be for at least $250.
LIMITATIONS ON PURCHASES Each Fund reserves the right to refuse any purchase
(including exchange) request, particularly requests that could adversely affect
the Fund or its operations. This includes those from any individual or group
who, in a Fund's view, is likely to engage in excessive trading (usually defined
as more than four redemptions or exchanges out of the Fund within a calendar
year).
21
<PAGE>
CANCELED OR FAILED PAYMENTS Each Fund accepts checks and ACH transfers at full
value subject to collection. If a Fund does not receive your payment for shares
or you pay with a check or ACH transfer that does not clear, your purchase will
be canceled. You will be responsible for any losses or expenses incurred by a
Fund or the Transfer Agent, and the Fund may redeem shares you own in the
account (or another identically registered account maintained with the Transfer
Agent) as reimbursement. Each Fund and its agents have the right to reject or
cancel any purchase or exchange due to nonpayment.
SELLING SHARES
Each Fund processes redemption orders promptly. Generally, a Fund will send
redemption proceeds to you within a week. Delays may occur in cases of very
large redemptions, excessive trading or during unusual market conditions. Each
Fund may delay sending redemption proceeds until it has collected payment for
the shares you are selling, which may take up to 15 calendar days.
22
<PAGE>
- --------------------------------------------------------------------------------
TO SELL SHARES FROM YOUR ACCOUNT
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The Fund name
o The dollar amount or number of shares you want to sell
o How and where to send the redemption proceeds
o Obtain a signature guarantee (if required)
o Obtain other documentation (if required)
o Mail us your request and documentation
BY WIRE
o Wire redemptions are only available if your redemption is for $5,000 or
more and you did not decline wire redemption privileges on your account
application
o Call us with your request (unless you declined telephone
redemption privileges - See "By Telephone") OR
o Mail us your request (See "By Mail")
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which the account is registered
o Additional form of identification
o Redemption proceeds will be:
o Mailed to you Or
o Wired to you (unless you declined wire redemption privileges -See "By Wire")
SYSTEMATICALLY
o Complete the Systematic Withdrawal section of the application
o Attach a voided check to your application
o Mail us your completed application
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTION PRIVILEGES You may redeem your shares by telephone unless
you declined telephone redemption privileges on your account application. You
may be responsible for any fraudulent telephone order as long as the Transfer
Agent takes reasonable measures to verify the order.
WIRE REDEMPTION PRIVILEGES You may redeem your shares by wire unless you
declined wire redemption privileges on your account application. The minimum
amount that may be redeemed by wire is $5,000.
23
<PAGE>
SYSTEMATIC WITHDRAWALS You may redeem a specified amount of money from your
account once a month on a specified date. These payments are sent from your
account to a designated bank account by ACH payment. Systematic withdrawals must
be for at least $250.
SIGNATURE GUARANTEE REQUIREMENTS To protect you and each Fund against fraud,
signatures on certain requests must have a "signature guarantee." A signature
guarantee verifies the authenticity of your signature. You can obtain one from
most banking institutions or securities brokers, but not from a notary public.
For requests made in writing, a signature guarantee is required for any of the
following:
o Sales of over $50,000 worth of shares
o Changes to a shareholder's record name or address
o Redemptions from an account for which the address or account
registration has changed within the last 30 days
o Sending redemption proceeds to any person, address, brokerage firm or
bank account not on record
o Sending redemption proceeds to an account with a different
registration (name or ownership) from yours
o Changes to systematic investment or withdrawal, distribution,
telephone redemption or exchange option or any other election in
connection with your account
SMALL ACCOUNTS If the value of your account falls below $1,000 ($500 for an IRA
account), a Fund may ask you to increase your balance. If the account value is
still below $1,000 ($500 for an IRA account) after 60 days, a Fund may close
your account and send you the proceeds. A Fund will not close your account if it
falls below these amounts solely as a result of a reduction in your account's
market value.
REDEMPTIONS IN KIND Each Fund reserves the right to pay redemption proceeds in
portfolio securities rather than cash. These redemptions "in kind" usually occur
if the amount to be redeemed is large enough to affect a Fund's operations (for
example, if it represents more than 1% of the Fund's assets).
24
<PAGE>
LOST ACCOUNTS The Transfer Agent will consider your account lost if
correspondence to your address of record is returned as undeliverable, unless
the Transfer Agent determines your new address. When an account is lost, all
distributions on the account will be reinvested in additional Fund shares. In
addition, the amount of any outstanding (unpaid for six months or more) checks
for distributions that have been returned to the Transfer Agent will be
reinvested and the checks will be canceled.
SALES CHARGES
PURCHASES A sales charge is assessed on purchases of a Fund's shares as follows:
<TABLE>
<S> <C> <C> <C>
SALES CHARGE (LOAD) AS %
OF:
PUBLIC NET ASSET
AMOUNT OF PURCHASE OFFERING PRICE VALUE* REALLOWANCE %
$0 to $49,999 3.75 3.90 3.25
$50,000 to $99,999 3.25 3.36 2.75
$100,000 to $249,999 2.75 2.83 2.25
$250,000 to $499,999 2.25 2.30 1.85
$500,000 to $999,999 1.75 1.78 1.45
$1,000,000 and up 0.00 0.00 1.00
</TABLE>
* Rounded to the nearest one-hundredth percent.
The commission paid to the distributor is the sales charge less the reallowance
paid to certain financial institutions purchasing shares. Normally, reallowances
are paid as indicated in the above table. From time to time, the distributor may
elect to reallow the entire sales charge for all sales during a particular
period.
From time to time and at its own expense, the distributor may provide
compensation, including financial assistance, to certain dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising campaigns or other dealer-sponsored special events.
Compensation may include the provision of travel arrangements and lodging,
tickets for entertainment events and merchandise.
25
<PAGE>
REDEMPTIONS A contingent deferred sales charge ("CDSC") is assessed on
redemptions of shares that were part of a purchase of $1 million or more. The
CDSC is assessed as follows:
REDEEMED WITHIN SALES CHARGE
- --------------------------------------------------------------------------------
First year of purchase 1.00%
Second year of purchase 0.50%
The CDSC is paid on the lower of the NAV of shares redeemed or the cost of the
shares. To satisfy a redemption request, the Fund will first liquidate shares
that are not subject to a CDSC such as shares acquired with reinvested dividends
and capital gains. The Fund will then liquidate shares in the order that they
were first purchased until your redemption request is satisfied.
REDUCED SALES CHARGES You may qualify for a reduced sales charge on Fund
purchases under rights of accumulation or a letter of intent. Certain persons
may also be eligible to purchase or redeem Fund shares without a sales charge.
Please see the SAI for further information.
EXCHANGE PRIVILEGES
You may exchange your Fund shares for shares of another fund of the Trust by
telephone or in writing. For a list of funds available for exchange, you may
call the Transfer Agent. If you exchange into a fund that has a higher sales
charge than the fund, you will have to pay the difference between that fund's
sales charge and the Fund's sales charge. If you exchange into a fund that has
no sales charge or a lower sales charge than the Fund, you will not have to pay
a sales charge at the time of exchange. Because exchanges are a sale and
purchase of shares, they may have tax consequences.
26
<PAGE>
REQUIREMENTS You may make exchanges only between identically registered accounts
(name(s), address and taxpayer ID number). There is currently no limit on
exchanges, but each Fund reserves the right to limit exchanges. You may exchange
your shares by mail or telephone, unless you declined telephone redemption
privileges on your account application. You may be responsible for any
fraudulent telephone order as long as the Transfer Agent takes reasonable
measures to verify the order.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The names of the funds from which you are exchanging and into which
you are exchanging
o The dollar amount or number of shares you want to sell (and exchange)
o Open a new account and complete an account application if you are
requesting different shareholder privileges
o Mail us your request and documentation
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application
o Provide the following information:
o Your account number
o Exact name(s) in which account is registered
o Additional form of identification
- --------------------------------------------------------------------------------
RETIREMENT ACCOUNTS
Investors High Grade Bond Fund and Investors Bond Fund offer IRA accounts,
including traditional and Roth IRA accounts. Before investing in any IRA or
other retirement plan, you should consult your tax adviser. Whenever making an
investment in an IRA, be sure to indicate the year in which the contribution is
made.
27
<PAGE>
OTHER INFORMATION
DISTRIBUTIONS
Each Fund distributes its net investment income monthly and net capital gain at
least annually.
All distributions are reinvested in additional shares, unless you elect to
receive distributions in cash. For Federal income tax purposes, distributions
are treated the same whether they are received in cash or reinvested. Shares
become entitled to receive distributions on the day after the shares are issued.
TAXES
Each Fund generally intends to operate in a manner such that it will not be
liable for Federal income or excise tax.
INVESTORS BOND FUND AND INVESTORS HIGH GRADE BOND FUND A Fund's distribution of
net income (including short-term capital gain) is taxable to you as ordinary
income. A Fund's distribution of long-term capital gain is taxable to you as
long-term capital gain regardless of how long you have held your Fund shares.
Distributions also may be subject to certain state and local taxes.
TAXSAVER BOND FUND Generally, you are not subject to Federal income tax on the
Fund's distribution of tax-exempt interest income. The Fund's distribution of
taxable interest, other investment income and short-term capital gain is taxable
to you as ordinary income. It is anticipated that substantially all of the
Fund's net income will be exempt from Federal income tax. Distributions,
including distributions that are exempt from Federal income tax, may be subject
to certain state and local taxes.
If you are a "substantial user" or a "related person" of a substantial user of
facilities financed by private activity bonds held by the Fund, you may have to
pay Federal income tax on your pro rata share of the net income generated from
these securities. Distributions of interest income on certain private activity
bonds is an item of tax preference for purposes of individual and corporate
Federal AMT. Distributions of net income
28
<PAGE>
from tax-exempt obligations is included in the "adjusted current earnings" of
corporations for Federal AMT purposes. The Fund's distribution of long-term
capital gain is taxable to you as long-term capital gain regardless of how long
you have held your fund shares.
GENERAL If you buy shares shortly before a Fund makes a distribution, you may
pay the full price for the shares and then receive a portion of the price back
as a distribution that may be taxable to you.
The sale or exchange of Fund shares is a taxable transaction for Federal income
tax purposes.
Your Fund will send you information about the income tax status of distributions
paid during the year shortly after December 31 of each year.
For further information about the tax effects of investing in a Fund, including
state and local tax matters, please see the SAI and consult your tax adviser.
ORGANIZATION
The Trust is a Delaware business trust. No Fund expects to hold shareholders'
meetings unless required by Federal or Delaware law. Shareholders of each series
are entitled to vote at shareholders' meetings unless a matter relates only to
specific series (such as approval of an advisory agreement for a Fund). From
time to time, large shareholders may control a Fund or the Trust.
29
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables are intended to help you understand each Fund's financial
performance. Total return in the table represents the rate an investor would
have earned (or lost) on an investment in a Fund (assuming the reinvestment of
all distributions) and does not include the effect of sales charges. This
information has been audited by Deloitte & Touche LLP. Each Fund's financial
statements and the auditor's report are included in the Annual Report dated
March 31, 1999, which is available upon request, without charge.
INVESTORS HIGH GRADE BOND FUND
<TABLE>
<S> <C> <C>
YEAR ENDED MARCH 31,
1999 1998(A)
- ---------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SINGLE SHARE
Beginning Net Asset Value Per Share $9.96 $10.00
Income From Investment Operations:
Net Investment Income 0.57 0.02
Net Realized and Unrealized Gain (Loss) on Investments 0.03 (0.04)
Total From Investment Operations 0.60 (0.02)
Less Distributions:
From Net Investment Income (0.57) (0.02)
From Net Realized Capital Gain (0.07) 0.00
Total Distributions (0.64) (0.04)
Ending Net Asset Value Per Share $9.92 $9.96
OTHER INFORMATION
Ratios to Average Net Assets:
Net Expenses 0.70% 0.70%(d)
Gross Expenses(b) 1.12% 3.00%(d)
Net Investment Income 5.68% 5.56%(d)
Total Return(c) 6.12% (0.16%)
Portfolio Turnover Rate 172.60% -
Net Assets at End of Period
(in thousands) $35,754 $34,037
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Fund commenced operations on March 16, 1998.
(b) Reflects expense ratio in the absence of fee waivers and expense
reimbursements.
(c) Does not include sales charges.
(d) Annualized.
30
<PAGE>
INVESTORS BOND FUND
<TABLE>
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SINGLE SHARE
Beginning Net Asset Value Per Share $10.57 $10.19 $10.21 $10.00 $10.38
Income From Investment Operations:
Net Investment Income 0.67 0.71 0.71 0.74 0.82
Net Realized and Unrealized Gain (Loss)
on Investments (0.21) 0.38 - 0.21 (0.38)
Total From Investment Operations 0.46 1.09 0.71 0.95 0.44
Less Distributions:
From Net Investment Income (0.67) (0.71) (0.71) (0.74) (0.82)
From Net Realized Capital Gains (0.04) - (0.02) - -
Total Distributions (0.71) (0.71) (0.73) (0.74) (0.82)
Ending Net Asset Value Per Share $10.32 $10.57 $10.19 $10.21 $10.00
OTHER INFORMATION
Ratios to Average Net Assets:
Net Expenses 0.70% 0.70% 0.70% 0.43% 0.75%
Gross Expenses (a) 1.02% 1.22% 1.45% 1.36% 1.33%
Net Investment Income 6.33% 6.52% 6.94% 7.29% 8.19%
Total Return(b) 4.45% 10.98% 7.18% 9.84% 4.55%
Portfolio Turnover Rate 98.36% 116.65% 79.42% 42.89% 48.17%
Net Assets at End of Period
(in thousands) $70,446 $85,598 $22,190 $25,676 $25,890
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects expense ratio in the absence of fee waivers and expense
reimbursements.
(b) Does not include sales charge.
31
<PAGE>
TAXSAVER BOND FUND
<TABLE>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SINGLE SHARE
Beginning Net Asset Value Per Share $10.75 $10.49 $10.57 $10.39 $10.35
Income From Investment Operations:
Net Investment Income 0.48 0.53 0.56 0.57 0.57
Net Realized and Unrealized Gain
(Loss) on Investments 0.04 0.27 (0.03) 0.18 0.04
Total From Investment Operations 0.52 0.80 0.53 0.75 0.61
Less Distributions:
From Net Investment Income (0.48) (0.53) (0.56) (0.57) (0.57)
From Net Realized Capital Gains (0.18) (0.01) (0.05) - -
Total Distributions (0.66) (0.54) (0.61) (0.57) (0.57)
Ending Net Asset Value Per Share $10.61 $10.75 $10.49 $10.57 $10.39
OTHER INFORMATION
Ratios to Average Net Assets:
Net Expenses 0.60% 0.60% 0.60% 0.60% 0.60%
Gross Expenses(a) 1.11% 1.36% 1.53% 1.48% 1.45%
Net Investment Income 4.48% 4.95% 5.28% 5.35% 5.62%
Total Return(b) 4.95% 7.75% 5.15% 7.36% 6.18%
Portfolio Turnover Rate 61.60% 92.87% 34.19% 61.61% 63.85%
Net Assets at End of Period
(in thousands) $37,447 $39,203 $17,757 $17,915 $16,018
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects expense ratio in the absence of fee waivers and expense
reimbursements.
(b) Does not include sales charges.
32
<PAGE>
[ACCOUNT APPLICATION]
<PAGE>
[ACCOUNT APPLICATION CONT.]
<PAGE>
<TABLE>
<S> <C>
- -------------------------------
FOR MORE INFORMATION FORUM
- ------------------------------- FUNDS
The following documents are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS INVESTORS HIGH GRADE BOND FUND
Additional information about each Fund's investments is available in the
Fund's annual and semi-annual INVESTORS BOND FUND
reports to shareholders. In each Fund's annual report, you will find a
discussion of the market conditions and investment strategies that TAXSAVER BOND FUND
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI provides more detailed information about each Fund and is
incorporated by reference into this Prospectus.
You can get a free copy of both reports and the SAI, request other
information and discuss your questions about each Fund by contacting the
Fund at:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
800-943-6786
800-94FORUM
207-879-0001
You can also review each Fund's reports and SAI at the Public Reference
Room of the Securities and Exchange Commission. You can get text-only
copies, for a fee, by writing to or calling the following: [Logo]
Forum Funds
Public Reference Room P.O. Box 446
Securities and Exchange Commission Portland, Maine 04112
Washington, D.C. 20549-6009 800-94FORUM
Telephone: 800-SEC-0330 800-943-6786
207-879-0001
Free copies are available from the SEC's Internet website
at http://www.sec.gov.
Investment Company Act File No. 811-3023.
</TABLE>
<PAGE>
FORUM
FUNDS ---------------------------------------------
PROSPECTUS
---------------------------------------------
AUGUST 1, 1999
MAINE MUNICIPAL BOND FUND SEEKS
A HIGH LEVEL OF CURRENT INCOME MAINE MUNICIPAL BOND FUND
EXEMPT FROM BOTH FEDERAL AND MAINE
STATE INCOME TAXES BY INVESTING
PRIMARILY IN MAINE MUNICIPAL
SECURITIES.
THE FUND DOES NOT PAY RULE 12B-1
(DISTRIBUTION) FEES.
The Securities and Exchange Commission
has not approved or disapproved the Fund's
shares of determined whether this
Prospectus is accurate or complete. Any
representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
[Picture graphics]
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY 2
PERFORMANCE 4
FEE TABLES 6
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS 8
MANAGEMENT 12
YOUR ACCOUNT 14
How to Contact the Fund 14
General Information 14
Buying Shares 15
Selling Shares 18
Sales Charges 21
Exchange Privileges 23
OTHER INFORMATION 24
FINANCIAL HIGHLIGHTS 26
<PAGE>
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
Maine Municipal Bond Fund (the "Fund") seeks high current income exempt from
both Federal and Maine State income tax (other than the alternative minimum tax
("AMT")).
PRINCIPAL INVESTMENT STRATEGIES
[Margin callout: CONCEPTS TO UNDERSTAND
DEBT SECURITY means a security such as a bond or note that obligates
the issuer to pay the security owner a specified sum of money
(interest) at set intervals as well as to repay the principal amount
of the security at its maturity
MATURITY means the date on which a debt security is (or may be) due and
payable
BOND means a debt security with a long-term maturity, usually 5 years
or longer
NOTE means a debt security with a short-term maturity, usually less
than 1 year
NRSRO means a "nationally recognized statistical rating organization"
such as Standard & Poor's that rates debt securities by relative credit
risk
INVESTMENT GRADE SECURITY means a debt security rated in one of the
four highest long-term or two highest short-term ratings categories by
an NRSRO or unrated and determined to be of comparable quality
MUNICIPAL SECURITY means a debt security issued by or on behalf of the
State of Maine, its local governments and public financing authorities
and U.S. territories and possessions, the interest on which is exempt
from Federal and Maine State income tax (other than AMT)
The Fund invests primarily in investment grade Maine municipal securities.
Generally, the average weighted maturity of the Fund's portfolio securities is
between 5 and 15 years.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money on your investment in the Fund or the Fund could
underperform other investments. The principal risks of an investment in the Fund
include:
o The Fund's share price, yield and total return will fluctuate in
response to price movements in the fixed income securities markets
o The value of most debt securities fall when interest rates rise; the
longer a debt's maturity and the lower its credit quality, the more
its value typically falls in response to an increase in interest rates
o The Fund can not collect interest and principal payments on a debt
security if the issuer defaults
o The Fund is non-diversified. The Fund may focus its investments in the
securities of a comparatively small number of issuers. Concentration
of the Fund in securities of a limited number of issuers exposes it to
2
<PAGE>
greater market risk and potential monetary losses than if its assets
were diversified among the securities of a greater number of issuers
o Economic and political changes in Maine may have a greater effect on
the Fund than if the Fund invested in municipal securities of various
states
o The Fund's investment adviser (the "Adviser") may make poor investment
decisions
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for you if you:
o Are an income-oriented investor in a high tax bracket and desire
tax-exempt income
o Seek income and more price stability than stocks offer
o Seek capital preservation
o Are pursuing a long-term goal
The Fund may NOT be appropriate for you if you:
o Are pursuing a short-term goal or are investing emergency reserves
o Are investing funds in a tax-deferred or tax-exempt account (such as
an IRA)
o Do not desire tax-exempt income
3
<PAGE>
PERFORMANCE
The following chart illustrates the variability of the Fund's returns. The chart
and the following table provide some indication of the risks of investing in the
Fund by showing changes in the Fund's performance from year to year and how the
Fund's returns compare to a broad measure of market performance. PERFORMANCE
INFORMATION REPRESENTS ONLY PAST PERFORMANCE AND DOES NOT NECESSARILY INDICATE
FUTURE RESULTS.
The following chart shows the annual total returns for each full calendar year
that the Fund has operated. The chart does not reflect sales charges, and if
reflected, the returns would be less than shown.
[EDGAR REPRESENTATION OF GRAPH CHART]
PAST PERFORMANCE CHART
Year Average Annual Total Return
- ---- ---------------------------
1992 8.20%
1993 11.21%
1994 -4.20%
1995 15.26%
1996 3.65%
1997 7.26%
1998 5.63%
The calendar year-to-date total return as of June 30, 1999 was -0.84%.
During the periods shown in the chart, the highest quarterly return was 6.36%
(for the quarter ended March 31, 1995) and the lowest quarterly return was
- -4.15% (for the quarter ended March 31, 1994).
4
<PAGE>
The following table compares the Fund's average annual total returns as of
December 31, 1998 to the Lehman 10-Year Municipal Bond Index.
<TABLE>
<S> <C> <C>
MAINE MUNICIPAL BOND FUND LEHMAN 10-YEAR MUNICIPAL BOND
YEAR(S) INDEX
- --------------------------------------------------------------------------------------------------------------------
1 Year 2.99% 6.76%
5 Years 4.80% 6.63%
Since Inception (12/5/91) 6.39% 8.03%(1)
</TABLE>
(1) For the period 11/30/91 - 12/31/98.
The Lehman 10-Year Municipal Bond Index is a market index of investment grade
fixed-rate municipal securities with an average maturity of 10 years. The index
is unmanaged and reflects the reinvestment of interest and principal payments.
Unlike the performance figures of the Fund, the index's performance does not
reflect the effect of expenses.
5
<PAGE>
FEE TABLES
The following tables describe the various fees and expenses that you will pay if
you invest in the Fund.
<TABLE>
<S> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- ----------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of the offering 3.00%
price)
Maximum Sales Charge (Load) Imposed on Reinvested Distributions None
Maximum Deferred Sales Charge (Load) 1.00%(1)
Redemption Fee None
Exchange Fee None
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Applicable only to purchases of $1 million or more.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES(1) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- -----------------------------------------------------------------------------------------------------------------
Management Fees 0.40%
Distribution (12b-1) Fees None
Other Expenses 0.92%
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.32%
Fee Waiver and Expense Reimbursement 0.72%
Net Expenses 0.60%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on amounts incurred during the Fund's fiscal year ended March 31,
1999 stated as a percentage of assets.
(2) Based on certain contractual fee waivers and expense reimbursements that
may increase after July 31, 2000.
6
<PAGE>
EXAMPLE
The following is a hypothetical example intended to help you compare the cost of
investing in the Fund to the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Fund for the time periods
indicated, you pay the maximum sales charge and then redeem all of your shares
at the end of the periods. The example also assumes that your investment has a
5% annual return, that the Fund's operating expenses remain the same as stated
in the above table and that distributions are reinvested. Although your actual
costs may be higher or lower, under these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$430 $706 $1,002 $1,843
7
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income exempt from both
Federal and Maine State income tax (other than the AMT) without assuming undue
risk.
INVESTMENT STRATEGIES
THE ADVISER'S PROCESS
[Margin callout: CONCEPTS TO UNDERSTAND
YIELD CURVE means a graph that plots the yield of all bonds of similar quality
against the bonds' maturities.
The Adviser continuously monitors economic factors such as interest rate
outlooks and technical factors such as the shape of the yield curve in
combination with the stated objective of the Fund to determine an appropriate
maturity profile for the Fund's investment portfolio. The Adviser then
principally searches for securities that satisfy the maturity profile of the
Fund and that provide the greatest potential return relative to the risk of the
security. The Adviser may sell a debt security if:
o Revised economic forecasts or interest rate outlook requires a
repositioning of the portfolio
o The security subsequently fails to meet the Adviser's investment
criteria
o A more attractive security is found or funds are needed for another
purpose
o The Adviser believes that the security has reached its appreciation
potential
INVESTMENT POLICIES
[Margin callout: CONCEPTS TO UNDERSTAND
PRIVATE ACTIVITY BOND means a bond that is issued by or on behalf
of public authorities to finance privately operated facilities. Private
Activity Bonds are primarily revenue securities
GENERAL OBLIGATION SECURITY means a security whose principal and
interest payment is secured by a municipality's full faith and credit
and taxing power
REVENUE SECURITY means a security whose principal and interest is
payable from revenues of a particular facility, class of facilities or
from the proceeds of a special excise or other tax]
The Fund invests primarily in investment grade municipal securities. The Fund
may, however, invest up to 20% of its total assets in securities the interest
income on which is subject to Federal income tax. Municipal Securities include
municipal bonds, notes and leases. Municipal leases are securities that permit
government issuers to acquire property and equipment without the security being
subject to the
8
<PAGE>
constitutional and statutory requirements for the issuance of long-term debt
securities. The Fund invests in general obligation securities and revenue
securities, including private activity securities. Generally, the average
weighted maturity of the Fund's portfolio securities is between 5 and 15 years.
TEMPORARY DEFENSIVE MEASURES In order to respond to adverse market, economic or
other conditions, the Fund may assume a temporary defensive position and invest
without limit in cash and prime quality cash equivalents such as commercial
paper and money market instruments. As a result, the Fund may be unable to
achieve its investment objective.
INVESTMENT RISKS
GENERAL The Fund's net asset value and total return will fluctuate based upon
changes in the value of its portfolio securities. The market value of securities
in which the Fund invests is based upon the market's perception of value and is
not necessarily an objective measure of the securities' value. There is no
assurance that the Fund will achieve its investment objective. An investment in
the Fund is not by itself a complete or balanced investment program. The value
of your investment in the Fund may change in response to changes in interest
rates. An increase in interest rates typically causes a decline in the value of
the municipal securities in which the Fund invests. An additional risk is that
issuers may prepay fixed rate securities when interest rates fall, forcing the
Fund to invest in securities with lower interest rates.
Your investment in the Fund is also subject to the risk that the financial
condition of an issuer of a security held by the Fund may cause it to default or
become unable to pay interest or principal due on the security. This risk
generally increases as security credit ratings decrease. The Fund is also
non-diversified. The Fund may focus its investments in the securities of a
comparatively small number of issuers. Concentration of the Fund in securities
of a limited number of issuers exposes it to greater market risk and potential
monetary losses than if its assets were diversified among the securities of a
greater number of issuers. Finally, your
9
<PAGE>
investment in the Fund is subject to the risk that the Adviser may make poor
investment decisions.
SPECIFIC RISKS INVOLVING MAINE MUNICIPAL SECURITIES Economic or political
factors in Maine may adversely affect issuers of Maine municipal securities.
Adverse economic or political factors will affect the Fund's net asset value
more than if the Fund invested in more geographically diverse investments. As a
result, the value of the Fund's assets may fluctuate more widely than the value
of shares of a fund investing in securities relating to a number of different
states.
The following is a summary of the NRSRO ratings for Maine municipal securities.
In 1991, citing declines in key financial indicators and continued softness in
the Maine economy, Standard & Poor's lowered its credit rating for Maine general
obligations from AAA to AA+, and at the same time lowered its credit rating on
bonds issued by the Maine Municipal Bond Bank, the Maine Court Facilities
Authority and State of Maine Certificates of Participation for highway
equipment, from AA to A+. In August 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-1980s," Moody's lowered its
credit rating for Maine general obligations 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. On May 13, 1997,
Moody's "confirmed and refined from Aa to Aa3" Maine's general obligation bond
rating in accord with a new national rating system published by Moody's in
January 1997. On June 5, 1998, Moody's raised its credit rating on Maine general
obligations bonds from Aa3 to Aa2. Since 1996, Maine general obligation bonds
also have been rated by Fitch IBCA, Inc. ("Fitch"). Fitch has assigned a rating
of AA to Maine general obligation bonds. There can be no assurance that Maine
general obligations or the securities of any Maine political subdivision,
authority or corporation owned by the Fund will be rated in any
10
<PAGE>
category or will not be downgraded by an NRSRO. Further information concerning
the State of Maine is contained in the Statement of Additional Information
("SAI").
YEAR 2000 Certain computer systems may not process date-related information
properly on and after January 1, 2000. The Adviser is addressing this matter for
its systems. The Fund's other service providers have informed the Fund that they
are taking similar measures. This matter, if not corrected, could adversely
affect the services provided to the Fund or the issuers in which the Fund
invests and, therefore, could lower the value of your shares.
11
<PAGE>
MANAGEMENT
The Fund is a series of Forum Funds (the "Trust"), an open-end, management
investment company (mutual fund). The business of the Trust and of the Fund is
managed under the direction of the Board of Trustees (the "Board"). The Board
formulates the general policies of the Fund and meets periodically to review the
Fund's performance, monitor investment activities and practices and discuss
other matters affecting the Fund. Additional information regarding the Board, as
well as the Trust's executive officers, may be found in the SAI.
THE ADVISER
The Adviser is Forum Investment Advisors, LLC, Two Portland Square, Portland,
Maine 04101. The Adviser is a privately owned company headquartered in Portland,
Maine and controlled by John Y. Keffer, who is Chairman of the Board of the
Trust.
Subject to the general control of the Board, the Adviser makes investment
decisions for the Fund. For the fiscal year ended March 31, 1999, the Adviser
received an advisory fee of 0.40% of the average daily net assets of the Fund.
As of June 30, 1999, the Adviser had approximately $2.3 billion of assets under
management.
PORTFOLIO MANAGER
LES C. BERTHY Senior Portfolio Manager of the Adviser, has been primarily
responsible for the day-to-day management of the Fund since its inception on
December 5, 1991. Mr. Berthy has 27 years of experience in the investment
industry, and prior to his association with the Adviser in January 1991, was
Managing Director and Co-Chief Executive Officer of Irwin Union Capital Corp.,
an affiliate of Irwin Union Bank & Trust Co.
12
<PAGE>
OTHER SERVICE PROVIDERS
The Forum Financial Group ("Forum") of companies provide services to the Fund.
As of June 30, 1999, Forum provided administration and distribution services to
investment companies and collective investment funds with assets of
approximately $73 billion.
Forum Fund Services, LLC, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., is the distributor (principal
underwriter) of the Fund's shares. The distributor acts as the representative of
the Trust in connection with the offering of the Fund's shares. The distributor
may enter into arrangements with banks, broker-dealers or other financial
institutions through which investors may purchase or redeem shares and may, at
its own expense, compensate persons who provide services in connection with the
sale or expected sale of the Fund's shares.
Forum Administrative Services, LLC provides administrative services to the Fund,
Forum Accounting Services, LLC is the Fund's accountant, Forum Shareholder
Services, LLC (the "Transfer Agent") is the Fund's transfer agent and Forum
Trust, LLC is the Fund's custodian.
FUND EXPENSES
The Fund pays for all of its expenses. The Fund's expenses are comprised of its
own expenses as well as Trust expenses that are allocated among the Fund and the
other funds of the Trust. The Adviser or other service providers may voluntarily
waive all or any portion of their fees and/or reimburse certain expenses of the
Fund. Any fee waiver or expense reimbursement increases the Fund's performance
for the period during which the waiver is in effect.
Certain service providers have undertaken to waive a portion of their fees
and/or reimburse certain expenses in order to limit the Fund's expenses
(excluding taxes, interest, portfolio transaction expenses and extraordinary
expenses) to 0.60% or less of the average daily net assets of the Fund.
13
<PAGE>
YOUR ACCOUNT
[Margin call out: HOW TO CONTACT THE FUND
Write to us at:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
Telephone us at:
(800) 94FORUM or (800) 943-6786 (Toll Free)
(207) 879-0001
Wire investments (or ACH payments) to us at:
Bankers Trust Company
New York, New York
ABA #021001033 For Credit to:
Forum Shareholder Services, LLC
Account # 01-465-547
Maine Municipal Bond Fund
(Your Name)
(Your Account Number)]
GENERAL INFORMATION
You may purchase or sell (redeem) shares at the net asset value of a share (NAV)
plus any applicable sales charge (or minus any applicable sales charge in the
case of redemptions) next calculated after the Transfer Agent receives your
request in proper form. For instance, if the Transfer Agent receives your
purchase request in proper form after 4:00 p.m., Eastern time, your transaction
will be priced at the next business day's NAV plus or minus the applicable sales
charge. The Fund cannot accept orders that request a particular day or price for
the transaction or any other special conditions.
The Fund does not issue share certificates.
If you purchase shares directly from the Fund, you will receive monthly
statements and a confirmation of each transaction. You should verify the
accuracy of all transactions in your account as soon as you receive your
confirmations.
The Fund reserves the right to waive minimum investment amounts and may
temporarily suspend (during unusual market conditions) or discontinue any
service or privilege.
WHEN AND HOW NAV IS DETERMINED The Fund calculates its NAV as of the close of
the New York Stock Exchange (normally 4:00 p.m., Eastern time) on each weekday
except days when the New York Stock Exchange is closed. The time at which NAV is
calculated may change in case of an emergency. The Fund's NAV is determined by
taking the market value of all securities owned by the Fund (plus all other
assets such as cash), subtracting liabilities and then dividing the result (net
assets) by the number of shares outstanding. The Fund values securities for
which market quotations are readily available at current market value. If market
quotations are not readily available, the Fund values securities at fair value
pursuant to procedures adopted by the Board.
14
<PAGE>
TRANSACTIONS THROUGH THIRD PARTIES If you invest through a broker or other
financial institution, the policies and fees (other than sales charges) charged
by that institution may be different than those of the Fund. Financial
institutions may charge transaction fees and may set different minimum
investments or limitations on buying or selling shares. These institutions may
also provide you with certain shareholder services such as periodic account
statements and trade confirmations summarizing your investment activity. Consult
a representative of your financial institution for further information.
BUYING SHARES
HOW TO MAKE PAYMENTS All investments must be in U.S. dollars and checks must be
drawn on U.S. banks.
CHECKS For individual, Uniform Gift to Minors Act ("UGMA") or Uniform
Transfer to Minors Act ("UTMA") accounts, the check must be made
payable to "Forum Funds" or to one or more owners of the account and
endorsed to "Forum Funds." For all other accounts, the check must be
made payable on its face to "Forum Funds." No other method of check
payment is acceptable (for instance, you may not pay by travelers
check).
ACH PAYMENT Instruct your financial institution to make an ACH
(automated clearinghouse) payment to us. These payments typically take
two days to settle. Your financial institution may charge you a fee for
this service.
WIRES Instruct your financial institution to make a Federal Funds wire
payment to us. Your financial institution may charge you a fee for this
service.
15
<PAGE>
MINIMUM INVESTMENTS The Fund accepts investments in the following minimum
amounts:
<TABLE>
<S> <C> <C>
MINIMUM INITIAL MINIMUM ADDITIONAL
INVESTMENT INVESTMENT
- ----------------------------------------------------------------------------------------------------------------------
Standard Account $2,000 $250
Accounts With Systematic Investment Plans $250 $250
</TABLE>
<TABLE>
<S> <C>
ACCOUNT REQUIREMENTS
- -----------------------------------------------------------------------------------------------------------------------
TYPE OF ACCOUNT REQUIREMENT
- -----------------------------------------------------------------------------------------------------------------------
INDIVIDUAL, SOLE PROPRIETORSHIP AND JOINT ACCOUNTS: o Instructions must be signed by all persons
Individual accounts are owned by one person, as are sole required to sign exactly as their names appear on
proprietorship accounts. Joint accounts have two or more the account
owners (tenants)
GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA): o Depending on state laws, you can set up a
These custodial accounts provide a way to give money to a custodial account under the Uniform Gift to Minors
child and other tax benefits. An individual can give up Act or the Uniform Transfers to Minors Act
to $10,000 ayear per child without paying Federal gift tax o The trustee must sign instructions in a manner
indicating trustee capacity
BUSINESS ENTITIES o For entities with officers, provide an
original or certified copy of a resolution that
identifies the authorized signers for the account
o For entities with partners or other interested
parties, provide a certified partnership agreement or
organizational document, or certified pages from the
partnership agreement or organizational document, that
identify the partners or interested parties
TRUSTS o The trust must be established before an
account can be opened
o Provide a certified trust document, or the
pages from the trust document, that identify the
trustees
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
INVESTMENT PROCEDURES
- --------------------------------------------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO YOUR ACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
BY CHECK BY CHECK
o Call or write us for an account application o Fill out an investment slip from a
o Complete the application confirmation or write us a letter
o Mail us your application and a check o Write your account number on your check
o Mail us the slip (or your letter) and the check
BY WIRE BY WIRE
o Call or write us for an account application o Call to notify us of your incoming wire
o Complete the application o Instruct your bank to wire your money to us
o Call us and we will assign you an account number
o Mail us your application
o Instruct your bank to wire your money to us
BY ACH PAYMENT BY SYSTEMATIC INVESTMENT
o Call or write us for an account application o Complete the systematic investment section of the
o Complete the application application
o Call us and we will assign you an account number o Attach a voided check to your application
o Mail us your application o Mail us the completed application
o Make an ACH payment
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SYSTEMATIC INVESTMENTS You may invest a specified amount of money in the Fund
once or twice a month on specified dates. These payments are taken from your
bank account by ACH payment. Systematic investments must be for at least $250.
LIMITATIONS ON PURCHASES The Fund reserves the right to refuse any purchase
(including exchange) request, particularly requests that could adversely affect
the Fund or its operations. This includes those from any individual or group
who, in the Fund's view, is likely to engage in excessive trading (usually
defined as more than four redemptions or exchanges out of the Fund within a
calendar year).
17
<PAGE>
CANCELED OR FAILED PAYMENTS The Fund accepts checks and ACH transfers at full
value subject to collection. If the Fund does not receive your payment for
shares or you pay with a check or ACH transfer that does not clear, your
purchase will be canceled. You will be responsible for any losses or expenses
incurred by the Fund or the Transfer Agent, and the Fund may redeem shares you
own in the account (or another identically registered account maintained with
the Transfer Agent) as reimbursement. The Fund and its agents have the right to
reject or cancel any purchase or exchange due to nonpayment.
SELLING SHARES
The Fund processes redemption orders promptly. Generally, the Fund will send
redemption proceeds to you within a week. Delays may occur in cases of very
large redemptions, excessive trading or during unusual market conditions. The
Fund may delay sending redemption proceeds until it has collected payment for
the shares you are selling, which may take up to 15 calendar days.
18
<PAGE>
TO SELL SHARES FROM YOUR ACCOUNT
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The Fund name
o The dollar amount or number of shares you want to sell
o How and where to send the redemption proceeds
o Obtain a signature guarantee (if required)
o Obtain other documentation (if required)
o Mail us your request and documentation
BY WIRE
o Wire redemptions are only available if your redemption is for $5,000 or
more and you did not decline wire redemptions on your account application
o Call us with your request (unless you declined telephone redemption
privileges - See "By Telephone") OR
o Mail us your request (See "By Mail")
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which the account is registered
o Additional form of identification
o Redemption proceeds will be:
o Mailed to you Or
o Wired to you (unless you declined wire redemption privileges - See "By
Wire")
SYSTEMATICALLY
o Complete the "Systematic Withdrawal" section of the application
o Attach a voided check to your application
o Mail us the completed application
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTION PRIVILEGES You may redeem your shares by telephone unless
you declined telephone redemption privileges on your account application. You
may be responsible for any fraudulent telephone order as long as the Transfer
Agent takes reasonable measures to verify the order.
WIRE REDEMPTION PRIVILEGES You may redeem your shares by wire unless you
declined wire redemption privileges on your account application. The minimum
amount that may be redeemed by wire is $5,000.
19
<PAGE>
SYSTEMATIC WITHDRAWALS You may redeem a specified amount of money from your
account once a month on a specified date. These payments are sent from your
account to a designated bank account by ACH payment. Systematic withdrawals must
be for at least $250.
SIGNATURE GUARANTEE REQUIREMENTS To protect you and the Fund against fraud,
signatures on certain requests must have a "signature guarantee." A signature
guarantee verifies the authenticity of your signature. You can obtain one from
most banking institutions or securities brokers, but not from a notary public.
For requests made in writing, a signature guarantee is required for any of the
following:
o Sales of over $50,000 worth of shares
o Changes to a shareholder's record name or address
o Redemptions from an account for which the address or account
registration has changed within the last 30 days
o Sending redemption proceeds to any person, address, brokerage firm or
bank account not on record
o Sending redemption proceeds to an account with a different
registration (name or ownership) from yours
o Changes to systematic investment or withdrawal, distribution,
telephone redemption or exchange option or any other election in
connection with your account
SMALL ACCOUNTS If the value of your account falls below $1,000 ($500 for IRA
accounts), the Fund may ask you to increase your balance. If the account value
is still below $1,000 ($500 for IRA accounts) after 60 days, the Fund may close
your account and send you the proceeds. The Fund will not close your account if
it falls below this amount solely as a result of a reduction in your account's
market value.
20
<PAGE>
REDEMPTIONS IN KIND The Fund reserves the right to pay redemption proceeds in
portfolio securities rather than cash. These redemptions "in kind" usually occur
if the amount to be redeemed is large enough to affect the Fund's operations
(for example, if it represents more than 1% of the Fund's assets).
LOST ACCOUNTS The Transfer Agent will consider your account lost if
correspondence to your address of record is returned as undeliverable, unless
the Transfer Agent determines your new address. When an account is lost, all
distributions on the account will be reinvested in additional Fund shares. In
addition, the amount of any outstanding (unpaid for six months or more) checks
for distributions that have been returned to the Transfer Agent will be
reinvested and the checks will be canceled.
SALES CHARGES
PURCHASES A front-end sales charge is assessed on purchases of the Fund's shares
as follows:
<TABLE>
<S> <C> <C> <C>
SALES CHARGE (LOAD) AS %
OF:
PUBLIC NET ASSET
AMOUNT OF PURCHASE OFFERING PRICE VALUE* REALLOWANCE
- -------------------------------------------------------------------------------------------------------------
$0 to $99,999 3.00% 3.09% 2.50%
$100,000 to $249,999 2.50% 2.56% 2.00%
$250,000 to $499,999 2.00% 2.04% 1.60%
$500,000 to $999,999 1.50% 1.52% 1.20%
$1,000,000 and up 0.00% 0.00% 1.00%
</TABLE>
* Rounded to the nearest one-hundredth percent.
21
<PAGE>
The offering price for the Fund's shares includes the relevant sales charge. The
commission paid to the distributor is the sales charge less the reallowance paid
to certain financial institutions purchasing shares. Normally, reallowances are
paid as indicated in the above table. From time to time, the distributor may
elect to reallow the entire sales charge for all sales during a particular
period.
From time to time and at its own expense, the distributor may provide
compensation, including financial assistance, to certain dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising campaigns or other dealer-sponsored special events.
Compensation may include the provision of travel arrangements and lodging,
tickets for entertainment events and merchandise.
REDEMPTIONS A contingent deferred sales charge ("CSDC") is assessed on
redemptions of shares that were part of a purchase of $1 million or more. The
CSDC is assessed as follows:
REDEEMED WITHIN SALES CHARGE
First year of purchase 1.00%
Second year of purchase 0.50%
The CDSC is paid on the lower of the NAV of shares redeemed or the cost of the
shares. To satisfy a redemption request, the Fund will first liquidate shares
that are not subject to a CDSC such as shares acquired with reinvested dividends
and capital gains. The Fund will then liquidate shares in the order that they
were first purchased until your redemption request is satisfied.
REDUCED SALES CHARGES You may qualify for a reduced sales charge on Fund
purchases under rights of accumulation or a letter of intent. Certain persons
may also be eligible to purchase or redeem Fund shares without a sales charge.
Please see the SAI for further information.
22
<PAGE>
EXCHANGE PRIVILEGES
You may exchange your Fund shares and buy shares of another fund of the Trust by
telephone or in writing. For a list of funds available for exchange, you may
call the Transfer Agent. If you exchange into a fund with a higher sales charge,
you will have to pay the difference between that fund's sales charge and the
Fund's sales charge at the time of exchange. If you exchange into a fund that
has no sales charge or a lower sales charge than the Fund, you will not have to
pay sales charge at the time exchange. For example, if you pay a 3% sales charge
in connection with your purchase of Fund shares and the new fund into which you
are exchanging has 4% sales charge, you will pay a 1% sales charge at the time
of exchange. Because exchanges are a sale and purchase of shares, they may have
tax consequences.
REQUIREMENTS You may make exchanges only between identically registered accounts
(name(s), address and taxpayer ID number). There is currently no limit on
exchanges, but the Fund reserves the right to limit exchanges. You may exchange
your shares by mail or telephone, unless you declined telephone redemption
privileges on your account application. You may be responsible for any
fraudulent telephone order as long as the Transfer Agent takes reasonable
measures to verify the order.
HOW TO EXCHANGE
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The names of the funds from which you are exchanging and into which you
are exchanging
o The dollar amount or number of shares you want to sell (and exchange)
o Open a new account and complete an account application if you are requesting
different shareholder privileges
o Mail us your request and documentation
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which account is registered
o Additional form of identification
- --------------------------------------------------------------------------------
23
<PAGE>
OTHER INFORMATION
DISTRIBUTIONS
The Fund distributes its net investment income monthly and net capital gain at
least annually.
All distributions are reinvested in additional shares, unless you elect to
receive distributions in cash. For Federal income tax purposes, distributions
are treated the same whether they are received in cash or reinvested. Shares
become entitled to receive distributions on the day after the shares are issued.
TAXES
The Fund generally intends to operate in a manner such that it will not be
liable for Federal income or excise tax.
Generally, you are not subject to Federal or Maine State income tax on the
Fund's distribution of tax-exempt interest income. The Fund's distribution of
taxable interest, other investment income and short-term capital gain are
taxable to you as ordinary income. The Fund's distribution of long-term capital
gain is taxable to you as long-term capital gain regardless of how long you have
held your Fund shares. It is anticipated that substantially all of the Fund's
net income will be exempt from Federal and Maine State income tax.
If you are a "substantial user" or a "related person" of a substantial user of
facilities financed by private activity bonds held by the Fund, you may have to
pay Federal income tax on your pro rata share of the net income generated from
these securities. Distributions of interest income on certain private activity
bonds are an item of tax preference for purposes of individual and corporate
Federal AMT. Distributions of net income from tax-exempt obligations are
included in "adjusted current earnings" of corporations for Federal AMT
purposes. The Maine AMT is based, in part, on the Federal AMT.
24
<PAGE>
If you buy shares shortly before the Fund makes a distribution, you may pay the
full price for the shares and then receive a portion of the price back as a
distribution that may be taxable to you.
The sale or exchange of Fund shares is a taxable transaction for Federal income
tax purposes.
The Fund will send you information about the income tax status of distributions
paid during the year shortly after December 31 of each year.
For further information about the tax effects of investing in the Fund,
including state and local tax matters, please see the SAI and consult your tax
adviser.
ORGANIZATION
The Trust is a Delaware business trust. The Fund does not expect to hold
shareholders' meetings unless required by Federal or Delaware law. Shareholders
of each series are entitled to vote at shareholders' meetings unless a matter
relates only to specific series (such as approval of an advisory agreement for a
Fund). From time to time, large shareholders may control the Fund or the Trust.
25
<PAGE>
FINANCIAL HIGHLIGHTS
The following table is intended to help you understanding the Fund's financial
performance for the past five years. Total return in the table represents the
rate an investor would have earned (or lost) on an investment in the Fund
(assuming the reinvestment of all distributions). This information has been
audited Deloitte & Touche LLP. The Fund's financial statements and the auditor's
report are included in the Annual Report dated March 31, 1999, which is
available upon request, without charge.
<TABLE>
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SINGLE SHARE
Beginning Net Asset Value Per Share $11.05 $10.73 $10.72 $10.47 $10.37
Income From Investment Operations:
Net Investment Income 0.49 0.51 0.51 0.51 0.52
Net Realized and Unrealized Gain (Loss) on
Investments 0.07 0.33 0.01 0.25 0.11
Total From Investment Operations 0.56 0.84 0.52 0.76 0.63
Less Distributions:
From Net Investment Income (0.49) (0.51) (0.51) (0.51) (0.52)
From Net Realized Capital Gain (0.05) (0.01) - - (0.01)
Total Distributions (0.54) (0.52) (0.51) (0.51) (0.53)
Ending Net Asset Value Per Share $11.07 $11.05 $10.73 $10.72 $10.47
OTHER INFORMATION
Ratios to Average Net Assets:
Net Expenses 0.60% 0.60% 0.60% 0.60% 0.50%
Gross Expenses(a) 1.32% 1.48% 1.56% 1.48% 1.40%
Net Investment Income 4.42% 4.65% 4.77% 4.73% 5.08%
Total Return(b) 5.19% 7.94% 4.98% 7.34% 6.31%
Portfolio Turnover Rate 28.61% 16.34% 21.18% 34.07% 31.55%
Net Assets at End of Period
(in thousands) $32,659 $28,196 $25,827 $26,044 $25,525
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects expense ratio in the absence of fee waivers and expense
reimbursements.
(b) Does not include sales charges.
26
<PAGE>
[ACCOUNT APPLICATION]
<PAGE>
[ACCOUNT APPLICATION CONT.]
<PAGE>
<TABLE>
<S> <C>
- ----------------------------
FOR MORE INFORMATION FORUM
- ---------------------------- FUNDS
The following documents are available free upon request:
MAINE MUNICIPAL BOND FUND
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the Fund's investments is available in the
Fund's annual and semi-annual
reports to shareholders. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI provides more detailed information about the Fund and is
incorporated by reference into this Prospectus.
You can get a free copy of both reports and the SAI, request other
information and discuss your questions about the Fund by contacting the
Fund at:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
800-943-6786
800-94FORUM
207-879-0001
You can also review the Fund's reports and SAI at the Public Reference
Room of the Securities and Exchange Commission. You can get text-only
copies, for a fee, by writing to or calling the following: [Logo]
Forum Funds
Public Reference Room P.O. Box 446
Securities and Exchange Commission Portland, Maine 04112
Washington, D.C. 20549-6009 800-943-6786
Telephone: 800-SEC-0330 800-94FORUM
207-879-0001
Free copies are available from the SEC's Internet website
at http://www.sec.gov.
Investment Company Act File No. 811-3023
</TABLE>
<PAGE>
FORUM FUNDS ---------------------------------------------
PROSPECTUS
---------------------------------------------
AUGUST 1, 1999
NEW HAMPSHIRE BOND FUND
NEW HAMPSHIRE BOND FUND SEEKS A
HIGH LEVEL OF CURRENT INCOME EXEMPT
FROM BOTH FEDERAL INCOME TAX AND
NEW HAMPSHIRE INTEREST AND DIVIDENDS
TAX BY INVESTING PRIMARILY IN NEW HAMPSHIRE
MUNICIPAL SECURITIES.
THE FUND DOES NOT PAY RULE 12B-1
(DISTRIBUTION) FEES.
The Securities and Exchange Commission
has not approved or disapproved the Fund's
shares of determined whether this
Prospectus is accurate or complete. Any
representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
[Picture graphics]
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY 2
PERFORMANCE 4
FEE TABLES 6
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS 7
MANAGEMENT 14
YOUR ACCOUNT 14
How to Contact the Fund 14
General Information 14
Buying Shares 15
Selling Shares 18
Sales Charges 21
Exchange Privileges 22
OTHER INFORMATION 24
FINANCIAL HIGHLIGHTS 27
<PAGE>
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
New Hampshire Bond Fund (the "Fund") seeks high current income exempt from
Federal income tax and New Hampshire interest and dividend tax (other than the
alternative minimum tax ("AMT"))
PRINCIPAL INVESTMENT STRATEGIES
[Margin callout: CONCEPTS TO UNDERSTAND
DEBT SECURITY means a security such as a bond or note that obligates
the issuer to pay the security owner a specified sum of money
(interest) at set intervals as well as repay the principal amount of
the security at its maturity
MATURITY means the date on which a debt security is (or may be) due and
payable
BOND means a debt security with a long-term maturity, usually 5 years
or longer
NOTE means a debt security with a short-term maturity, usually less
than 1 year
INVESTMENT GRADE SECURITY means a security rated in one of the four
highest long-term or two highest short-term ratings categories by an
NRSRO or unrated and determined to be of comparable quality
MUNICIPAL SECURITY means a debt security issued by or on behalf of the
State of New Hampshire, its local governments and public finance
authorities and U.S. territories and possessions, the interest on which
is exempt from Federal income tax and New Hampshire interest and
dividend tax (other than AMT)
The Fund invests primarily in investment grade New Hampshire municipal
securities. Generally, the average weighted maturity of the Fund's portfolio
securities is between 5 and 15 years.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money on your investment in the Fund or the Fund could
underperform other investments. The principal risks of an investment in the Fund
include:
o The Fund's share price, yield and total return will fluctuate in
response to price movements in the debt securities markets
o The value of most debt securities fall when interest rates rise; the
longer a debt security's maturity and the lower its credit quality,
the more its value typically falls in response to an increase in
interest rates
2
<PAGE>
o The Fund can not collect interest and principal payments on a debt
security if the issuer defaults
o Issuers may prepay fixed rate securities when interest rates fall,
forcing the Fund to invest in securities with lower interest rates
o The Fund is non-diversified. The Fund may focus its investments in a
comparatively small number of issuers. Concentration of the Fund in
securities of a limited number of issuers exposes it to greater market
risk and potential monetary losses than if its assets were diversified
among the securities of a greater number of issuers
o Economic and political changes in New Hampshire may have a greater
effect on the Fund than if the Fund invested in municipal securities
of various states
o The Fund's investment adviser (the "Adviser") may make poor investment
decisions
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for you if you:
o Are an income-oriented investor in a high tax bracket and desire
tax-exempt income
o Seek income and more price stability than stocks offer
o Seek capital preservation
o Are pursuing a long-term goal
The Fund may NOT be appropriate for you if you:
o Are pursuing a short-term goal or are investing emergency reserves
o Are investing funds in a tax deferred or tax-exempt account (such as
an IRA)
o Do not desire tax-exempt income
3
<PAGE>
PERFORMANCE
The following chart illustrates the variability of the Fund's returns. The chart
and the following table provide some indication of the risks of investing in the
Fund by showing changes in the Fund's performance from year to year and how the
Fund's returns compare to a broad measure of market performance. PERFORMANCE
INFORMATION REPRESENTS ONLY PAST PERFORMANCE AND DOES NOT NECESSARILY INDICATE
FUTURE RESULTS.
The following chart shows the annual total returns for each full calendar year
that the Fund has operated. The chart does not reflect sales charges and, if
reflected, the returns would be less than shown.
[EDGAR REPRESENTATION OF GRAPH CHART]
PAST PERFORMANCE CHART
Year Average Annual Total Return
- ---- ---------------------------
1993 11.86%
1994 -4.59%
1995 14.76%
1996 3.59%
1997 7.63%
1998 6.13%
The calendar year-to-date total return as of June 30, 1999 was - 1.05%
During the periods shown in the chart, the highest quarterly return was 5.76%
(for the quarter ended March 31, 1995) and the lowest quarterly return was
- -5.10% (for the quarter ended March 31, 1994).
4
<PAGE>
The following table compares the Fund's average annual total returns as of
December 31, 1998 to the Lehman 10-Year Municipal Bond Index.
<TABLE>
<S> <C> <C>
NEW HAMPSHIRE BOND FUND LEHMAN 10-YEAR MUNICIPAL BOND
YEAR(S) INDEX
- ----------------------------------------------------------------------------------------------------------------------
1 Year 3.48% 6.76%
5 Years 4.78% 6.63%
Since Inception (12/31/92) 5.93% 7.62%(1)
</TABLE>
(1) For the period 12/31/92 - 12/31/98.
The Lehman 10-Year Municipal Bond Index is a market index of investment grade
fixed-rate municipal securities with an average maturity of 10 years. The index
is unmanaged and reflects the reinvestment of interest and principal payments.
Unlike the performance figures of the Fund, the index's performance does not
reflect the effect of expenses.
5
<PAGE>
FEE TABLES
The following tables describe the various fees and expenses that you will pay if
you invest in the Fund.
<TABLE>
<S> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- --------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of the offering 3.00%
price)
Maximum Sales Charge (Load) Imposed on Reinvested Distributions None
Maximum Deferred Sales Charge (Load) 1.00%(1)
Redemption Fee None
Exchange Fee None
</TABLE>
(1) Applicable only on purchases of $1 million or more
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES(1) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ---------------------------------------------------------------------------------------------------------------------
Management Fees 0.40%
Distribution (12b-1) Fees None
Other Expenses 1.13%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.53%
Fee Waiver and Expense Reimbursement(2) 0.93%
Net Expenses 0.60%
</TABLE>
(1) Based on amounts incurred during the Fund's fiscal year ended March
31, 1999 stated as a percentage of assets.
(2) Based on contractual fee waivers and expense reimbursements that may
increase after July 31, 2000.
EXAMPLE
The following is a hypothetical example intended to help you compare the cost of
investing in the Fund to the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Fund for the time periods
indicated, you pay the maximum sales charge and then redeem all of your shares
at the end of those periods. The example also assumes that your investment has a
5% annual return, that the Fund's operating expenses remain the same as stated
in the above table and that distributions are reinvested. Although your actual
costs may be higher or lower, under these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$451 $769 $1,109 $2,069
6
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
INVESTMENT OBJECTIVE
The Fund seeks a high level of current income exempt from both Federal income
tax and New Hampshire interest and dividends tax (other than AMT).
INVESTMENT STRATEGIES
THE ADVISER'S PROCESS
[Margin callout: CONCEPTS TO UNDERSTAND
YIELD CURVE means a graph that plots the yield of all bonds of similar
quality and with maturities ranging from the shortest to the longest
available
U.S. GOVERNMENT SECURITIES means debt securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities
The Adviser continuously monitors economic factors such as interest rate
outlooks and technical factors such as the shape of the yield curve in
combination with the stated objective of the Fund to determine an appropriate
maturity profile for the Fund's investment portfolio. The Adviser then
principally searches for securities that satisfy the maturity profile of the
Fund and that provide the greatest potential return relative to the risk of the
security. The Adviser may sell a debt security if:
o Revised economic forecasts or interest rate outlook requires a
repositioning of the portfolio
o The security subsequently fails to meet the Adviser's investment
criteria
o A more attractive security is found or funds are needed for another
purpose
o The Adviser believes that the security has reached its appreciation
potential
INVESTMENT POLICIES
[Margin callout: CONCEPTS TO UNDERSTAND
PRIVATE ACTIVITY BOND means a bond that is issued by or on behalf of
public authorities to finance privately operated facilities. Private
Activity Bonds are primarily revenue securities
GENERAL OBLIGATION SECURITY means a security whose principal and
interest payments are secured by a municipality's full faith and credit
and taxing power
REVENUE SECURITY means a security whose principal and interest
generally is payable from revenues of a particular facility, class of
facilities or from the proceeds of a special excise or other tax]
NRSO means a "nationally recognized statistical rating organization"
such as Standard & Poor's that rates debt securities of relative
credit risk
The Fund invests primarily in investment grade New Hampshire municipal
securities. Municipal securities include municipal bonds, notes and leases.
Municipal leases are securities that permit government issuers to acquire
7
<PAGE>
property and equipment without the security being subject to constitutional and
statutory requirements for the issuance of long-term debt securities. The Fund
invests in general obligation securities and revenue securities, including
private activity bonds. Generally, the average weighted maturity of the Fund's
portfolio securities is between 5 and 15 years.
TEMPORARY DEFENSIVE MEASURES In order to respond to adverse market, economic or
other conditions, the Fund may assume a temporary defensive position and invest
without limit in cash and short-term U.S. Government Securities. As a result,
the Fund may be unable to achieve its investment objective.
INVESTMENT RISKS
GENERAL The Fund's net asset value and total return will fluctuate based upon
changes in the value of its portfolio securities. The market value of securities
in which the Fund invests is based upon the market's perception of value and is
not necessarily an objective measure of the securities' value. There is no
assurance the Fund will achieve its investment objective. An investment in the
Fund is not by itself a complete or balanced investment program.
The value of your investment in the Fund may change in response to changes in
interest rates. An increase in interest rates typically causes a fall in the
value of the municipal securities in which the Fund invests. An additional risk
is that issuers may prepay fixed rate securities when interest rates fall,
forcing the Fund to invest in securities with lower interest rates.
Your investment in the Fund is also subject to the risk that the financial
condition of an issuer of a security held by the Fund may cause it to default or
become unable to pay interest or principal due on the security. This risk
generally increases as security credit ratings decrease. Your investment in the
Fund is subject to the risk that the Adviser may make poor investment decisions.
The Fund also is non-diversified. The Fund may focus a larger percentage of its
assets in the securities of fewer issuers. Concentration of the Fund in
securities of a limited number of issuers exposes it to greater market risk and
monetary losses than if its assets were diversified among the securities of a
8
<PAGE>
greater number of issuers. Finally, your investment in the Fund is subject to
the risk that the Adviser may make poor investment decisions.
SPECIFIC RISKS OF NEW HAMPSHIRE MUNICIPAL SECURITIES Economic or political
factors in New Hampshire may adversely affect issuers of New Hampshire municipal
securities. Adverse economic or political factors will affect the Fund's net
asset value more than if the Fund invested in more geographically diverse
investments. As a result, the value of the Fund's assets may fluctuate more
widely than the value of shares of a fund investing in securities relating to a
number of different states.
The following is a summary of recent NRSRO ratings of New Hampshire municipal
securities. The major NRSROs have rated recent New Hampshire general obligation
or state-guaranteed bond issues as follows: Moody's - Aa2 (refined from Aa in
June 1997); Standard & Poor's ("S&P") - AA+ (stable) (revised from AA in
November 1995); Fitch IBCA - AA+ (revised from AA in November 1995). S&P's
rating revision cited sustained employment recovery, improved financial
position, low debt burden and high wealth indicators. Fitch IBCA noted
conservative debt and financial policies underpinning the State's credit
position, strengthened by economic buoyancy. A recent bond issued by the New
Hampshire Municipal Bond Bank without State guarantee has been separately rated
A1 by Moody's (stable) and A+ by S&P (stable). Bond ratings of individual
municipalities in New Hampshire vary in accordance with rating agencies'
estimates of the issuer's relative financial strength and ability to support
debt service. There can be no assurance that New Hampshire general obligations
or any New Hampshire municipal securities owned by the Fund will be rated in any
category or will not be downgraded by an NRSRO. Moody's and Fitch IBCA have
placed the State's ratings under increased surveillance due to uncertainty
surrounding the State's action to comply with a decision of the New Hampshire
Supreme Court
9
<PAGE>
regarding the funding of public education. Further information concerning the
State of New Hampshire is contained in the Statement of Additional Information
("SAI").
YEAR 2000 Certain computer systems may not process date-related information
properly on and after January 1, 2000. The Fund's Adviser is addressing this
matter for its systems. The other service providers have informed the Fund that
they are taking similar measures. This matter, if not corrected, could adversely
affect the services provided to the Fund or the issuers in which the Fund
invests and, therefore, could lower the value of your shares.
10
<PAGE>
MANAGEMENT
The Fund is a series of Forum Funds (the "Trust"), an open-end, management
investment company (mutual fund). The business of the Trust and of the Fund is
managed under the direction of the Board of Trustees (the "Board"). The Board
formulates the general policies of the Fund and meets periodically to review the
Fund's performance, monitor investment activities and practices, and discuss
other matters affecting the Fund. Additional information regarding the Board, as
well as the Trust's executive officers, may be found in the SAI.
THE ADVISER
The Adviser is Forum Investment Advisors, LLC, Two Portland Square, Portland,
Maine 04101. The Adviser is a privately owned company controlled by John Y.
Keffer, who is Chairman of the Board of the Trust.
Subject to the general control of the Board, the Adviser makes investment
decisions for the Fund. For the fiscal year ended March 31, 1999, the Adviser
received an advisory fee of 0.40% of the average daily net assets of the Fund.
As of June 30, 1999, the Adviser had approximately $2.3 billion of assets under
management.
PORTFOLIO MANAGER
LES C. BERTHY Senior Portfolio Manager of the Adviser, has been primarily
responsible for the day-to-day management of the Fund's portfolio since its
inception on December 31, 1992. Mr. Berthy has 27 years of experience in the
investment industry and, prior to his association with the Adviser in January
1991, was Managing Director and Co-Chief Executive Officer of Irwin Union
Capital Corp., an affiliate of Irwin Union Bank & Trust Co.
11
<PAGE>
OTHER SERVICE PROVIDERS
The Forum Financial Group ("Forum") of companies provide services to the Fund.
As of June 30, 1999, Forum provided administration and distribution services to
investment companies and collective investment funds with assets of
approximately $73 billion.
Forum Fund Services, LLC, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., is the distributor (principal
underwriter) of the Fund's shares. The distributor acts as the representative of
the Trust in connection with the offering of the Fund's shares. The distributor
may enter into arrangements with banks, broker-dealers or other financial
institutions through which investors may purchase or redeem shares and may, at
its own expense, compensate persons who provide services in connection with the
sale or expected sale of the Fund's shares.
Forum Administrative Services, LLC provides administrative services to the Fund,
Forum Accounting Services, LLC is the Fund's accountant, Forum Shareholder
Services, LLC (the "Transfer Agent") is the Fund's transfer agent and Forum
Trust, LLC is the Fund's custodian.
12
<PAGE>
FUND EXPENSES
The Fund pays for all of its expenses. The Fund's expenses are comprised of its
own expenses as well as Trust expenses that are allocated among the Fund and the
other funds of the Trust. The Adviser or other service providers may waive all
or any portion of their fees and/or reimburse certain expenses of the Fund. Any
fee waiver or expense reimbursement increases the Fund's performance for the
period during which the waiver or reimbursement is in effect.
Certain service providers have undertaken to waive a portion of their fees
and/or reimburse certain expenses in order to limit the Fund's expenses
(excluding taxes, interest, portfolio transaction expenses and extraordinary
expenses) to 0.60% or less of the average daily net assets of the Fund.
13
<PAGE>
YOUR ACCOUNT
[Margin call out: HOW TO CONTACT THE FUND
Write to us at:
Forum Shareholder Services, LLC
P.O. Box 466
Portland, Maine 04112
Telephone us at:
(800) 94FORUM or (800) 943-6786 (Toll Free)
(207) 879-0001
Wire investments (or ACH payments) to us at:
Bankers Trust Company
New York, New York
ABA #021001033 For Credit to:
Forum Shareholder Services, LLC
Account # 01-465-547
New Hampshire Bond Fund
(Your Name)
(Your Account Number)]
GENERAL INFORMATION
You may purchase or sell (redeem) shares at the net asset value of a share (NAV)
plus any applicable sales charge (or minus any applicable sales charge in the
case of redemptions) next calculated after the Transfer Agent receives your
request in proper form. For instance, if the Transfer Agent receives your
purchase request in proper form after 4:00 p.m., Eastern time, your transaction
will be priced at the next business day's NAV plus or minus the applicable sales
charge. The Fund cannot accept orders that request a particular day or price for
the transaction or any other special conditions.
The Fund does not issue share certificates.
If you purchase shares directly from the Fund, you will receive monthly
statements and a confirmation of each transaction. You should verify the
accuracy of all transactions in your account as soon as you receive your
confirmations.
The Fund reserves the right to waive minimum investment amounts and may
temporarily suspend (during unusual market conditions) or discontinue any
service or privilege.
WHEN AND HOW NAV IS DETERMINED The Fund calculates its NAV as of the close of
the New York Stock Exchange (normally 4:00 p.m., Eastern time) on each weekday
except days when the New York Stock Exchange is closed. The time at which NAV is
calculated may change in case of an emergency. The Fund's NAV is determined by
taking the market value of all securities owned by the Fund (plus all other
assets such as cash), subtracting liabilities and then dividing the result (net
assets) by the number of shares outstanding. The Fund values securities for
which market quotations are readily available at current market value. If market
quotations are not readily available, the Fund values securities at fair value.
14
<PAGE>
TRANSACTIONS THROUGH THIRD PARTIES If you invest through a broker or other
financial institution, the policies and fees (other than sales charges) charged
by that institution may be different than those of the Fund. Financial
institutions may charge transaction fees and may set different minimum
investments or limitations on buying or selling shares. These institutions may
also provide you with certain shareholder services such as periodic account
statements and trade confirmations summarizing your investment activity. Consult
a representative of your financial institution for further information.
BUYING SHARES
HOW TO MAKE PAYMENTS All investments must be in U.S. dollars and checks must be
drawn on U.S. banks.
CHECKS For individual, Uniform Gift to Minors Act ("UGMA") or Uniform
Transfers to Minors Act ("UTMA") accounts, the check must be made
payable to "Forum Funds" or to one or more owners of the account and
endorsed to "Forum Funds." For all other accounts, the check must be
made payable on its face to "Forum Funds." No other method of check
payment is acceptable (for instance, you may not pay by travelers
check).
ACH PAYMENT Instruct your financial institution to make an ACH
(automated clearinghouse) payment to us. These payments typically take
two days to settle. Your financial institution may charge you a fee for
this service.
WIRES Instruct your financial institution to make a Federal Funds wire
payment to us. Your financial institution may charge you a fee for this
service.
15
<PAGE>
MINIMUM INVESTMENTS The Fund accepts investments in the following minimum
amounts:
<TABLE>
<S> <C> <C>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL
INVESTMENT
- -----------------------------------------------------------------------------------------------------------------------
Standard Account $2,000 $250
Accounts With Systematic Investment Plans $250 $250
</TABLE>
<TABLE>
<S> <C>
ACCOUNT REQUIREMENTS
- ------------------------------------------------------------------------------------------------------------------------
TYPE OF ACCOUNT REQUIREMENT
- ------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL, SOLE PROPRIETORSHIP AND JOINT ACCOUNTS: o Instructions must be signed by all persons
Individual accounts are owned by one person, as are sole required to sign exactly as their names appear on
proprietorship accounts. Joint accounts have two or more the account
owners (tenants)
GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA): o Depending on state laws, you can set up a
These custodial accounts provide a way to give money to a custodial account under the Uniform Gift to Minors
child and other tax benefits. An individual can give up Act or the Uniform Transfers to Minors Act
to $10,000 a year per child without paying Federal o The trustee must sign instructions in a manner
gift tax indicating trustee capacity
BUSINESS ENTITIES o For entities with officers, provide an
original or certified copy of a resolution that
identifies the authorized signers for the account
o For entities with partners or other interested
parties, provide a certified partnership
agreement or organizational document, or
certified pages from the partnership agreement or
organizational document, that identify the
partners or interested parties
TRUSTS o The trust must be established before an
account can be opened
o Provide a certified trust document, or the
pages from the trust document, that identify the trustees
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
INVESTMENT PROCEDURES
- -------------------------------------------------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO YOUR ACCOUNT
- -------------------------------------------------------------------------------------------------------------------------------
BY CHECK BY CHECK
o Call or write us for an account application o Fill out an investment slip from a
o Complete the application confirmation or write us a letter
o Mail us your application and a check o Write your account number on your check
o Mail us the slip (or your letter) and the check
BY WIRE BY WIRE
o Call or write us for an account application o Call to notify us of your incoming wire
o Complete the application o Instruct your bank to wire your money to us
o Call us and we will assign you an account number
o Mail us your application
o Instruct your bank to wire your money to us
BY ACH PAYMENT BY SYSTEMATIC INVESTMENT
o Call or write us for an account application o Complete the systematic investment section of the
o Complete the application application
o Call us and we will assign you an account number o Attach a voided check to your application
o Mail us your application o Mail us the completed application
o Make an ACH payment
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SYSTEMATIC INVESTMENTS You may invest a specified amount of money in the Fund
once or twice a month on specified dates. These payments are taken from your
bank account by ACH payment. Systematic investments must be for at least $250.
LIMITATIONS ON PURCHASES The Fund reserves the right to refuse any purchase
(including exchange) request, particularly requests that could adversely affect
the Fund or its operations. This includes those from any individual or group
who, in the Fund's view, is likely to engage in excessive trading (usually
defined as more than four redemptions or exchanges out of the Fund within a
calendar year).
17
<PAGE>
CANCELED OR FAILED PAYMENTS The Fund accepts checks and ACH transfers at full
value subject to collection. If the Fund does not receive your payment for
shares or you pay with a check or ACH transfer that does not clear, your
purchase will be canceled. You will be responsible for any losses or expenses
incurred by the Fund or the Transfer Agent, and the Fund may redeem shares you
own in the account (or other identically registered account you maintain with
the Transfer Agent) as reimbursement. The Fund and its agents have the right to
reject or cancel any purchase or exchange due to nonpayment.
SELLING SHARES
The Fund processes redemption orders promptly. Generally, the Fund will send
redemption proceeds to you within a week. Delays may occur in cases of very
large redemptions, excessive trading or during unusual market conditions. The
Fund may delay sending redemption proceeds until it has collected payment for
the shares you are selling, which may take up to 15 calendar days.
18
<PAGE>
- --------------------------------------------------------------------------------
TO SELL SHARES FROM YOUR ACCOUNT
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The Fund name
o The dollar amount or number of shares you want to sell
o How and where to send the redemption proceeds
o Obtain a signature guarantee (if required)
o Obtain other documentation (if required)
o Mail us your request and documentation
BY WIRE
o Wire redemptions are only available if your redemption is for $5,000 or more
and you did not decline wire redemption privileges on your account
application
o Call us with your request (unless you declined telephone redemption
privileges - See "By Telephone") OR
o Mail us your request (See "By Mail")
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which the account is registered
o Additional form of identification
o Redemption proceeds will be:
o Mailed to you Or
o Wired to you (unless you declined wire redemption privileges -See "By
Wire")
SYSTEMATICALLY
o Complete the systematic withdrawal section of the application
o Attach a voided check to you application
o Mail us the completed application
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTION PRIVILEGES You may redeem your shares by telephone unless
you declined telephone redemption privileges on your account application. You
may be responsible for any fraudulent telephone order as long as the Transfer
Agent takes reasonable measures to verify the order.
WIRE REDEMPTION PRIVILEGES You may redeem your shares by wire unless you
declined wire redemption privileges on your account application. The minimum
amount that may be redeemed by wire is $5,000.
19
<PAGE>
SYSTEMATIC WITHDRAWALS You may redeem a specified amount of money from your
account once a month on a specified date. These payments are sent from your
account to a designated bank account by ACH payment. Systematic withdrawals must
be for at least $250.
SIGNATURE GUARANTEE REQUIREMENTS To protect you and the Fund against fraud,
signatures on certain requests must have a "signature guarantee." A signature
guarantee verifies the authenticity of your signature. You can obtain one from
most banking institutions or securities brokers, but not from a notary public.
For requests made in writing, a signature guarantee is required for any of the
following:
o Sales of over $50,000 worth of shares
o Changes to a shareholder's record name or address
o Redemptions from an account for which the address or account
registration has changed within the last 30 days
o Sending redemption proceeds to any person, address, brokerage firm or
bank account not on record
o Sending redemption proceeds to an account with a different
registration (name or ownership) from yours
o Changes to systematic investment or withdrawal, distribution,
telephone redemption or exchange option or any other election in
connection with your account
SMALL ACCOUNTS If the value of your account falls below $1,000 ($500 for IRA
accounts), the Fund may ask you to increase your balance. If the account value
is still below $1,000 ($500 for IRA accounts) after 60 days, the Fund may close
your account and send you the proceeds. The Fund will not close your account if
it falls below these amounts solely as a result of a reduction in your account's
market value.
REDEMPTIONS IN KIND The Fund reserves the right to pay redemption proceeds in
portfolio securities rather than cash. These redemptions "in kind" usually occur
if the amount to be redeemed is large enough to
20
<PAGE>
affect the Fund's operations (for example, if it represents more than 1% of the
Fund's assets).
LOST ACCOUNTS The Transfer Agent will consider your account lost if
correspondence to your address of record is returned as undeliverable, unless
the Transfer Agent determines your new address. When an account is lost, all
distributions on the account will be reinvested in additional Fund shares. In
addition, the amount of any outstanding (unpaid for six months or more) checks
for distributions that have been returned to the Transfer Agent will be
reinvested and the checks will be canceled.
SALES CHARGES
PURCHASES A front-end sales charge is assessed on purchases of the Fund's shares
as follows:
<TABLE>
<S> <C> <C> <C>
SALES CHARGE (LOAD) AS %
OF:
PUBLIC NET ASSET
AMOUNT OF PURCHASE OFFERING PRICE VALUE* REALLOWANCE %
- -------------------------------------------------------------------------------------------------------------------
$0 to $99,999 3.00 3.09 2.50
$100,000 to $249,999 2.50 2.56 2.00
$250,000 to $499,999 2.00 2.04 1.60
$500,000 to $999,999 1.50 1.52 1.20
$1,000,000 and up 0.00 0.00 1.00
</TABLE>
*Rounded to the nearest one-hundredth percent.
The offering price for the Fund's shares includes the relevant sales charge. The
commission paid to the distributor is the sales charge less the reallowance paid
to certain financial institutions purchasing shares. Normally, reallowances are
paid as indicated in the above table. From time to time, the distributor may
elect to reallow the entire sales charge for all sales during a particular
period.
21
<PAGE>
From time to time and at its own expense, the distributor may provide
compensation, including financial assistance, to certain dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising campaigns or other dealer-sponsored special events.
Compensation may include the provision of travel arrangements and lodging,
tickets for entertainment events and merchandise.
REDEMPTIONS A contingent deferred sales charge ("CDSC") is assessed on
redemptions of shares that were part of a purchase of $1 million or more. The
CDSC is assessed as follows:
REDEEMED WITHIN SALES CHARGE
First year of purchase 1.00%
Second year of purchase 0.50%
The CDSC is paid on the lower of the NAV of shares redeemed or the cost of the
shares. To satisfy a redemption request, the Fund will first liquidate shares
that are not subject to a CDSC such as shares acquired with reinvested dividends
and capital gains. The Fund will then liquidate shares in the order that they
were first purchased until your redemption request is satisfied.
REDUCED SALES CHARGES You may qualify for a reduced sales charge on Fund
purchases under rights of accumulation or a letter of intent. Certain persons
may also be eligible to purchase or redeem Fund shares without a sales charge.
Please see the SAI for further information.
EXCHANGE PRIVILEGES
You may exchange your Fund shares and buy shares of another fund of the Trust by
telephone or in writing. For a list of funds available for exchange, you may
call the Transfer Agent. If you exchange into a fund with a higher sales charge
than the Fund, you will have to pay the difference between
22
<PAGE>
that fund's sales charge and the Fund's sales charge. If you exchange into a
fund that has no sales charge or a lower sales charge than the Fund, you will
not have to pay a sales charge at the time of exchange. Because exchanges are a
sale and purchase of shares, they may have tax consequences.
REQUIREMENTS You may make exchanges only between identically registered accounts
(name(s), address and taxpayer ID number). There is currently no limit on
exchanges, but the Fund reserves the right to limit exchanges. You may exchange
your shares by mail or telephone, unless you declined telephone redemption
privileges on your account application. You may be responsible for any
fraudulent telephone order as long as the Transfer Agent takes reasonable
measures to verify the order.
HOW TO EXCHANGE
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The names of the Funds from which you are exchanging and into which
you are exchanging
o The dollar amount or number of shares you want to sell (and exchange)
o Open a new account and complete an account application if you are
requesting different shareholder privileges
o Mail us your request and documentation
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which account is registered
o Additional form of identification
- --------------------------------------------------------------------------------
23
<PAGE>
OTHER INFORMATION
DISTRIBUTIONS
The Fund distributes its net investment income monthly and net capital gain at
least annually.
All distributions are reinvested in additional shares, unless you elect to
receive distributions in cash. For Federal income tax purposes, distributions
are treated the same whether they are received in cash or reinvested. Shares
become entitled to receive distributions on the day after the shares are issued.
TAXES
The Fund generally intends to operate in a manner such that it will not be
liable for Federal income or excise tax.
Generally, you are not subject to Federal income tax and New Hampshire State
interest and dividends tax on the Fund's distribution of tax-exempt interest
income. The Fund's distribution of taxable interest, other investment income and
short-term capital gain are taxable to you as ordinary income. The Fund's
distribution of long-term capital gain is taxable to you as long-term capital
gain regardless of how long you have held your Fund shares. It is anticipated
that substantially all of the Fund's net income will be exempt from Federal
income tax and New Hampshire State interest and dividends tax (other than AMT).
If you are a New Hampshire: (1) resident individual, (2) a partnership, limited
liability company, association or trust whose beneficial interest is not
transferable or, (3) a fiduciary deriving your appointment from a New Hampshire
court,
24
<PAGE>
you will generally not be subject to the New Hampshire interest and dividends or
business profits tax on net income paid by the Fund to the extent that the Fund
invests in New Hampshire tax-exempt municipal securities or U.S. government
obligations. Net income paid by the Fund from other forms of investment will be
subject to the interest and dividends tax. Special interest and dividends tax
rules apply to net income received by trusts, estates, partnerships, limited
liability companies and "S" corporations and their beneficiaries or owners, if
all or some of its beneficiaries or owners are not New Hampshire residents.
If you are a partnership, limited liability company, association or trust having
a transferable beneficial interest, you are not subject to the New Hampshire
interest and dividends tax. However, if you are engaged in business activity in
New Hampshire, you must pay the New Hampshire business profits tax on all income
(except income earned on U.S. government obligations) attributable to New
Hampshire, including net income paid by the Fund.
If you are a "substantial user" or a "related person" of a substantial user of
facilities financed by private activity bonds held by the Fund, you may have to
pay Federal income tax on your pro rata shares of the net income generated from
these securities. Distributions of interest income on certain private activity
bonds are an item of tax preference for purposes of individual and corporate
Federal AMT. Distributions of net income from tax-exempt obligations are
included in "adjusted current earnings" of corporations for Federal AMT
purposes.
If you buy shares just before the Fund makes a distribution, you will pay the
full price for the shares and then receive a portion of the price back as a
distribution that may be taxable to you.
25
<PAGE>
The sale or exchange of Fund shares is a taxable transaction for Federal income
tax purposes.
The Fund will send you information about the income tax status of distributions
paid during the year shortly after December 31 of each year.
For further information about the tax effects of investing in the Fund,
including state and local tax matters, please see the SAI and consult your tax
adviser.
ORGANIZATION
The Trust is a Delaware business trust. The Fund does not expect to hold
shareholders' meetings unless required by Federal or Delaware law. Shareholders
of each series are entitled to vote at shareholders' meetings unless a matter
relates only to specific series (such as approval of an advisory agreement for
the Fund). From time to time, large shareholders may control the Fund or the
Trust.
26
<PAGE>
FINANCIAL HIGHLIGHTS
The following table is intended to help you understand the Fund's financial
performance for the past five years. Total return in the table represents the
rate an investor would have earned (or lost) on an investment in the Fund
(assuming the reinvestment of all distributions) and does not include the effect
of sales charges. This information has been audited by Deloitte & Touche LLP.
The Fund's financial statements and the auditor's report are included in the
Annual Report dated March 31, 1999, which is available upon request, without
charge.
<TABLE>
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SINGLE SHARE
Beginning Net Asset Value Per Share $10.73 $10.31 $10.33 $10.08 $9.96
Income from Investment Operations:
Net Investment Income 0.46 0.47 0.48 0.48 0.49
Net Realized and Unrealized Gain (Loss) on
Investments 0.13 0.43 (0.02) 0.25 0.12
Total from Investment Operations 0.59 0.90 0.46 0.73 0.61
Less Distributions:
From Net Investment Income (0.46) (0.48) (0.48) (0.48) (0.49)
From Net Realized Capital Gain (0.06) _ _ _ _
Total Distributions (0.52) (0.48) (0.48) (0.48) (0.49)
Ending Net Asset Value Per Share $10.80 $10.73 $10.31 $10.33 $10.08
OTHER INFORMATION
Ratios to Average Net Assets:
Net Expenses 0.60% 0.60% 0.60% 0.60% 0.46%
Gross Expenses (a) 1.53% 1.81% 2.22% 2.26% 2.19%
Net Investment Income 4.28% 4.45% 4.65% 4.65% 4.95%
Total Return(b) 5.61% 8.84% 4.56% 7.36% 6.32%
Portfolio Turnover Rate 41.78% 22.99% 53.46% 34.31% 37.59%
Net Assets at End of Period
(in thousands) $15,227 $12,908 $8,691 $6,903 $5,276
- ------------------------------------------------------------------------------------------------------------------------
(a) Reflects expense ratio in the absence of fee waivers and
expense reimbursements.
(b) Does not include sales charges.
</TABLE>
27
<PAGE>
[ACCOUNT APPLICATION]
<PAGE>
[ACCOUNT APPLICATION CONT.]
<PAGE>
<TABLE>
<S> <C>
- ------------------------------
FOR MORE INFORMATION FORUM
- ------------------------------ FUNDS
The following documents are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS NEW HAMPSHIRE BOND FUND
Additional information about the Fund's investments is available in the
Fund's annual and semi-annual
reports to shareholders. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI provides more detailed information about the Fund and is
incorporated by reference into this Prospectus.
You can get a free copy of both reports and the SAI, request other
information and discuss your questions about the Fund by contacting the
Fund at:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
800-943-6786
800-94FORUM
207-879-0001
[Logo]
You can also review the Fund's reports and SAI at the Public Reference Forum Funds
Room of the Securities and Exchange Commission. You can get text-only P.O. Box 446
copies, for a fee, by writing to or calling the following: Portland, Maine 04112
(800) 943-6786
Public Reference Room (800) 94FORUM
Securities and Exchange Commission (207) 879-0001
Washington, D.C. 20549-6009
Telephone: 800-SEC-0330
Free copies are available from the SEC's Internet website
at http://www.sec.gov.
Investment Company Act File No. 811-3023.
</TABLE>
<PAGE>
----------------------------------------
PROSPECTUS
----------------------------------------
AUGUST 1, 1999
INVESTORS GROWTH FUND SEEKS
LONG-TERM CAPITAL APPRECIATION
BY INVESTING PRIMARILY IN THE INVESTORS GROWTH FUND
COMMON STOCK OF COMPANIES DOMICILED
IN THE UNITED STATES.
THE FUND DOES NOT PAY RULE 12B-1
(DISTRIBUTION) FEES.
The Securities and Exchange Commission
has not approved or disapproved the Fund's
shares of determined whether this
Prospectus is accurate or complete. Any
representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
[Picture graphics]
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY 2
PERFORMANCE 4
FEE TABLES 6
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS 8
MANAGEMENT 11
YOUR ACCOUNT 13
How to Contact the Fund 13
General Information 13
Buying Shares 14
Selling Shares 17
Sales Charges 20
Exchange Privileges 21
Retirement Accounts 22
OTHER INFORMATION 23
FINANCIAL HIGHLIGHTS 25
<PAGE>
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE Investors Bond Fund (the "Fund") seeks long-term capital
appreciation
PRINCIPAL INVESTMENT STRATEGIES
[Margin callout: CONCEPTS TO UNDERSTAND
COMMON STOCK means an equity or ownership interest in a company
MARKET CAPITALIZATION means the value of a company's common stock in
the stock market]
The Fund invests primarily in the common stock of domestic companies with market
capitalizations of $2 billion or more and that possess above average growth
potential or value not fully reflected in its stock price.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money on your investment in the Fund or the Fund could
underperform other investments. The principal risks of an investment in the Fund
include:
o The stock market goes down
o The stock market continues to undervalue the stocks in the Fund's
portfolio
o The smaller the market capitalization of a company, the greater the
potential for stock price fluctuation
o The Fund's investment adviser (the "Adviser") makes poor investment
decisions
2
<PAGE>
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for you if you:
o Are willing to tolerate significant changes in the value of your
investment
o Are pursuing a long-term goal
o Are willing to accept higher short-term risk for higher potential
long-term return
The Fund may NOT be appropriate for you if you:
o Need regular income or stability of principal
o Are pursuing a short-term goal or investing emergency reserves
3
<PAGE>
PERFORMANCE
The following chart and table provide some indication of the risks of investing
in the Fund by showing the Fund's returns compared to a broad measure of market
performance. PERFORMANCE INFORMATION REPRESENTS ONLY PAST PERFORMANCE AND DOES
NOT NECESSARILY INDICATE FUTURE RESULTS.
The following chart shows the annual total return for the only full calendar
year that the Fund has operated. The chart does not reflect sales charges and,
if reflected, the return would be less than shown.
[EDGAR REPRESENTATION OF GRAPH CHART]
PAST PERFORMANCE CHART
Year Average Annual Total Return
- ---- ---------------------------
1998 16.66%
The calendar year-to-date total return as of June 30, 1999 was 5.77%.
During the period shown in the chart, the highest quarterly return was 16.96%
(for the quarter ended December 31, 1998) and the lowest quarterly return was
- -10.18% (for the quarter ended September 30, 1998).
4
<PAGE>
The following table compares the Fund's average annual total return as of
December 31, 1998 to the Standard & Poor's 500 Composite Index (the "S&P 500
Index").
<TABLE>
<S> <C> <C>
INVESTORS GROWTH FUND S&P 500 INDEX
YEAR(S)
- ----------------------------------------------------------------------------------------------------------------
1 Year 11.99% 28.58%
Since Inception (12/12/97) 13.59% 28.07%(1)
</TABLE>
(1) For the period 11/30/97-12/31/98.
The S&P 500 Index is an index of common stock. The S&P 500 Index is unmanaged
and reflects the reinvestment of all dividends paid by stocks included in the
index. Unlike the performance figures of the Fund, the S&P 500 Index's
performance does not reflect the effect of expenses.
5
<PAGE>
FEE TABLES
The following tables describe the various fees and expenses that you will pay if
you invest in the Fund.
<TABLE>
<S> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of the
offering price
4.00%
Maximum Sales Charge (Load) Imposed on Reinvested Distributions None
Maximum Deferred Sales Charge (Load) 1.00%(1)
Redemption Fee None
Exchange Fee None
</TABLE>
(1) Applicable only on purchases of $1 million or more.
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES (1) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees 0.65%
Distribution (12b-1) Fees None
Other Expenses 0.79%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.44%
Fee Waiver and Expense Reimbursement(2) 0.34%
Net Expenses 1.10%
</TABLE>
(1) Based on amounts incurred during the Fund's fiscal year ended March 31, 1999
stated as a percentage of assets.
(2) Based on contractual fee waivers and expense reimbursements that may
increase after July 31, 2000.
6
<PAGE>
EXAMPLE
The following is a hypothetical example intended to help you compare the cost of
investing in the Fund to the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Fund for the time periods
indicated, you pay the maximum sales charge and then redeem all of your shares
at the end of these periods. The example also assumes that your investment has a
5% annual return, that the Fund's operating expenses remain the same as stated
in the above table and that distributions are reinvested. Although your actual
costs may be higher or lower, under these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$541 $837 $1,155 $2,055
7
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation.
INVESTMENT STRATEGIES
[Margin callout: CONCEPTS TO UNDERSTAND
FUNDAMENTAL ANALYSIS means the analysis of a company's financial
condition to forecast the future value of its stock price. This
analysis includes review of a company's balance sheet and income
statement, asset history, earnings history, product or service
development and management productivity
PRICE/EARNINGS RATIO means the price of a stock dividend by the
company's earnings per share
PRICE/CASH FLOW means the price of a stock dividend by free cash flow
per share
TECHNICAL ANALYSIS means the analysis of stock prices and trading
volume]
THE ADVISER'S PROCESS
The Adviser may invest in companies that have above average growth potential or
value not fully reflected in their stock price. The Adviser utilizes fundamental
analysis, valuation measures such as price/earnings ratios and price/cash flow
ratios and technical analysis to determine those companies whose shares are
attractive for purchase. In evaluating companies, the Adviser considers the
company's:
o Historical growth rate and return on capital
o Expected future growth rate and return on capital
o Financial condition
o Industry and competitive position in the industry
o Management quality
The Adviser constantly monitors the companies in the Fund's portfolio to
determine if there have been any fundamental changes in the companies. The
Adviser may sell a stock if:
o A more attractively priced stock is found or if funds are needed for
other purposes
o The underlying company experiences negative internal developments
o The underlying company experiences a decline in financial condition
o The underlying company experiences a significant erosion in
profitability, earnings or cash flow
o The security is overvalued compared to its fundamentals
o It is oversized compared to other holdings
8
<PAGE>
INVESTMENT POLICIES
The Fund invests primarily all of its total assets in the common stock of
domestic companies with market capitalizations of $2 billion or more that
possess above average growth potential or that possess value not yet fully
reflected in the stock's price. Although common atock often gives the owner the
right to vote on measures affecting the company's organization and operations,
th e Fund does not intend to exercise control over the management of the
companies in which it invests. Common stocks have a history of long-term growth
in value, but their prices tend to fluctuate over the short-term.
TEMPORARY DEFENSIVE MEASURES In order to respond to adverse market, economic, or
other conditions, the Fund may assume a temporary defensive position and invest
without limit in cash and prime quality cash equivalents such as commercial
paper and money market instruments. As a result, the Fund may be unable to
achieve its investment objective.
INVESTMENT RISKS
GENERAL The Fund's net asset value and investment return will fluctuate based
upon changes in the value of its portfolio securities. The market value of
securities in which the Fund invests is based upon the market's perception of
value and is not necessarily an objective measure of the securities' value.
There is no assurance that the Fund will achieve its investment goal. An
investment in the Fund is not by itself a complete or balanced investment
program.
There is also the risk that the market will not recognize the intrinsic value of
the stocks for an unexpectedly long time. The smaller a company's market
capitalization, the greater the potential for stock price fluctuations,
increased volatility due to lower trading volume, less publically available
information and less liquidity. There is also the risk that the
9
<PAGE>
Adviser's
judgment as to the growth potential or value of a stock may prove to be wrong.
Finally, a decline in investor demand for the stocks held by the Fund also may
adversely affect the value of these securities.
YEAR 2000 Certain computer systems may not process date-related information
properly on and after January 1, 2000. The Adviser is addressing this matter for
its systems. The Fund's other service providers have informed the Fund that they
are taking similar measures. This matter, if not corrected, could adversely
affect the services provided to the Fund or the companies in which the Fund
invests and, therefore, could lower the value of your shares.
10
<PAGE>
MANAGEMENT
The Fund is a series of Forum Funds (the "Trust"), an open-end, management
investment company (mutual fund). The business of the Trust and of the Fund is
managed under the direction of the Board of Trustees (the "Board"). The Board
formulates the general policies of the Fund and meets periodically to review the
Fund's performance, monitor investment activities and practices and discuss
other matters affecting the Fund. Additional information regarding the Board, as
well as the Trust's executive officers, may be found in the Statement of
Additional Information ("SAI").
THE ADVISER
The Fund's Adviser is Forum Investment Advisors, LLC, Two Portland Square,
Portland, Maine 04101. The Adviser is a privately owned company controlled by
John Y. Keffer, who is Chairman of the Board of the Trust.
Subject to the general control of the Board, the Adviser makes investment
decisions for the Fund. For its services, the Fund paid the Adviser an advisory
fee of 0.65% of the average daily net assets of the Fund during its most recent
fiscal year.
As of June 30, 1999, the Adviser had approximately $2.3 billion of assets under
management.
PORTFOLIO MANAGER
MARK D. KAPLAN Portfolio Manager of the Adviser, has been primarily responsible
for the day-to-day management of the Fund's portfolio since its inception on
December 12, 1997. Mr. Kaplan has over 15 years of experience in the investment
industry and, prior to his association with the Adviser in September 1995, was
Managing Director and Director of Research at H.M. Payson & Co., an investment
advisory and trust services company. Mr. Kaplan is a Chartered Financial
Analyst.
11
<PAGE>
OTHER SERVICE PROVIDERS
The Forum Financial Group ("Forum") of companies provide services to the Fund.
As of June 30, 1999, Forum provided administration and distribution services to
investment companies and collective investment funds with assets of
approximately $73 billion.
Forum Fund Services, LLC, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., is the distributor (principal
underwriter) of the Fund's shares. The distributor acts as the representative of
the Trust in connection with the offering of the Fund's shares. The distributor
may enter into arrangements with banks, broker-dealers or other financial
institutions through which investors may purchase or redeem shares and may, at
its own expense, compensate persons who provide services in connection with the
sale or expected sale of the Fund's shares.
Forum Administrative Services, LLC provides administrative services to the Fund,
Forum Accounting Services, LLC is the Fund's accountant, Forum Shareholder
Services, LLC ("Transfer Agent") is the Fund's transfer agent and Forum Trust,
LLC is the Fund's custodian.
FUND EXPENSES
The Fund pays for all of its expenses. The Fund's expenses are comprised of its
own expenses as well as Trust expenses that are allocated among the Fund and the
other funds of the Trust. The Adviser or other service providers may waive all
or any portion of their fees and/or reimburse certain expenses of the Fund. Any
waiver or expense reimbursement would have the effect of increasing the Fund's
performance for the period during which the waiver or reimbursement was in
effect.
Certain service providers have undertaken to waive a portion of their fees
and/or to reimburse certain expenses in order to limit the Fund's expenses
(excluding taxes, interest, portfolio transaction expenses and extraordinary
expenses) to 1.10% or less of the average daily net assets of the Fund.
12
<PAGE>
YOUR ACCOUNT
[Margin call out: HOW TO CONTACT THE FUND
Write to us at:
Forum Shareholder Services, LLC
P.O. Box 466
Portland, Maine 04112
Telephone us at:
(800) 94FORUM or (800) 943-6786 (Toll Free)
(207) 879-0001
Wire investments (or ACH payments) to us at:
Bankers Trust Company
New York, New York
ABA #021001033 For Credit to:
Forum Shareholder Services, LLC
Account # 01-465-547
Investors Growth Fund
(Your Name)
(Your Account Number)]
GENERAL INFORMATION
You may purchase or sell (redeem) shares at the net asset value of a share (NAV)
plus any applicable sales charge (or minus any applicable sales charge in the
case of redemptions) next calculated after the Transfer Agent receives your
request in proper form. For instance, if the Transfer Agent receives your
purchase request in proper form after 4:00 p.m., Eastern time, your transaction
will be priced at the next business day's NAV plus the applicable sales charge.
The Fund cannot accept orders that request a particular day or price for the
transaction or any other special conditions.
The Fund does not issue share certificates.
If you purchase shares directly from the Fund, you will receive monthly
statements and a confirmation of each transaction. You should verify the
accuracy of all transactions in your account as soon as you receive your
confirmations.
The Fund reserves the right to waive minimum investment amounts and may
temporarily suspend (during unusual market conditions) or discontinue any
service or privilege.
WHEN AND HOW NAV IS DETERMINED The Fund calculates its NAV as of the close of
the New York Stock Exchange (normally 4:00 p.m., Eastern time) on each weekday
except days when the New York Stock Exchange is closed. The time at which NAV is
calculated may change in case of an emergency. The Fund's NAV is determined by
taking the market value of all securities owned by the Fund (plus all other
assets such as cash), subtracting liabilities and then dividing the result (net
assets) by the number of shares outstanding. The Fund values securities for
which market quotations are readily available at current market value. If market
quotations are not readily available, then the Fund values securities at fair
value pursuant to procedures adopted by the Board.
13
<PAGE>
TRANSACTIONS THROUGH THIRD PARTIES If you invest through a broker or other
financial institution, the policies and fees (other than sales charges) charged
by that institution may be different than those of the Fund. Financial
institutions may charge transaction fees and may set different minimum
investments or limitations on buying or selling shares. These institutions may
also provide you with certain shareholder services such as periodic account
statements and trade confirmations summarizing your investment activity. Consult
a representative of your financial institution for further information.
BUYING SHARES
HOW TO MAKE PAYMENTS All investments must be in U.S. dollars and checks must be
drawn on U.S. banks.
CHECKS For individual, Uniform Gift to Minors Act ("UGMA") or Uniform
Transfers to Minors Act ("UTMA") accounts, the check must be made
payable to "Forum Funds" or to one or more owners of the account and
endorsed to "Forum Funds." For all other accounts, the check must be
made payable on its face to "Forum Funds." No other method of check
payment is acceptable (for instance, you may not pay by travelers
check).
ACH PAYMENT Instruct your financial institution to make an ACH
(automated clearinghouse) payment to us. These payments typically take
two days to settle. Your financial institution may charge you a fee for
this service.
WIRES Instruct your financial institution to make a Federal Funds wire
payment to us. Your financial institution may charge you a fee for this
service.
14
<PAGE>
MINIMUM INVESTMENTS The Fund accepts investments in the following minimum
amounts:
<TABLE>
<S> <C> <C>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENT
- -----------------------------------------------------------------------------------------------------------------------
Standard Account $2,000 $250
Traditional and Roth IRA Accounts $1,000 $250
Accounts With Systematic Investment Plans $250 $250
</TABLE>
<TABLE>
<S> <C>
ACCOUNT REQUIREMENTS
TYPE OF ACCOUNT REQUIREMENT
- --------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL, SOLE PROPRIETORSHIP AND JOINT ACCOUNTS: o Instructions must be signed by all persons
Individual accounts are owned by one person, as are sole required to sign exactly as their names appear on
proprietorship accounts. Joint accounts have two or more the account
owners (tenants)
GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA): o Depending on state laws, you can set up a
These custodial accounts provide a way to give money to a custodial account under the Uniform Gift to Minors
child and other tax benefits. An individual can give up Act or the Uniform Transfers to Minors Act
to $10,000 a year per child without paying Federal gift o The trustee must sign instructions in a manner
tax indicating trustee capacity
BUSINESS ENTITIES o For entities with officers, provide an original or
certified copy of a resolution that identifies the
authorized signers for the account
o For entities with partners or other interested
parties, provide a certified partnership
agreement or organizational document, or
certified pages from the partnership agreement or
organizational document, that identify the
partners or interested parties
TRUSTS o The trust must be established before an
account can be opened
o Provide a certified trust document, or the
pages from the trust document, that identify the
trustees
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
INVESTMENT PROCEDURES
- ----------------------------------------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO YOUR ACCOUNT
- ----------------------------------------------------------------------------------------------------------------------
BY CHECK BY CHECK
o Call or write us for an account application o Fill out an investment slip from a
o Complete the application confirmation or write us a letter
o Mail us your application and a check o Write your account number on your check
o Mail us the slip (or your letter) and the check
BY WIRE BY WIRE
o Call or write us for an account application o Call to notify us of your incoming wire
o Complete the application o Instruct your bank to wire your money to us
o Call us and we will assign you an account number
o Mail us your application
o Instruct your bank to wire your money to us
BY ACH PAYMENT BY SYSTEMATIC INVESTMENT
o Call or write us for an account application o Complete the systematic investment section of the
o Complete the application application
o Call us and we will assign you an account number o Attach a voided check to your application
o Mail us your application o Mail us the completed application
o Make an ACH payment
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
SYSTEMATIC INVESTMENTS You may invest a specified amount of money in the Fund
once or twice a month on specified dates. These payments are taken from your
bank account by ACH payment. Systematic investments must be for at least $250.
LIMITATIONS ON PURCHASES The Fund reserves the right to refuse any purchase
(including exchange) request, particularly requests that could adversely affect
the Fund or its operations. This includes those from any individual or group
who, in the Fund's view, is likely to engage in excessive trading (usually
defined as more than four redemptions or exchanges out of the Fund within a
calendar year).
16
<PAGE>
CANCELED OR FAILED PAYMENTS The Fund accepts checks and ACH transfers at full
value subject to collection. If the Fund does not receive your payment for
shares or you pay with a check or ACH transfer that does not clear, your
purchase will be canceled. You will be responsible for any losses or expenses
incurred by the Fund or the Transfer Agent, and the Fund may redeem shares you
own in the account (or another identically registered account that you maintain
with the Transfer Agent) as reimbursement. The Fund and its agents have the
right to reject or cancel any purchase or exchange due to nonpayment.
SELLING SHARES
The Fund processes redemption orders promptly. Generally, the Fund will send
redemption proceeds to you within a week. Delays may occur in cases of very
large redemptions, excessive trading or during unusual market conditions. The
Fund may delay sending redemption proceeds until it has collected payment for
the shares you are selling, which may take up to 15 calendar days.
17
<PAGE>
TO SELL SHARES FROM YOUR ACCOUNT
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The Fund name
o The dollar amount or number of shares you want to sell
o How and where to send the redemption proceeds
o Obtain a signature guarantee (if required)
o Obtain other documentation (if required)
o Mail us your request and documentation
BY WIRE
o Wire redemptions are only available if your redemption is for $5,000 or
more and you did not decline wire redemption privileges on your account
application
o Call us with your request (unless you have declined telephone redemption
privileges - See "By Telephone") OR
o Mail us your request (See "By Mail")
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which the account is registered
o Additional form of identification
o Redemption proceeds will be:
o Mailed to you Or
o Wired to you (unless you declined wire redemption privileges-See "By
Wire")
SYSTEMATICALLY
o Complete the systematic withdrawal section of the application
o Attach a voided check to your application
o Mail us your completed application
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTION PRIVILEGES You may redeem your shares by telephone unless
you declined telephone redemption privileges on your account application. You
may be responsible for any fraudulent telephone order as long as the Transfer
Agent takes reasonable measures to verify the order.
WIRE REDEMPTION PRIVILEGES You may redeem your shares by wire unless you
declined wire redemption privileges on your account application. The minimum
amount that may be redeemed by wire is $5,000.
18
<PAGE>
SYSTEMATIC WITHDRAWALS You may redeem a specified amount of money from your
account once a month on a specified date. These payments are sent from your
account to a designated bank account by ACH payment. Systematic withdrawals must
be for at least $250.
SIGNATURE GUARANTEE REQUIREMENTS To protect you and the Fund against fraud,
signatures on certain requests must have a "signature guarantee." A signature
guarantee verifies the authenticity of your signature. You can obtain one from
most banking institutions or securities brokers, but not from a notary public.
For requests made in writing, a signature guarantee is required for any of the
following:
o Sales of over $50,000 worth of shares
o Changes to a shareholder's record name or address
o Redemptions from an account for which the address or account
registration has changed within the last 30 days
o Sending redemption proceeds to any person, address, brokerage firm or
bank account not on record
o Sending redemption proceeds to an account with a different
registration (name or ownership) from yours
o Changes to systematic investment or withdrawal, distribution,
telephone redemption or exchange option or any other election in
connection with your account
SMALL ACCOUNTS If the value of your account falls below $1,000 ($500 for IRA
accounts), the Fund may ask you to increase your balance. If the account value
is still below $1,000 ($500 for IRA accounts) after 60 days, the Fund may close
your account and send you the proceeds. The Fund will not close your account if
it falls below these amounts solely as a result of a reduction in your account's
market value.
REDEMPTIONS IN KIND The Fund reserves the right to pay redemption proceeds in
portfolio securities rather than in cash. These redemptions "in kind" usually
occur if the amount to be redeemed is large enough to
19
<PAGE>
affect the Fund's operations (for example, if it represents more than 1% of the
Fund's assets).
LOST ACCOUNTS The Transfer Agent will consider your account lost if
correspondence to your address of record is returned as undeliverable, unless
the Transfer Agent determines your new address. When an account is lost, all
distributions on the account will be reinvested in additional Fund shares. In
addition, the amount of any outstanding (unpaid for six months or more) checks
for distributions that have been returned to the Transfer Agent will be
reinvested and the checks will be canceled.
SALES CHARGES
PURCHASES A sales charge is assessed on purchases of Fund shares as follows:
<TABLE>
<S> <C> <C> <C>
SALES CHARGE (LOAD) AS %
OF:
PUBLIC
AMOUNT OF PURCHASE OFFERING PRICE NET ASSET VALUE* REALLOWANCE %
- ---------------------------------------------------------------------------------------------------------------
$0 to $49,999 4.00 4.17 3.50
$50,000 to $99,999 3.50 3.63 3.00
$100,000 to $249,999 3.00 3.09 2.50
$250,000 to $499,999 2.50 2.56 2.10
$500,000 to $999,999 2.00 2.04 1.70
$1,000,000 and up 0.00 0.00 1.00
</TABLE>
* Rounded to the nearest one-hundredth percent.
The offering price for the Fund's shares includes the relevant sales charge. The
commission paid to the distributor is the sales charge less the reallowance paid
to certain financial institutions purchasing shares. Normally, reallowances are
paid as indicated in the above table. From time to time, however, the
distributor may elect to reallow the entire sales charge for all sales during a
particular period.
From time to time and at its own expense, the distributor may provide
compensation, including financial assistance, to certain dealers in
20
<PAGE>
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns or other dealer-sponsored special
events. Compensation may include the provision of travel arrangements and
lodging, tickets for entertainment events and merchandise.
REDEMPTIONS A contingent deferred sales charge ("CDSC") is assessed on
redemptions of shares that were part of a purchase of $1 million or more. The
CDSC is assessed as follows:
REDEEMED WITHIN SALES CHARGE
----------------------------------------------------------------------
First year of purchase 1.00%
Second year of purchase 0.50%
The CDSC is paid on the lower of the NAV of shares redeemed or the cost of the
shares. To satisfy a redemption request, the Fund will first liquidate shares
that are not subject to a CDSC such as shares acquired with reinvested dividends
and capital gains. The Fund will then liquidate shares in the order that they
were first purchased until your redemption request is satisfied.
REDUCED SALES CHARGES You may qualify for a reduced sales charge on Fund
purchases under rights of accumulation or a letter of intent. Certain persons
may also be eligible to purchase or redeem Fund shares without a sales charge.
Please see the SAI for further information.
EXCHANGE PRIVILEGES
You may exchange your Fund shares and buy shares of another fund of the Trust by
telephone or in writing. For a list of funds available for exchange, you may
call the Transfer Agent. If you exchange into a fund that has a higher sales
charge than the Fund you will have to pay the difference between that fund's
sales charge and the Fund's sales charge. If you exchange into a Fund that has
no sales charge or a lower sales charge than the Fund, you will not have to pay
a
21
<PAGE>
sales charge at the time of exchange. Because exchanges are a sale and purchase
of shares, they may have tax consequences.
REQUIREMENTS You may make exchanges only between identically registered accounts
(name(s), address and taxpayer ID number). There is currently no limit on
exchanges, but the Fund reserves the right to limit exchanges. You may exchange
your shares by mail or telephone, unless you declined telephone redemption
privileges on your account application. You may be responsible for any
fraudulent telephone order as long as the Transfer Agent takes reasonable
measures to verify the order.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The names of the Fund from which you are exchanging and into which you
are exchanging
o The dollar amount or number of shares you want to sell (and exchange)
o Open a new account and complete an account application if you are requesting
different shareholder privileges
o Mail us your request and documentation
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which account is registered
o Additional form of identification
- --------------------------------------------------------------------------------
RETIREMENT ACCOUNTS
The Fund offers IRA accounts, including traditional and Roth IRA accounts.
Before investing in any IRA or other retirement plan, you should consult your
tax adviser. Whenever making an investment in an IRA, be sure to indicate the
year in which the contribution is made.
22
<PAGE>
OTHER INFORMATION
DISTRIBUTIONS
The Fund distributes its net investment income quarterly and net capital gain at
least annually.
All distributions are reinvested in additional shares, unless you elect to
receive distributions in cash. For Federal income tax purposes, distributions
are treated the same whether they are received in cash or reinvested. Shares
become entitled to receive distributions on the day after the shares are issued.
TAXES
The Fund generally intends to operate in a manner such that it will not be
liable for Federal income or excise tax.
The Fund's distribution of net income (including short-term capital gain) is
taxable to you as ordinary income. The Fund's distributions of long-term capital
gain is taxable to you as long-term capital gain regardless of how long you
have held your Fund shares.
If you buy shares shortly before the Fund makes a distribution, you may pay the
full price for the shares and then receive a portion of the price back as a
distribution that may be taxable to you.
The sale or exchange of Fund shares is a taxable transaction for Federal income
tax purposes.
The Fund will send you information about the Fund's distributions paid during
the year shortly after December 31 of each year.
For further information about the tax effects of investing in the Fund,
including state and local tax matters, please see the SAI and consult your tax
adviser.
23
<PAGE>
ORGANIZATION
The Trust is a Delaware business trust. The Fund does not expect to hold
shareholders' meetings unless required by Federal or Delaware law. Shareholders
of each series are entitled to vote at shareholders' meetings unless a matter
relates only to specific series (such as approval of an advisory agreement for
the Fund). From time to time, large shareholders may control the Fund or the
Trust.
24
<PAGE>
FINANCIAL HIGHLIGHTS
The following table is intended to help you understand the Fund's financial
performance. Total return in the table represents the rate an investor would
have earned (or lost) on an investment in the Fund (assuming the reinvestment of
all distributions). This information has been audited by Deloitte & Touche LLP.
The Fund's financial statements and the auditor's report are included in the
Annual Report dated March 31, 1999, which is available upon request, without
charge.
<TABLE>
<S> <C> <C>
YEAR ENDED MARCH 31,
1999 1998(a)
- ------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SINGLE SHARE
Beginning Net Asset Value Per Share $11.35 $10.00
Income from Investment Operations:
Net Investment Income 0.06 0.03
Net Realized and Unrealized Gain
(Loss) on Investments 0.61 1.32
Total from Investment Operations 0.67 1.35
Less Distributions:
From Net Investment Income (0.09) -
From Net Realized Capital Gain (0.33) -
Total Distributions (0.42) -
Ending Net Asset Value Per Share $11.60 $11.35
OTHER INFORMATION
Ratios to Average Net Assets:
Expenses 1.10% 1.10% (b)
Gross Expenses(c) 1.44% 1.56% (b)
Net Investment Income 0.51% 0.96% (b)
Total Return(d) 6.25% 13.50%
Portfolio Turnover Rate 26.82% 0.00%
Net Assets at End of Period $29,107 $33,899
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Fund commenced operations on December 12, 1997.
(b) Annualized.
(c) Reflects expense ratio in the absence of fee waivers and expense
reimbursements.
(d) Does not include sales charges.
25
<PAGE>
[ACCOUNT APPLICATION]
<PAGE>
[ACCOUNT APPLICATION CONT.]
<PAGE>
<TABLE>
<S> <C>
- --------------------------------
FOR MORE INFORMATION FORUM
- -------------------------------- FUNDS
The following documents are available free upon request:
INVESTORS GROWTH FUND
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the Fund's investments is available in the
Fund's annual and semi-annual
reports to shareholders. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI provides more detailed information about the Fund and is
incorporated by reference into this Prospectus.
You can get a free copy of both reports and the SAI, request other
information and discuss your questions about the Fund by contacting the
Fund at:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
800-943-6786
800-94FORUM
207-879-0001
[Logo]
You can also review the Fund's reports and SAI at the Public Reference Forum Funds
Room of the Securities and Exchange Commission. You can get text-only P.O. Box 446
copies, for a fee, by writing to or calling the following: Portland, Maine 04112
800-943-6786
Public Reference Room 800-94FORUM
Securities and Exchange Commission 207-879-0001
Washington, D.C. 20549-6009
Telephone: 800-SEC-0330
Free copies are available from the SEC's Internet website
at http://www.sec.gov.
Investment Company Act File No. 811-3023.
</TABLE>
<PAGE>
FORUM
FUNDS ----------------------------------------
PROSPECTUS
----------------------------------------
AUGUST 1, 1999
PAYSON VALUE FUND
PAYSON BALANCED FUND
PAYSON VALUE FUND SEEKS HIGH TOTAL
RETURN BY INVESTING PRIMARILY IN
COMMON STOCK AND CONVERTIBLE SECURITIES.
PAYSON BALANCED FUND SEEKS HIGH CURRENT
INCOME AND CAPITAL APPRECIATION BY
INVESTING PRIMARILY IN COMMON STOCK AND
CONVERTIBLE SECURITIES.
THE FUNDS DO NOT PAY RULE 12B-1 (DISTRIBUTION) FEES.
The Securities and Exchange Commission
has not approved or disapproved either
Fund's shares or determined whether this
Prospectus is accurate or complete. Any
representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
[Picture graphics]
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY 2
PERFORMANCE 6
FEE TABLES 9
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS 11
MANAGEMENT 15
YOUR ACCOUNT 18
How to Contact the Funds 18
General Information 18
Buying Shares 19
Selling Shares 22
Sales Charges 25
Exchange Privileges 26
Retirement Accounts 27
OTHER INFORMATION 28
FINANCIAL HIGHLIGHTS 30
<PAGE>
RISK/RETURN SUMMARY
PAYSON VALUE FUND
[Margin callout: Concepts to Understand
COMMON STOCK means an equity or ownership interest in a company
CONVERTIBLE SECURITY means a security such as a preferred stock or
bond that may be converted into a specified number of shares of common
stock
VALUE COMPANY means a company whose market price is low relative to
its price histories and/or the stock of comparable companies
MARKET CAPITALIZATION means the value of a company's common stock in
the stock market]
INVESTMENT OBJECTIVE Payson Value Fund (a "Fund") seeks high total return
(capital appreciation and current income).
PRINCIPAL INVESTMENT STRATEGY The Fund primarily invests in common stock and
convertible securities of large and medium capitalization domestic value
companies. Large domestic companies typically have market capitalizations in
excess of $12 billion while medium domestic companies typically have market
capitalizations in the range of $2 billion to $12 billion.
2
<PAGE>
PAYSON BALANCED FUND
[Margin callout: Concepts to Understand
DEBT SECURITY means a security such as a bond or note that obligates
the issuer to pay the security owner a specified sum of money
(interest) at set intervals as well as to repay the principal amount of
the security at its maturity
BOND means a debt security with a long-term maturity of usually 5 years
or longer
NOTE means a debt security with a short-term maturity, usually less
than 5 years
U.S. GOVERNMENT SECURITIES means debt securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities
INVESTMENT GRADE SECURITY means a security rated in one of the four
highest ratings categories by a nationally recognized statistical rating
organization ("NRSRO") such as Standard & Poor's or unrated and
determined to be of comparable quality]
INVESTMENT OBJECTIVE Payson Balanced Fund (a "Fund") seeks a combination of high
current income and capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES The Fund primarily invests in common and
convertible securities stock of large and medium capitalization domestic value
companies. The Fund also invests in investment grade debt securities including
U.S. Government Securities and corporate bonds and notes that have an average
weighted maturity between 3 and 5 years. Large domestic companies typically have
market capitalizations in excess of $12 billion while medium domestic companies
typically have market capitalizations in the range of $2 billion to $12 billion.
The Fund may only purchase a security if, immediately after purchase, at least
25% of the Fund's net assets are invested in debt securities, including U.S.
Government Securities.
3
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
GENERAL RISKS An investment in a Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. You could lose money on your investment in a Fund or a Fund
could underperform other investments. The principal risks of an investment in a
Fund include:
o The stock or bond market goes down
o Value stocks fall out of favor with the stock market
o The stock market continues to undervalue the stocks in a Fund's
portfolio
o The prices of medium capitalization securities may fluctuate more
significantly than the securities of larger companies
o The judgment of a Fund's investment adviser (the "Adviser") as to the
value of a stock proves to be wrong
RISKS OF DEBT SECURITIES Because Payson Balanced Fund invests in debt
securities, the Fund has the following additional risks:
o The Fund's share price, yield and total return will fluctuate in
response to price movements in the debt securities markets
o The value of most debt securities fall when interest rates rise; the
longer a debt security's maturity and the lower its credit quality,
the more its value typically falls in response to an increase in
interest rates
o The Fund will not collect interest and principal payments on a debt
security if the issuer defaults
o Issuers may prepay fixed rate securities when interest rates fall
forcing the Fund to invest in securities with lower interest rates
4
<PAGE>
WHO MAY WANT TO INVEST IN THE FUNDS
A Fund may be appropriate for you if you:
o Are willing to tolerate significant changes in the value of your
investment
o Are pursuing a long-term goal
o Are willing to accept higher short-term risk
An investment in Payson Balanced Fund also may be appropriate for you if you
seek income with a greater degree of price stability than that which is offered
through stock investments.
A Fund may not be appropriate for you if you:
o Want an investment that pursues market trends or focuses only on
particular sectors or industries
o Need regular income or stability of principal
o Are pursuing a short-term goal or investing emergency reserves
5
<PAGE>
PERFORMANCE
The following charts illustrate the variability of a Fund's returns. These
charts and the following tables provide some indication of the risks of
investing in a Fund by showing changes in each Fund's performance from year to
year and how each Fund's returns compare to a broad range of market performance.
PERFORMANCE INFORMATION REPRESENTS ONLY PAST PERFORMANCE AND DOES NOT
NECESSARILY INDICATE FUTURE RESULTS.
PAYSON VALUE FUND
The following chart shows the annual total returns for each full calendar year
that the Fund has operated. The chart does not reflect sales charges and, if
reflected, the annual total returns would be less than shown.
[EDGAR REPRESENTATION OF GRAPH CHART]
Past Performance Chart
Year Average Annual Total Return
- ---- ---------------------------
1993 19.38%
1994 -3.67%
1995 28.18%
1996 18.95%
1997 31.62%
1998 5.79%
The calendar year-to-date total return as of June 30, 1999 was 12.97%.
During the periods shown in the chart, the highest quarterly return was 16.87%
(for the quarter ended December 31, 1998) and the lowest quarterly return was
- -15.50% (for the quarter ended September 30, 1998).
The following table compares the Fund's average annual total return as of
December 31, 1998 to the Standard & Poor's Composite 500 Index ("S&P 500
Index").
6
<PAGE>
<TABLE>
<S> <C> <C>
Year(s) Payson Value Fund S&P 500 Index
- ---------------------------------------------------------------------------------------------------------------
1 Year 1.56% 28.58%
5 Years 14.44% 24.03%
Since Inception (7/31/92) 15.39% 20.79%
</TABLE>
The S&P 500 Index is a market index of common stock. The S&P 500 Index is
unmanaged and reflects reinvestment of dividends. Unlike the performance figures
of the Fund, the S&P 500 Index's performance does not reflect the effect of
expenses.
PAYSON BALANCED FUND
The following chart shows the annual total returns for each full calendar year
that the Fund has operated. The chart does not reflect sales charges and, if
reflected, the annual total returns would be less than shown.
[EDGAR REPRESENTATION OF GRAPH CHART]
Past Performance Chart
Year Average Annual Total Return
- ---- ---------------------------
1993 15.97%
1994 -4.20%
1995 28.33%
1996 11.20%
1997 20.99%
1998 3.53%
The calendar year-to-date total return as of June 30, 1999 was 2.86%.
During the periods shown in the chart, the highest quarterly return was 15.81%
(for the quarter ended December 31, 1998) and the lowest quarterly return was
- -12.26% (for the quarter ended September 30, 1998).
7
<PAGE>
The following table compares the Fund's average annual total returns as of
December 31, 1998 to the S&P 500 Index.
<TABLE>
<S> <C> <C>
YEAR(S) PAYSON BALANCED FUND S&P 500 INDEX
- ----------------------------------------------------------------------------------------------------------
1 Year -0.61%% 28.58%
5 Years 10.45%% 24.03%
Since Inception (11/25/91) 11.46% 21.05%(1)
</TABLE>
(1) For the period 11/30/91-12/31/98.
The S&P 500 Index is a market index of common stock. The S&P 500 Index is
unmanaged and reflects the reinvestment of dividends. Unlike the performance
figures of the Fund, the S&P 500 Index's performance does not reflect the effect
of expenses.
8
<PAGE>
FEE TABLES
The following tables describe the various fees and expenses that you will pay if
you invest in a Fund.
<TABLE>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
- -----------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of the offering price) 4.00%
Maximum Sales Charge (Load) Imposed on Reinvested Distributions None
Maximum Deferred Sales Charge (Load) 1.00%(1)
Redemption Fee None
Exchange Fee None
</TABLE>
(1) Applicable only on purchases of $1 million or more.
<TABLE>
<S> <C>
Annual Fund Operating Expenses(1) (expenses that are deducted from Fund assets)
- ---------------------------------------------------------------------------------------------------------------
PAYSON VALUE FUND
Management Fees 0.80%
Distribution (12b-1) Fees None
Other Expenses 0.95%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.75%
Fee Waiver and Expense Reimbursement(2) 0.30%
Net Expenses 1.45%
PAYSON BALANCED FUND
Management Fees 0.60%
Distribution (12b-1) Fees None
Other Expenses 0.89%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.49%
Fee Waiver and Expense Reimbursement(2) 0.34%
Net Expenses 1.15%
</TABLE>
(1) Based on amounts incurred during each Fund's fiscal year ended March
31, 1999 stated as a percentage of assets.
(2) Based on contractual fee waivers and expense reimbursements that may
increase after July 31, 2000.
9
<PAGE>
EXAMPLE
The following is a hypothetical example intended to help you compare the cost of
investing in each Fund to the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in a Fund for the time periods
indicated, you pay the maximum sales charge and then redeem all of your shares
at the end of those periods. The example also assumes that your investment has a
5% annual return, that the Fund's operating expenses remain the same as stated
in the above table and that distributions are reinvested. Although your actual
costs may be higher or lower, under these assumptions your costs would be:
PAYSON VALUE FUND PAYSON BALANCED FUND
- --------------------------------------------------------------------------------
1 year $571 $546
3 years $929 $852
5 years $1,311 $1,181
10 years $2,380 $2,108
10
<PAGE>
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
INVESTMENT OBJECTIVES
PAYSON VALUE FUND seeks high total return (capital appreciation and current
income) by investing in a diversified portfolio of common stock and securities
convertible into common stock which appear undervalued in the market place.
PAYSON BALANCED FUND seeks a combination of high current income and capital
appreciation by investing in common stock and securities convertible into common
stock which appear to be undervalued and in investment-grade debt securities,
including U.S. Government, government agency and corporate obligations.
INVESTMENT STRATEGIES
[Margin callout: Concepts to Understand
FUNDAMENTAL ANALYSIS means the analysis of a company's financial
condition to forecast the future value of its stock price. This
analysis includes review of a company's balance sheet and income
statement, asset history, earnings history, product or service
development and management productivity
PRICE/EARNINGS RATIO means the price of a stock divided by the
company's earnings per share
PRICE/SALES RATIO means the price of a stock divided by the company's
annual sales per share
PRICE/BOOK RATIO means the price of a stock divided by the company's
book value per share
DIVIDEND YIELD means the percentage rate of return paid on common or
preferred stock in dividends]
THE ADVISER'S PROCESS
The Adviser maintains a long-term, equity-oriented perspective, being much less
concerned with investment performance on a quarterly or shorter basis than with
real, long-term growth of income. Investment time horizon is the paramount
determinant of long-term investment strategy, and each Fund has a long-term time
horizon.
The Adviser uses both a quantitative and a fundamental approach to identify
stocks that are undervalued compared to the company's financial condition. The
Adviser first conducts a fundamental analysis of prospective companies to
determine their near and long-term financial prospects and then uses
quantitative measurements, including price/earnings ratios, price/book ratios,
price/sales ratios, dividend yields and profitability, to select those stocks
that appear undervalued.
With respect to Payson Balanced Fund's investment in debt securities, the
Adviser continuously monitors interest rate outlooks, the shape of
11
<PAGE>
the yield curve and other economic factors to determine an appropriate maturity
profile for the Fund's investment portfolio consistent with the Fund's
objective. In particular, the Adviser watches the yield spreads between higher
and lower quality debt securities, between different sectors of the economy, and
between different types of debt securities to identify those that provide the
highest yield at the best price.
The Adviser monitors the investments in a Fund's portfolio to determine if there
have been fundamental changes in the companies or issuers whose securities are
held. The Adviser may sell a security if:
o The security subsequently fails to meet the Adviser's initial
investment criteria
o A more attractive security is found or if funds are needed for other
purposes
o The Adviser believes that the security has reached its appreciation
potential
o Revised economic forecast or interest rate outlook requires a
repositioning of debt securities held by Payson Balanced Fund
INVESTMENT POLICIES
PAYSON VALUE FUND The Fund invests primarily in common stock and convertible
securities of large and medium size domestic companies with market
capitalizations of $2 billion or more. Large domestic companies typically have
market capitalizations in excess of $12 billion while medium domestic companies
typically have market capitalizations in the range of $2 billion to $12 billion.
PAYSON BALANCED FUND The Fund invests primarily in common stock and investment
grade debt securities of large and medium size domestic companies with market
capitalizations in excess of $2 billion and in investment grade debt securities.
Large domestic companies typically have market capitalizations in excess of $12
billion while medium domestic companies typically have market capitalizations in
the range of
12
<PAGE>
$2 billion to $12 billion. The Fund may also invest in investment grade debt
securities including U.S. Government Securities and corporate bonds and notes.
The Fund may only purchase a security if, immediately after purchase, at least
25% of the Fund's net assets are invested in debt securities. Normally, the Fund
invests in securities with varying maturities ranging from short-term
(overnight) to 30 years. Generally, the average dollar-weighted maturity of the
Fund's debt investments will be between 3 and 5 years.
TEMPORARY DEFENSIVE MEASURES In order to respond to adverse market, economic or
other conditions, each Fund may assume a temporary defensive position and invest
without limit in cash and prime quality cash equivalents such as commercial
paper and money market instruments. As a result, a Fund may be unable to achieve
its investment objective.
INVESTMENT RISKS
GENERAL A Fund's net asset value and total return will fluctuate based upon
changes in the value of its portfolio securities. The market value of securities
in which a Fund invests is based upon the market's perception of value and is
not necessarily an objective measure of the securities' value. There is no
assurance that a Fund will achieve its investment objective. An investment in a
Fund is not by itself a complete or balanced investment program.
Because a Fund uses a value approach to select potential stock or debt
securities, there is the risk that the market will not recognize the intrinsic
value of the stocks or bonds for an unexpectedly long time. Further, the prices
of medium capitalization securities may fluctuate more significantly than the
securities of larger companies. Generally, this increased volatility is due to
the fact that the stock of medium capitalization companies is traded less
frequently and is less liquid than the stock of large capitalization companies.
Also, there is usually less information available
13
<PAGE>
on medium capitalization companies than on larger capitalization companies.
Finally, there is also the risk that the Adviser's judgment as to the value of a
stock or bond may prove to be wrong.
RISKS OF DEBT SECURITIES An investment in Payson Balanced Fund is subject to
additional risks because it invests in debt securities. The value of your
investment in the Fund may change in response to changes in interest rates. An
increase in interest rates typically causes a fall in the value of the debt
securities in which the Fund invests. Issuers may pre-pay fixed rate securities
when interest rates fall, forcing the Fund to invest in securities with lower
interest rates. Your investment in the Fund is also subject to the risk that the
financial condition of an issuer of a security held by the Fund may cause it to
default or become unable to pay interest or principal due on the security.
YEAR 2000 Certain computer systems may not process date-related information
properly on and after January 1, 2000. The Adviser is addressing this matter for
its systems. The Funds' other service providers have informed the Funds that
they are taking similar measures. This matter, if not corrected, could adversely
affect the services provided to the Funds or the companies and issuers in which
the Funds invest and, therefore, could lower the value of your shares.
14
<PAGE>
MANAGEMENT
Each Fund is a series of Forum Funds (the "Trust"), an open-end, management
investment company (mutual fund). The business of the Trust and of each Fund is
managed under the direction of the Board of Trustees (the "Board"). The Board
formulates the general policies of each Fund and meets periodically to review
each Fund's performance, monitor investment activities and practices and discuss
other matters affecting the Funds. Additional information regarding the Board,
as well as the Trust's executive officers, may be found in the Statement of
Additional Information ("SAI").
THE ADVISER
Each Fund's adviser is H. M. Payson & Co., One Portland Square, P.O. Box 31,
Portland, Maine 04112. The Adviser was founded in 1854 and was incorporated in
Maine in 1987, making it one of the oldest investment firms in the United States
operating under its original name.
Subject to the general control of the Board, the Adviser makes investment
decisions for each Fund. For its services, Payson Value Fund paid the Adviser an
advisory fee of 0.80% of its average daily net assets and Payson Balanced Fund
paid the Adviser an advisory fee 0.65% of its average daily net assets during
the most recent fiscal year.
As of June 30, 1999, the Adviser had approximately $1.3 billion of assets under
management.
15
<PAGE>
PORTFOLIO MANAGERS
JOHN C. KNOX Managing Director and Senior Research Analyst of the Adviser, has
been primarily responsibility for the day-to-day management of Payson Value
Fund's portfolio since July 10, 1995. Mr. Knox has over 24 years of experience
in the investment industry and has been associated with the Adviser since 1981.
Mr. Knox is a Chartered Financial Analyst.
PETER E. ROBBINS Managing Director and Director of Research of the Adviser, has
been primarily responsible for the day-to-day management of Payson Balanced Fund
since April 1, 1993. Mr. Robbins has over 19 years of experience in the
investment industry and has been associated with the Adviser since 1982, except
for the period from January 1988 to October 1990. During that period Mr. Robbins
was president of Mariner Capital Group, a real estate development and
non-financial asset management business. Mr. Robbins is a Chartered Financial
Analyst.
OTHER SERVICE PROVIDERS
The Forum Financial Group ("Forum") of companies provide services to each Fund.
As of June 30, 1999, Forum provided administration and distribution services to
investment companies and collective investment funds with assets of
approximately $73 billion.
Forum Fund Services, LLC, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., is the distributor (principal
underwriter) of each Fund's shares. The distributor acts as the representative
of the Trust in connection with the offering of each Fund's shares. The
distributor may enter into arrangements with banks, broker-dealers or other
financial institutions through which investors
16
<PAGE>
may purchase or redeem shares and may, at its own expense, compensate persons
who provide services in connection with the sale or expected sale of each Fund's
shares.
Forum Administrative Services, LLC provides administrative services to each
Fund, Forum Accounting Services, LLC is each Fund's fund accountant, Forum
Shareholder Services, LLC ("Transfer Agent") is each Fund's transfer agent and
Forum Trust, LLC is each Fund's custodian.
FUND EXPENSES
Each Fund pays for all of its expenses. Each Fund's expenses are comprised of
its own expenses as well as Trust expenses that are allocated among the Fund and
the other funds of the Trust. The Adviser or other service providers may waive
all or any portion of their fees and reimburse certain expenses of a Fund. Any
waiver or expense reimbursement increases a Fund's performance for the period
during which the waiver is in effect.
Certain service providers have undertaken to waive a portion of their fees
and/or reimburse certain expenses in order to limit expenses (excluding taxes,
interest, portfolio transaction expenses and extraordinary expenses) to 1.45% or
less of the average daily net assets of Payson Value Fund and 1.15% or less of
the average daily net assets of the Payson Balanced Fund.
17
<PAGE>
YOUR ACCOUNT
[Margin call out: HOW TO CONTACT THE FUNDS
Write to us at:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
Telephone us at:
(800) 805-8258 (Toll Free)
(207) 879-0001
Wire investments (or ACH payments) to us at:
Bankers Trust Company
New York, New York
ABA #021001033 For Credit to:
Forum Shareholder Services, LLC
Account # 01-465-547
Re: (Name of Your Fund)
(Your Name)
(Your Account Number)]
GENERAL INFORMATION
You may purchase or sell (redeem) shares at the net asset value of a share (NAV)
plus any applicable sales charge (or minus any applicable sales charge in the
case of redemptions) next calculated after the Transfer Agent receives your
request in proper form. For instance, if the Transfer Agent receives your
purchase request in proper form after 4:00 p.m., Eastern time, your transaction
will be priced at the time of the next business day's NAV plus or minus the
applicable sales load. A Fund cannot accept orders that request a particular day
or price for the transaction or any other special conditions.
The Funds do not issue share certificates.
If you purchase shares directly from a Fund, you will receive quarterly
statements and a confirmation of each transaction. You should verify the
accuracy of all transactions in your account as soon as you receive your
confirmations.
Each Fund reserves the right to waive minimum investment amounts and may
temporarily suspend (during unusual market conditions) or discontinue any
service or privilege.
WHEN AND HOW NAV IS DETERMINED Each Fund calculates its NAV as of the close of
the New York Stock Exchange (normally 4:00 p.m., Eastern time) on each weekday
except days when the New York Stock Exchange is closed. The time at which NAV is
calculated may change in case of an emergency. A Fund's NAV is determined by
taking the market value of all securities owned by the Fund (plus all other
assets such as cash), subtracting all liabilities and then dividing the result
(net assets) by the number of shares outstanding. A Fund values securities for
which market quotations are readily available at current market value. If market
quotations are not readily available, then a Fund values securities at fair
value pursuant to procedures adopted by the Board.
18
<PAGE>
TRANSACTIONS THROUGH THIRD PARTIES If you invest through a broker or other
financial institution, the policies and fees (other than sales charges) charged
by that institution may be different than those of a Fund. Financial
institutions may charge transaction fees and may set different minimum
investments or limitations on buying or selling shares. These institutions may
also provide you with certain shareholder services such as periodic account
statements and trade confirmations summarizing your investment activity. Consult
a representative of your financial institution for more information.
BUYING SHARES
HOW TO MAKE PAYMENTS All investments must be in U.S. dollars and checks must be
drawn on U.S. banks.
CHECKS For individual, Uniform Gift to Minors Act ("UGMA") or Uniform
Transfers to Minors ("UTMA") accounts, the check must be made payable
to "Payson Funds" or to one or more owners of the account and endorsed
to "Payson Funds." For all other accounts, the check must be made
payable on its face to "Payson Funds." No other method of check
payment is acceptable (for instance, you may not pay by travelers
checks).
ACH PAYMENT Instruct your financial institution to make an ACH
(automated clearinghouse) payment to us. These payments typically take
two days to settle. Your financial institution may charge you a fee
for this service.
WIRES Instruct your financial institution to make a Federal Funds wire
payment to us. Your financial institution may charge you a fee for
this service.
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<PAGE>
MINIMUM INVESTMENTS Each Fund accepts investments in the following minimum
amounts:
<TABLE>
<S> <C> <C>
Minimum Initial Minimum Additional
Investment Investment
- -------------------------------------------------------------------------------------------------------------------
Standard Account $2,000 $250
Traditional and Roth IRA Accounts $1,000 $250
Accounts With Systematic Investment Plans $250 $250
</TABLE>
<TABLE>
ACCOUNT REQUIREMENTS
<S> <C>
Type of Account Requirement
- --------------------------------------------------------------------------------------------------------------------
INDIVIDUAL, SOLE PROPRIETORSHIP AND JOINT ACCOUNTS: o Instructions must be signed by all persons
Individual accounts are owned by one person, as are sole required to sign exactly as their names appear on
proprietorship accounts. Joint accounts have two or more the account
owners (tenants)
GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA): o Depending on state laws, you can set up a
These custodial accounts provide a way to give money to a custodial account under the Uniform Gift to Minors
child and obtain tax benefits. An individual can give up Act or the Uniform Transfers to Minors Act
to $10,000 a year per child without paying Federal gift o The trustee must sign instructions in a manner
tax indicating trustee capacity
BUSINESS ENTITIES o For entities with officers, provide an original or
certified copy of a resolution that
identifies the authorized signers for the account
o For entities with partners or other interested
parties, provide a certified partnership
agreement or organizational document, or
certified pages from the partnership agreement or
organizational document, that identifies the
partners or interested parties
TRUSTS o The trust must be established before an
account can be opened
o Provide a certified trust document, or the
pages from the trust document, that identify the
trustees
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
INVESTMENT PROCEDURES
<TABLE>
<S> <C>
TO OPEN AN ACCOUNT TO ADD TO YOUR ACCOUNT
- -----------------------------------------------------------------------------------------------------------------------------
BY CHECK BY CHECK
o Call or write us for an account application o Fill out an investment slip from a
o Complete the application confirmation or write us a letter
o Mail us your application and a check o Write your account number on your check
o Mail us the slip (or your letter) and the check
BY WIRE BY WIRE
o Call or write us for an account application o Call to notify us of your incoming wire
o Complete the application o Instruct your bank to wire your money to us
o Call us and we will assign you an account number
o Mail us your application
o Instruct your bank to wire your money to us
BY ACH PAYMENT BY SYSTEMATIC INVESTMENT
o Call or write us for an account application o Complete the systematic investment section of the
o Complete the application application
o Call us and we will assign you an account number o Attach a voided check to your application
o Mail us your application o Mail us the completed application
o Make an ACH payment
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SYSTEMATIC INVESTMENTS You may invest a specified amount of money in a Fund once
or twice a month on specified dates. These payments are taken from your bank
account by ACH payment. Systematic investments must be for at least $250.
LIMITATIONS ON PURCHASES Each Fund reserves the right to refuse any purchase
(including exchange) request, particularly requests that could adversely affect
the Fund or its operations. This includes those from any individual or group
who, in a Fund's view, is likely to engage in excessive trading (usually defined
as more than four redemptions or exchanges out of the Fund within a calendar
year).
21
<PAGE>
CANCELED OR FAILED PAYMENTS Each Fund accept checks and ACH transfers at full
value subject to collection. If a Fund does not receive your payment for shares
or you pay with a check or ACH transfer that does not clear, your purchase will
be canceled. You will be responsible for any losses or expenses incurred by a
Fund or the Transfer Agent, and the Fund may redeem shares you own in the
account (or another identically registered account maintained with the Transfer
Agent) as reimbursement. Each Fund and its agents have the right to reject or
cancel any purchase or exchange due to nonpayment.
SELLING SHARES
Each Fund processes redemption orders promptly. Generally, a Fund will send
redemption proceeds to you within a week. Delays may occur in cases of very
large redemptions, excessive trading or during unusual market conditions. Each
Fund may delay sending redemption proceeds until it has collected payment for
the shares you are selling, which may take up to 15 calendar days.
22
<PAGE>
TO SELL SHARES FROM YOUR ACCOUNT
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The Fund name
o The dollar amount or number of shares you want to sell
o How and where to send the redemption proceeds
o Obtain a signature guarantee (if required)
o Obtain other documentation (if required)
o Mail us your request and documentation
BY WIRE
o Wire redemptions are only available if your redemption is for $5,000 or
more and you did not decline wire redemption privileges on your account
application
o Call us with your request (unless you declined telephone redemption
privileges - See "By Telephone") or
o Mail us your request (See "By Mail")
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which the account is registered
o Additional form of identification
o Redemption proceeds will be:
o Mailed to you or
o Wired to you (unless you declined wire redemption privileges - See "By
Wire")
SYSTEMATICALLY
o Complete the systematic withdrawal section of the application
o Attach a voided check to your application
o Mail us your completed application
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTION PRIVILEGES You may redeem your shares by telephone unless
you declined telephone redemption privileges on your account application. You
may be responsible for any fraudulent telephone order as long as the Transfer
Agent takes reasonable measures to verify the order.
WIRE REDEMPTION PRIVILEGES You may redeem your shares by wire unless you
declined wire redemption privileges on your account application. The minimum
amount that may be redeemed by wire is $5,000.
23
<PAGE>
SYSTEMATIC WITHDRAWALS You may redeem a specified amount of money from your
account once a month on a specified date. These payments are sent from your
account to a designated bank account by ACH payment. Systematic withdrawals must
be for at least $250.
SIGNATURE GUARANTEE REQUIREMENTS To protect you and the Funds against fraud,
signatures on certain requests must have a "signature guarantee." A signature
guarantee verifies the authenticity of your signature. You can obtain one from
most banking institutions or securities brokers, but not from a notary public.
For requests made in writing, a signature guarantee is required for any of the
following:
o Sales of over $50,000 worth of shares
o Changes to a shareholder's record name or address
o Redemptions from an account for which the address or account
registration has changed within the last 30 days
o Sending redemption proceeds to any person, address, brokerage firm or
bank account not on record
o Sending redemption proceeds to an account with a different
registration (name or ownership) from yours
o Changes to systematic investment or withdrawal, distribution,
telephone redemption or exchange option or any other election in
connection with your account
SMALL ACCOUNTS If the value of your account falls below $1,000 ($500 for IRA
accounts), a Fund may ask you to increase your balance. If the account value is
still below $1,000 ($500 for IRA accounts) after 60 days, a Fund may close your
account and send you the proceeds. A Fund will not close your account if it
falls below these amounts solely as a result of a reduction in your account's
market value.
REDEMPTIONS IN KIND Each Fund reserves the right to pay redemption proceeds in
portfolio securities rather than cash. These redemptions "in kind" usually occur
if the amount to be redeemed is large enough to affect a Fund's operations (for
example, if it represents more than 1% of the Fund's assets).
24
<PAGE>
LOST ACCOUNTS The Transfer Agent will consider your account lost if
correspondence to your address of record is returned as undeliverable, unless
the Transfer Agent determines your new address. When an account is lost, all
distributions on the account will be reinvested in additional Fund shares. In
addition, the amount of any outstanding (unpaid for six months or more) checks
for distributions that have been returned to the Transfer Agent will be
reinvested and the checks will be canceled.
SALES CHARGES
PURCHASES A sales charge is assessed on purchases of a Fund's shares as follows:
<TABLE>
<S> <C> <C> <C>
Sales Charge (Load) as % of:
Public Net Asset
Amount of Purchase Offering Price Value* Reallowance %
$0-$49,999 4.00 4.17% 3.50
$50,000 to $99,999 3.50 3.63% 3.00
$100,000 to $249,999 3.00 3.09% 2.50
$250,000 to $499,999 2.50 2.56% 2.10
$500,000 to $999,999 2.00 2.04% 1.70
$1,000,000 and up 0.00 0.00% 1.00
</TABLE>
* Rounded to the nearest one-hundredth percent.
The offering price of a Fund's shares includes the relevant sales charge. The
commission paid to the distributor is the sales charge less the reallowance paid
to certain financial institutions purchasing shares as principal or agent.
Normally, reallowances are paid as indicated in the above table. From time to
time, however, the distributor may elect to reallow the entire sales charge for
all sales during a particular period.
From time to time and at its own expense, the distributor may provide
compensation, including financial assistance, to certain dealers in connection
with conferences, sales or training programs for their employees,
25
<PAGE>
seminars for the public, advertising campaigns or other dealer-sponsored special
events. Compensation may includethe provision of travel arrangements and
lodging, tickets for entertainment events and merchandise.
REDEMPTIONS A contingent deferred sales charge ("CDSC") is assessed on
redemptions of shares that were part of a purchase of $1 million or more. The
CDSC is assessed as follows:
REDEEMED WITHIN SALES CHARGE
--------------------------------------------------------------------
First year of purchase 1.00%
Second year of purchase 0.50%
The CDSC is paid on the lower of the NAV of shares redeemed or the cost of the
shares. To satisfy a redemption request, the Fund will first liquidate shares
that are not subject to a CDSC such as shares acquired with reinvested dividends
and capital gains. The Fund will then liquidate shares in the order that they
were purchased until your redemption request is satisfied.
REDUCED SALES CHARGES You may qualify for a reduced sales charge on Fund
purchases under rights of accumulation or a letter of intent. Certain persons
may also be eligible to purchase or redeem Fund shares without a sales charge.
Please see the SAI for further information.
EXCHANGE PRIVILEGES
You may exchange your Fund shares and buy shares of another fund of the Trust by
telephone or in writing. For a list of funds available for exchange, you may
call the Transfer Agent. If you exchange into a fund that has a higher sales
charge, you will have to pay the difference between that fund's sales charge and
the Fund's sales charge at the time of exchange. If you exchange into a fund
that has no sales charge or a
26
<PAGE>
lower sales charge than the Fund, you will not have to pay a sales charge at the
time of exchange. Because exchanges are a sale and purchase of shares, they may
have tax consequences.
REQUIREMENTS You may make exchanges only between identically registered accounts
(name(s), address and taxpayer ID number). There is currently no limit on
exchanges, but the Funds reserve the right to limit exchanges. You may exchange
your shares by mail or telephone, unless you declined telephone redemption
privileges on your account application. You may be responsible for any
fraudulent telephone order as long as the Transfer Agent takes reasonable
measures to verify the order.
HOW TO EXCHANGE
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The names of the funds from which you are exchanging and into
which you are exchanging
o The dollar amount or number of shares you want to sell (and
exchange)
o Open a new account and complete an account application if you are
requesting different shareholder privileges
o Mail us your request and documentation
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which account is registered
o Additional form of identification
- --------------------------------------------------------------------------------
RETIREMENT ACCOUNTS
Each Fund offers IRA accounts, including traditional and Roth IRAs. Before
investing in any IRA or other retirement plan, you should consult your tax
adviser. Whenever making an investment in an IRA, be sure to indicate the year
for which the contribution is made.
27
<PAGE>
OTHER INFORMATION
DISTRIBUTIONS
Each Fund distributes its net investment income annually and net capital gain at
least annually.
All distributions are reinvested in additional shares, unless you elect to
receive distributions in cash. For Federal income tax purposes, distributions
are treated the same whether they are received in cash or reinvested. Shares
become entitled to receive distributions on the day after the shares are issued.
TAXES
Each Fund intends to operate in a manner such that it will not be liable for
Federal income or excise tax.
A Fund's distribution of net income (including short-term capital gains) is
taxable to you as ordinary income. A Fund's distribution of long-term capital
gain is taxable to you as long-term capital gain regardless of how long you have
held your Fund shares.
If you buy shares just before a Fund makes a distribution, you will pay the full
price for the shares and then receive a portion of the price back as a
distribution that may be taxable to you.
The sale or exchange of Fund shares is a taxable transaction for income tax
purposes.
Your Fund will send you information about the income tax status of distributions
paid shortly after December 31 of each year.
For further information about the tax effects of investing in a Fund, including
state and local tax matters, please see the SAI and consult your tax adviser.
28
<PAGE>
ORGANIZATION
The Trust is a Delaware business trust. No Fund expects to hold shareholders'
meetings unless required by Federal or Delaware law. Shareholders of each series
are entitled to vote at shareholders' meetings unless a matter relates only to
specific series (such as approval of an advisory agreement for a Fund). From
time to time, large shareholders may control a Fund or the Trust.
29
<PAGE>
FINANCIAL HIGHLIGHTS
The following table is intended to help you understand each Fund's financial
performance. Total return in the table represents the rate an investor would
have earned (or lost) on an investment in a Fund (assuming the reinvestment of
all distributions). This information has been audited by Deloitte & Touche LLP.
Each Fund's financial statements and the auditor's report are included in the
Annual Report dated March 31, 1999, which is available upon request, without
charge.
PAYSON VALUE FUND
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended March 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Selected Data For A Single Share
Beginning Net Asset Value Per Share $21.67 $16.10 $15.99 $12.71 $12.11
Income from Investment Operations:
Net Investment Income 0.07 0.12 0.21 0.21 0.18
Net Realized and Unrealized Gain (Loss) on
Investments (1.16) 6.93 1.80 3.29 0.60
Total From Investment Operations (1.09) 7.05 2.01 3.50 0.78
Less Distributions:
From Net Investment Income (0.07) (0.12) (0.20) (0.21) (0.18)
From Net Realized Capital Gain (1.21) (1.36) (1.70) (0.01) ( - )
Total Distributions (1.28) (1.48) (1.90) (0.22) (0.18)
Ending Net Asset Value Per Share $19.30 $21.67 $16.10 $15.99 $12.71
Other Information
Ratios to Average Net Assets:
Net Expenses 1.45% 1.45% 1.45% 1.45% 1.46%
Gross Expenses(a) 1.75% 1.87% 2.07% 2.16% 2.25%
Net Investment Income 0.35% 0.62% 1.30% 1.47% 1.59%
Total Return(b) (4.57)% 45.28% 13.01% 27.77% 6.52%
Portfolio Turnover Rate 40.82% 38.85% 24.13% 53.06% 27.20%
Net Assets at End of Period $18,253 $19,918 $13,109 $10,319 $7,960
(in thousands)
- --------------------------------------------------------------------------------
</TABLE>
(a) Reflects expense ratio in the absence of fee waivers and expense
reimbursements.
(b) Does not include sales charges.
30
<PAGE>
PAYSON BALANCED FUND
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended March 31,
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Selected Data For A Single Share
Beginning Net Asset Value Per Share $14.79 $13.20 $13.70 $11.90 $11.71
Income from Investment Operations:
Net Investment Income 0.28 0.37 0.42 0.43 0.44
Net Realized and Unrealized Gain (Loss) on
Investments (1.51) 3.52 0.84 2.12 0.24
Total from Investment Operations (1.23) 3.89 1.26 2.55 0.68
Less Distributions:
From Net Investment Income (0.28) (0.37) (0.42) (0.43) (0.44)
From Net Realized Capital Gain (0.80) (1.93) (1.34) (0.32) (0.05)
Total Distributions (1.08) (2.30) (1.76) (0.75) (0.49)
Ending Net Asset Value Per Share $12.48 $14.79 $13.20 $13.70 $11.90
Other Information
Ratios to Average Net Assets:
Net Expenses 1.15% 1.15% 1.15% 1.15% 1.15%
Gross Expenses(a) 1.49% 1.57% 1.67% 1.70% 1.72%
Net Investment Income 2.07% 2.58% 3.07% 3.25% 3.91%
Total Return(b) (8.20)% 31.27% 9.42% 21.70% 6.00%
Portfolio Turnover Rate 99.59% 66.13% 52.93% 61.77% 50.06%
Net Assets at End of Period $23,189 $24,440 $18,163 $17,455 $13,872
(in thousands)
- --------------------------------------------------------------------------------
</TABLE>
(a) Reflects expense ratio in the absence of fee waivers and expense
reimbursements
(b) Does not include sales charges
31
<PAGE>
[ACCOUNT APPLICATION]
<PAGE>
[ACCOUNT APPLICATION CONT.]
<PAGE>
<TABLE>
<S> <C>
- -----------------------------
FOR MORE INFORMATION FORUM
- ----------------------------- FUNDS
The following documents are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS PAYSON
Additional information about each Fund's investments is available in the VALUE FUND
Fund's annual and semi-annual reports to shareholders. In each Fund's
annual report, you will find a discussion of the market conditions and PAYSON
investment strategies that significantly affected the Fund's performance BALANCED FUND
during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI provides more detailed information about each Fund and is
incorporated by reference into this Prospectus.
You can get a free copy of both reports and the SAI, request other
information and discuss your questions about each Fund by contacting the
Fund at:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
800-805-8285
207-879-0001
You can also review each Fund's reports and SAI at the Public Reference
Room of the Securities and Exchange Commission. You can get text-only
copies, for a fee, by writing to or calling the following:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-6009
Telephone: 800-SEC-0330 [Logo]
Forum Funds
Free copies are available from the SEC's Internet website at P.O. Box 446
http://www.sec.gov. Portland, Maine 04112
800-805-8258
207-879-0001
Investment Company Act File No. 811-3023.
</TABLE>
<PAGE>
------------------------------
PROSPECTUS
------------------------------
August 1, 1999
AUSTIN GLOBAL
EQUITY FUND
[Picture graphics on left half
of cover.]
AUSTING GLOBAL EQUITY FUND
SEEKS CAPITAL APPRECIATION BY
INVESTING PRIMARILY IN COMMON
STOCK AND SECURITIES CONVERTIBLE
INTO COMMON STOCK OF COMPANIES
DOMICILED IN THE UNITED STATES
AND ABROAD.
THE FUND DOES NOT PAY
RULE 12B-1 (DISTRIBUTION) FEES.
The Securities and Exchange Commission
has not approved or dispproved the
Fund's shares or determined whether this
Prospectus is accurate or complete. Any
representation to the contrary is a
criminal offense.
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY 2
PERFORMANCE 4
FEE TABLES 6
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS 7
MANAGEMENT 11
YOUR ACCOUNT 13
How to Contact the Fund 13
General Information 13
Buying Shares 14
Selling Shares 17
Exchange Privileges 20
Retirement Accounts 21
OTHER INFORMATION 22
FINANCIAL HIGHLIGHTS 24
<PAGE>
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE Austin Global Equity Fund (the "Fund") seeks capital
appreciation
PRINCIPAL INVESTMENT STRATEGY
[Margin callout: CONCEPTS TO UNDERSTAND
COMMON STOCK means an equity or ownership interest in a company
CONVERTIBLE SECURITY means a security such as a preferred stock or bond
that may be converted into a specified number of shares of common stock
AMERICAN DEPOSITARY RECEIPT ("ADR") means a receipt for shares of a
foreign based companies held by a U.S. bank that entitles the holder to
all dividends]
The Fund's adviser (the"Adviser") studies political and economic developments in
various countries to identify those which offer the best investment
opportunities. Currently, the Fund invests primarily in the common stock
(including ADRs) and securities convertible into common stock of companies based
in the United States, Europe, Japan and the Pacific Basin. The Fund principally
invests in the common stock of companies that have above average growth
potential. The Fund also invests in companies that are experiencing growth but
whose growth has not been recognized by the market.
PRINCIPAL RISKS OF INVESTING IN THE FUND
GENERAL RISKS You could lose money on your investment in the Fund or the Fund
could underperform other investments. The principal risks of an investment in
the Fund include:
o The U.S. or foreign stock markets go down
o The stock market does not recognize the growth potential of the stocks
in the Fund's portfolio
o The Adviser may make poor investment decisions
RISKS OF FOREIGN SECURITIES Because investing in the securities of foreign
companies can have more risk than investing in U.S. based companies, an
investment in the Fund may have the following additional risks:
o Foreign securities may be subject to greater fluctuations in price
than securities of U.S. companies denominated in U.S. dollars
o There may not be sufficient public information regarding foreign
issuers
o Political and economic instability abroad may adversely affect the
operations of foreign issuers and the value of their securities
2
<PAGE>
o Changes in foreign tax laws, exchange controls and policies on
nationalization and expropriation may affect the operations of foreign
issuers and the value of their securities
o Fluctuations in currency exchange rates may adversely affect the value
of foreign securities
These risks may be greater for securities of issuers located in emerging or
developing markets.
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for you if you:
o Are willing to tolerate global risk
o Are willing to tolerate significant changes in the value of your
investment
o Are pursuing a long-term goal
o Are willing to accept higher short-term risk
The Fund may NOT be appropriate for you if you:
o Want an investment that pursues market trends or focuses only on
particular sectors or industries
o Need regular income or stability of principal
o Are pursuing a short-term goal or investing emergency reserves
3
<PAGE>
PERFORMANCE
The following chart illustrates the variability of the Fund's returns. The chart
and the following table provide some indication of the risks of investing in the
Fund by showing changes in the Fund's performance from year to year and how the
Fund's returns compare to a broad measure of market performance. PERFORMANCE
INFORMATION REPRESENTS ONLY PAST PERFORMANCE AND DOES NOT NECESSARILY INDICATE
FUTURE RESULTS.
The following chart shows the annual total return for each full calendar year
that the Fund has operated.
[EDGAR REPRESENTATION OF GRAPH CHART]
PAST PERFORMANCE CHART
Year Average Annual Total Return
- ---- ---------------------------
1994 2.10%
1995 22.62%
1996 14.53%
1997 23.93%
1998 22.90%
The calendar year-to-date total return as of June 30, 1999 was 4.93%.
During the periods shown in the chart, the highest quarterly return was 20.01%
(for the quarter ended December 31, 1998) and the lowest quarterly return was
- -13.62% (for the quarter ended September 30, 1998).
4
<PAGE>
The following table compares the Fund's average annual total returns as of
December 31, 1998 to the Morgan Stanley Capital International World Index ("MSCI
World Index").
<TABLE>
<S> <C> <C>
YEAR(S) AUSTIN GLOBAL EQUITY FUND MSCI WORLD INDEX
- ---------------------------------------------------------------------------------------------------------------
1 Year 22.90% 24.34%
5 Years 16.91% 15.68%
Since Inception 16.67% 16.48%(1)
</TABLE>
(1) For the period 11/30/93 - 12/31/98.
The MSCI World Index is a market index of a diverse range of global stock
markets in the United States, Canada, Europe, Australia, New Zealand and the Far
East. The MSCI World Index is unmanaged and reflects the reinvestment of
dividends. Unlike the performance figures of the Fund, MSCI World Index's the
index's performance does not reflect the effect of expenses.
5
<PAGE>
FEE TABLES
The following tables describe the various fees and expenses that you will pay if
you invest in the Fund.
<TABLE>
<S> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Sales Charge (Load) Imposed on Reinvested Distributions None
Maximum Deferred Sales Charge (Load) None
Redemption Fee None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES(1)(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees 1.50%
Distribution (12b-1) Fees None
Other Expenses 0.92%
TOTAL ANNUAL FUND OPERATING EXPENSES 2.42%
</TABLE>
(1) Based on amounts incurred during the Fund's fiscal year ended March 31,
1999 stated as a percentage of assets.
EXAMPLE
The following is a hypothetical example intended to help you compare the cost of
investing in the Fund to the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% annual return, that the
Fund's operating expenses remain the same as stated in the above table, and that
distributions are reinvested. Although your actual costs may be higher or lower,
under these assumptions your costs would be:
1 year 3 years 5 years 10 years
-------------------------------------------------------------------------
$245 $755 $1,291 $2,756
6
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
[Margin callout: CONCEPT TO UNDERSTAND
FUNDAMENTAL ANALYSIS means the analysis of a company's financial
condition to forecast the probable future value of its stock price.
This analysis includes review of a company's balance sheet and income
statement, asset history, earnings history, product or service
development and management productivity
GROSS DOMESTIC PRODUCT means the value of a country's goods and
services produced during a certain period of time, usually one year]
INVESTMENT OBJECTIVE
The Fund seeks capital appreciation by investing primarily in a portfolio of
common stock and securities convertible into common stock.
INVESTMENT STRATEGIES
THE ADVISER'S PROCESS
First, the Adviser studies the political and economic developments in various
foreign countries in order to determine which offer the best opportunities for
investment. The Adviser focuses on, among other things, gross domestic product,
interest rate movements, employment costs, earnings trends, currency
fluctuations, changes in governmental policy and leadership, and the laws and
taxes relating to foreign investors. Currently, the Adviser invests primarily in
the securities of companies located in the United States, Europe, Japan and the
Pacific Basin.
The Adviser relies primarily on fundamental analyses of prospective companies to
identify those companies with above average growth and/or appreciation
potential. The Adviser also uses fundamental analysis to identify companies that
are experiencing growth but whose growth has not yet been recognized by the
market.
In order to avoid the risks of foreign investments due to the different
accounting and disclosure requirements imposed on foreign companies, the Adviser
routinely invests in ADRs. Because ADRs are traded in the U.S. markets and more
information is available about the issuer, the Adviser can evaluate the
fundamentals of the issuer more easily.
7
<PAGE>
The Adviser continuously monitors the companies in the Fund's portfolio to
determine if there have been fundamental changes in the companies. The Adviser
may sell a security if:
o The underlying company experiences a decline in financial condition
o The underlying company experiences a significant erosion in
profitability, earnings or cash flow
o The stock is overvalued compared to its fundamentals
o The Fund's holding of a stock is oversized compared to other holdings
o There are negative trends in inflation, recession or interest rates
INVESTMENT POLICIES
Under normal circumstances, the Fund invests primarily all of its total assets
in common stock (including ADRs) and convertible securities of issuers located
in three or more countries. The Fund generally invests more of its assets in the
securities of U.S. issuers and ADRs than in the securities of foreign issuers.
Currently, the Fund limits its investments in any one country or in securities
denominated in any one currency to 25% of its total assets. This limitation does
not apply to the securities of U.S. issuers or securities denominated in the
U.S. dollar. The Fund intends to invest up to 25% of its total assets in
companies in the telecommunications industry.
TEMPORARY DEFENSIVE MEASURES In order to respond to adverse market, economic or
other conditions, the Fund may assume a temporary defensive position and invest
without limit in cash and prime cash equivalents. As a result, the Fund may be
unable to achieve its investment objective.
INVESTMENT RISKS
GENERAL The Fund's net asset value and total return will fluctuate based upon
changes in the value of its portfolio securities. The market values of
8
<PAGE>
securities in which the Fund invests are based upon the market's perception of
value and is not necessarily an objective measure of the securities value. There
is no assurance that the Fund will achieve its investment objective. An
investment in the Fund is not by itself a complete or balanced investment
program. Finally, your investment is subject to the risk that the Adviser may
make poor investment decisions.
RISKS OF FOREIGN SECURITIES Because the Fund invests in foreign securities, an
investment in the Fund may have the following additional risks:
o Foreign securities may be subject to greater fluctuations in price
than securities of U.S. companies denominated in U.S. dollars
o There may not be sufficient public information regarding foreign
issuers and foreign companies may not be subject to uniform
accounting, auditing and financial reporting standards as are U.S.
companies
o Political and economic instability abroad may adversely affect the
operations of foreign issuers and the value of their securities
o Changes in foreign tax laws, exchange controls and policies on
nationalization and expropriation also may affect the operations of
foreign issuers and the value of their securities
o Fluctuations in currency exchange rates may adversely affect the value
of foreign securities
o Foreign securities and their markets may be less liquid than U.S.
markets
o Foreign securities and their issuers are not subject to the same
degree of regulation as U.S. issuers regarding information disclosure,
insider trading and market manipulation
o Foreign security registration, custody and settlement may be subject
to delays or other operational and administrative problems
o Foreign brokerage commissions and custody fees are generally higher
than those in the U.S.
These risks may be greater for investments in issuers located in emerging or
developing markets. These markets may be under capitalized, may have less
developed legal and financial systems or may have less stable currencies than
markets of developed countries.
9
<PAGE>
YEAR 2000 Certain computer systems may not process date-related information
properly on and after January 1, 2000. The Adviser is addressing this matter for
its systems. The Fund's other service providers have informed the Fund that they
are taking similar measures. Investments in foreign companies are particularly
vulnerable to Year 2000 risk as these companies may not have the financial
resources, technology or personnel needed to address Year 2000 readiness
concerns. This matter, if not corrected, could adversely affect the services
provided to the Fund or the companies in which the Fund invests and, therefore,
could lower the value of your shares.
10
<PAGE>
MANAGEMENT
The Fund is a series of Forum Funds (the "Trust"), an open-end, management
investment company (mutual fund). The business of the Trust and of the Fund is
managed under the direction of the Board of Trustees (the "Board"). The Board
formulates the general policies of the Fund and meets periodically to review the
Fund's performance, monitor investment activities and practices and discuss
other matters affecting the Fund. Additional information regarding the Board, as
well as the Trust's executive officers, may be found in the Statement of
Additional Information ("SAI").
THE ADVISER
The Fund's Adviser is Austin Investment Management, Inc., 375 Park Avenue, New
York, New York 10152. The Adviser is a privately owned company, controlled by
Peter Vlachos.
Subject to the general control of the Board, the Adviser makes investment
decisions for the Fund. For its services, the Fund paid the Adviser an advisory
fee of 1.50% of the average daily net assets of the Fund during its most recent
fiscal year.
As of June 30, 1999, the Adviser had approximately $200 million in assets under
management.
PORTFOLIO MANAGER
PETER VLACHOS President and Chief Portfolio Manager of the Adviser, has been
primarily responsible for the day-to-day management of the Fund since its
inception on December 3, 1993. Mr. Vlachos has over 30 years of experience in
the investment industry and prior to his association with the Adviser in 1989,
he was a portfolio manager at Neuberger & Berman, Inc.
11
<PAGE>
OTHER SERVICE PROVIDERS
The Forum Financial Group ("Forum") of companies provides services to the Fund.
As of June 30, 1999, Forum provided administration and distribution services to
investment companies and collective investment funds with assets of
approximately $73 billion.
Forum Fund Services, LLC, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., is the distributor (principal
underwriter) of the Fund's shares. The distributor acts as the representative of
the Trust in connection with the offering of the Fund's shares. The distributor
may enter into arrangements with banks, broker-dealers or other financial
institutions through which investors may purchase or redeem shares and may, at
its own expense, compensate persons who provide services in connection with the
sale or expected sale of the Fund's shares.
Forum Administrative Services, LLC provides administrative services to the Fund,
Forum Accounting Services, LLC is the Fund's accountant, Forum Shareholder
Services, LLC ("Transfer Agent") is the Fund's transfer agent and Forum Trust,
LLC is the Fund's custodian.
FUND EXPENSES
The Fund pays for all of its expenses. The Fund's expenses are comprised of its
own expenses as well as Trust expenses that are allocated among the Fund and the
other funds of the Trust. The Adviser or other service providers may voluntarily
waive all or any portion of their fees and/or reimburse certain expenses of the
Fund. Any fee waiver or expense reimbursement increases the Fund's performance
for the period during which the waiver or expense reimbursement is in effect.
Certain service providers have undertaken to waive a portion of their fee and/or
reimburse certain expenses in order to limit the Fund's expenses (excluding
taxes, interest, portfolio transaction expenses and extraordinary expenses) to
2.50% or less of the average daily net assets of the Fund.
12
<PAGE>
YOUR ACCOUNT
[Margin call out: HOW TO CONTACT THE FUND
Write to us at:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
Telephone us at:
(800) 754-8759 (Toll Free)
(207) 879-0001
Wire investments (or ACH payments) to us at:
Bankers Trust Company
New York, New York
ABA #021001033 For Credit to:
Forum Shareholder Services, LLC
Account # 01-465-547
Austin Global Equity Fund
(Your Name)
(Your Account Number)]
GENERAL INFORMATION
You may purchase or sell (redeem) shares at the net asset value of a share (NAV)
next calculated after the Transfer Agent receives your request in proper form.
For instance, if the Transfer Agent receives your purchase request in proper
form after 4:00 p.m., Eastern time, your transaction will be priced at the time
of the next business day's NAV. The Fund cannot accept orders that request a
particular day or price for the transaction or any other special conditions.
The Fund does not issue share certificates.
If you purchase shares directly from the Fund, you will receive quarterly
statements and a confirmation of each transaction. You should verify the
accuracy of all transactions in your account as soon as you receive your
confirmations.
The Fund reserves the right to waive minimum investment amounts and may
temporarily suspend (during unusual market conditions) or discontinue any
service or privilege.
WHEN AND HOW NAV IS DETERMINED The Fund calculates its NAV as of the close of
the New York Stock Exchange (normally 4:00 p.m., Eastern time) on each weekday
except days when the New York Stock Exchange is closed. The time at which NAV is
calculated may change in case of an emergency. The Fund's NAV is determined by
taking the market value of all securities owned by the Fund (plus all other
assets such as cash), subtracting liabilities and then dividing the result (net
assets) by the number of shares outstanding. The Fund values securities for
which market quotations are readily available at current market value. If market
quotations are not readily available, the Fund values securities at fair value
pursuant to procedures adopted by the Board.
13
<PAGE>
TRANSACTIONS THROUGH THIRD PARTIES If you invest through a broker or other
financial institution, the policies and fees charged by that institution may be
different than those of the Fund. Financial institutions may charge transaction
fees and may set different minimum investments or limitations on buying or
selling shares. These institutions also may provide you with certain shareholder
services such as periodic account statements and trade confirmations summarizing
your investment activity. Consult a representative of your financial institution
for more information.
BUYING SHARES
HOW TO MAKE PAYMENTS. All investments must be in U.S. dollars and checks must be
drawn on U.S. banks.
CHECKS For individual, Uniform Gift to Minors Act ("UGMA") or Uniform
Transfer to Minors Act ("UTMA") accounts, the check must be made
payable to "Austin Global Equity Fund" or to one or more owners of the
account and endorsed to "Austin Global Equity Fund." For all other
accounts, the check must be made payable on its face to "Austin Global
Equity Fund." No other method of check payment is acceptable (for
instance, you may not pay by travelers check).
ACH PAYMENT Instruct your financial institution to make an ACH
(automated clearinghouse) payment to us. These payments typically take
two days to settle. Your financial institution may charge you a fee for
this service.
WIRES Instruct your financial institution to make a Federal Funds wire
payment to us. Your financial institution may charge you a fee for this
service.
14
<PAGE>
MINIMUM INVESTMENTS. The Fund accepts investments in the following minimum
amounts:
<TABLE>
<S> <C> <C>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL
INVESTMENT
- ---------------------------------------------------------------------------------------------------------------------
Standard Account $10,000 $2,500
Traditional and Roth IRA Accounts $2,000 $1,000
Accounts With Systematic Investment Plans $250 $250
</TABLE>
<TABLE>
<S> <C>
ACCOUNT REQUIREMENTS
- --------------------------------------------------------------------------------------------------------------------------
TYPE OF ACCOUNT REQUIREMENT
- --------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL, SOLE PROPRIETORSHIP AND JOINT ACCOUNTS: o Instructions must be signed by all persons
Individual accounts are owned by one person, as are sole required to sign exactly as their names appear on
proprietorship accounts. Joint accounts have two or more the account
owners (tenants)
GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA): o Depending on state laws, you can set up a
These custodial accounts provide a way to give money to a custodial account under the Uniform Gift to Minors
child and other tax benefits. An individual can give up Act or the Uniform Transfers to Minors Act
to $10,000 a year per child without paying Federal gift tax o The trustee must sign instructions in a manner
indicating trustee capacity
BUSINESS ENTITIES o For entities with officers, provide an original or
certified copy of a resolution that identifies the
authorized signers for the account
o For entities with partners or other interested
parties, provide a certified partnership agreement or
organizational document, or certified pages from the
partnership agreement or organizational document, that
identify the partners or interested parties
TRUSTS o The trust must be established before an
account can be opened
o Provide a certified trust document, or the
pages from the trust document, that identify the
trustees
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
INVESTMENT PROCEDURES
- --------------------------------------------------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO YOUR ACCOUNT
BY CHECK BY CHECK
o Call or write us for an account application o Fill out an investment slip from a
o Complete the application confirmation or write us a letter
o Mail us your application and a check o Write your account number on your check
o Mail us the slip (or your letter) and the check
BY WIRE BY WIRE
o Call or write us for an account application o Call to notify us of your incoming wire
o Complete the application o Instruct your bank to wire your money to us
o Call us and we will assign you an account number
o Mail us your application
o Instruct your bank to wire your money to us
BY ACH PAYMENT BY SYSTEMATIC INVESTMENT
o Call or write us for an account application o Complete the systematic investment section of the
o Complete the application application
o Call us and we will assign you an account number o Attach a voided check to your application
o Mail us your application o Mail us the completed application
o Make an ACH payment
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SYSTEMATIC INVESTMENTS You may invest a specified amount of money in the Fund
once or twice a month on specified dates. These payments are taken from your
bank account by ACH payment. Systematic investments must be for at least $250.
LIMITATIONS ON PURCHASES The Fund reserves the right to refuse any purchase
(including exchange) request, particularly requests that could adversely affect
the Fund or its operations. This includes those from any individual or group
who, in the Fund's view, is likely to engage in excessive trading (usually
defined as more than four redemptions or exchanges out of the Fund within a
calendar year).
16
<PAGE>
CANCELED OR FAILED PAYMENTS The Fund accepts checks and ACH transfers at full
value subject to collection. If the Fund does not receive your payment for
shares or you pay with a check or ACH transfer that does not clear, your
purchase will be canceled. You will be responsible for any losses or expenses
incurred by the Fund or the Transfer Agent, and the Fund may redeem shares you
own in the account (or another identically registered account maintained with
the Transfer Agent) as reimbursement. The Fund and its agents have the right to
reject or cancel any purchasedue to nonpayment.
SELLING SHARES
The Fund processes redemption orders promptly. Generally, the Fund will send
redemption proceeds to you within a week. Delays may occur in cases of very
large redemptions, excessive trading or during unusual market conditions. The
Fund may delay sending redemption proceeds until it has collected payment for
the shares you are selling, which may take up to 15 calendar days.
17
<PAGE>
- --------------------------------------------------------------------------------
TO SELL SHARES FROM YOUR ACCOUNT
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The Fund name
o The dollar amount or number of shares you want to sell
o How and where to send the redemption proceeds
o Obtain a signature guarantee (if required)
o Obtain other documentation (if required)
o Mail us your request and documentation
BY WIRE
o Wire redemptions are only available if your redemption is for $5,000 or
more and you did not decline wire redemption privileges on your account
application:
o Call us with your request (if you declined telephone redemption privileges -
See "By Telephone") OR
o Mail us your request (See "By Mail")
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which the account is registered
o Additional form of identification
o Redemption proceeds will be:
o Mailed to you Or
o Wired to you (unless you declined wire redemption privileges -See "By
Wire")
SYSTEMATICALLY
o Complete the systematic withdrawal section of the application
o Attach a voided check to your application
o Mail us the completed application
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTION PRIVILEGES You may redeem your shares by telephone unless
you declined telephone redemption privileges on your account application. You
may be responsible for any fraudulent telephone order as long as the Transfer
Agent takes reasonable measures to verify the order.
WIRE REDEMPTION PRIVILEGES You may redeem your shares by wire unless you
declined wire redemption privileges on your account application. The minimum
amount that may be redeemed by wire is $5,000.
18
<PAGE>
SYSTEMATIC WITHDRAWALS You may redeem a specified amount of money from your
account once a month on a specified date. These payments are sent from your
account to a designated bank account by ACH payment. Systematic withdrawals must
be for at least $250.
SIGNATURE GUARANTEE REQUIREMENTS To protect you and the Fund against fraud,
signatures on certain requests must have a "signature guarantee." A signature
guarantee verifies the authenticity of your signature. You can obtain one from
most banking institutions or securities brokers, but not from a notary public.
For requests made in writing, a signature guarantee is required for any of the
following:
o Sales of over $50,000 worth of shares
o Changes to a shareholder's record name or address
o Redemptions from an account for which the address or account
registration has changed within the last 30 days
o Sending redemption proceeds to any person, address, brokerage firm or
bank account not on record
o Sending redemption proceeds to an account with a different
registration (name or ownership) from yours
o Changes to systematic investment or withdrawal, distribution,
telephone redemption or exchange option or any other election in
connection with your account
SMALL ACCOUNTS If the value of your account falls below $1,000($500 for IRAs),
the Fund may ask you to increase your balance. If the account value is still
below $1,000 ($500 for IRAs) after 60 days, the Fund may close your account and
send you the proceeds. The Fund will not close your account if it falls below
these amounts solely as a result of a reduction in your account's market value.
REDEMPTIONS IN KIND The Fund reserves the right to pay redemption proceeds in
portfolio securities rather than cash. These redemptions "in kind" usually occur
if the amount to be redeemed is large enough to
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affect the Fund's operations (for example, if it represents more than 1% of the
Fund's assets).
LOST ACCOUNTS The Transfer Agent will consider your account lost if
correspondence to your address of record is returned as undeliverable, unless
the Transfer Agent determines your new address. When an account is lost, all
distributions on the account will be reinvested in additional Fund shares. In
addition, the amount of any outstanding (unpaid for six months or more) checks
for distributions that have been returned to the Transfer Agent will be
reinvested and the checks will be canceled.
EXCHANGE PRIVILEGES
You may exchange your Fund shares and buy shares of another fund of the Trust by
telephone or in writing. For a list of funds available for exchange, you may
call the Transfer Agent. If you exchange into a fund that imposes a sales
charge, you will have to pay that fund's sales charge at the time of exchange.
Because exchanges are a sale and purchase of shares, they may have tax
consequences.
REQUIREMENTS You may make exchanges only between identically registered accounts
(name(s), address and taxpayer ID number). There is currently no limit on
exchanges, but the Fund reserves the right to limit exchanges. You may exchange
your shares by mail or telephone, unless you declined telephone redemption
privileges on your account application. You may be responsible for any
fraudulent telephone order as long as the Transfer Agent takes reasonable
measures to verify the order.
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HOW TO EXCHANGE
- --------------------------------------------------------------------------------
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The names of the Fund from which you are exchanging and into which you
are exchanging
o The dollar amount or number of shares you want to sell (and exchange)
o Open a new account and complete an account application if you are
requesting different shareholder privileges
o Mail us your request and documentation
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which account is registered
o Additional form of identification
- --------------------------------------------------------------------------------
RETIREMENT ACCOUNTS
The Fund offers IRA accounts, including traditional and Roth IRAs. Before
investing in any IRA or other retirement plan, you should consult your tax
adviser. Whenever making an investment in an IRA, be sure to indicate the year
for which the contribution is made.
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OTHER INFORMATION
DISTRIBUTIONS
The Fund distributes its net investment income annually and net capital gain at
least annually.
All distributions are reinvested in additional shares, unless you elect to
receive distributions in cash. For Federal income tax purposes, distributions
are treated the same whether they are received in cash or reinvested. Shares
become entitled to receive distributions on the day after the shares are issued.
TAXES
The Fund generally intends to operate in a manner such that it will not be
liable for Federal income or excise tax.
The Fund's distribution of net income (including short-term capital gain) is
taxable to you as ordinary income. The Fund's distribution of long-term capital
gain is taxable to you as long-term capital gain regardless of how long you have
held you Fund shares.
The Fund's distribution of net income generated by investments in foreign
securities may be subject to foreign income or other taxes.
If you buy shares shortly before the Fund makes a distribution, you may pay the
full price for the shares and then receive a portion of the price back as a
distribution that may be taxable to you.
The sale or exchange of Fund shares is a taxable transaction for income tax
purposes.
The Fund will send you information about the income tax status of the
distributions paid during the year shortly after December 31 of each year.
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For further information about the tax effects of investing in the Fund,
including state, local and foreign tax matters, please see the SAI and consult
your tax adviser.
ORGANIZATION
The Trust is a Delaware business trust. The Fund does not expect to hold
shareholders' meetings unless required by Federal or Delaware law. Shareholders
of each series are entitled to vote at shareholders' meetings unless a matter
relates only to specific series (such as approval of an advisory agreement for
the Fund). From time to time, large shareholders may control the Fund or the
Trust.
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FINANCIAL HIGHLIGHTS
The following table is intended to help you understand the Fund's financial
performance. Total return in the table represents the rate an investor would
have earned (or lost) on an investment in the Fund (assuming the reinvestment of
all distributions). This information has been audited by Deloitte & Touche LLP.
The Fund's financial statements and the auditor's report are included in the
Annual Report dated March 31, 1999, which is available upon request, without
charge.
<TABLE>
<S> <C> <C> <C> <C> <C>
YEAR/PERIOD ENDED
MARCH 31, MARCH 31, MARCH 31, JUNE 30, JUNE 30,
1999 1998 1997 1996 1995
--------------------------------------------------------------------------
SELECTED DATA FOR A SINGLE SHARE
Beginning Net Asset Value Per Share $16.27 $12.84 $13.19 $11.60 $9.80
Income from Investment Operations:
Net Investment Income (Loss) 0.15 (0.07) (0.11) (0.12) 0.04(a)
Net Realized and Unrealized Gain (Loss) on
Investments 1.32 4.95 0.86 1.98 1.76
Total from Investment Operations 1.47 4.88 0.75 1.86 1.80
Less Distributions:
From Net Investment Income (0.14) _ _ _ _
From Net Realized Capital Gain (0.90) (1.45) (1.10) (0.27) _
From Return of Capital (0.12) _ _ _ _
Total Distributions (1.16) (1.45) (1.10) (0.27) _
Ending Net Asset Value Per Share $16.58 $16.27 $12.84 $13.19 $11.60
OTHER INFORMATION
Ratios to Average Net Assets:
Net Expenses 2.42% 2.50% 2.50%(c) 2.50% 2.50%
Gross Expenses(b) 2.42% 2.69% 3.38%(c) 3.25% 3.19%
Net Investment Income (Loss) 0.92% (0.50%) (1.09%)(c) (0.98%) 0.41%
Total Return 9.51% 39.88% 5.38% 16.22% 18.37%
Portfolio Turnover Rate 51.15% 57.37% 44.79% 93.55% 35.31%
Net Assets at End of Period
(in thousands) $22,014 $15,379 $10,289 $10,326 $8,474
</TABLE>
(a) Calculated using the weighted average shares outstanding.
(b) Reflects expense ratio in the absence of fee waivers and expense
reimbursements.
(c) Annualized.
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[ACCOUNT APPLICATION]
<PAGE>
[ACCOUNT APPLICATION CONT.]
<PAGE>
<TABLE>
<S> <C>
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FOR MORE INFORMATION
- ---------------------------
The following documents are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the Fund's investments is contained in the
Fund's annual and semi-annual
reports to shareholders. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI provides more detailed information about the Fund and is
incorporated by reference into this Prospectus.
You can get a free copy of both reports and the SAI, request other
information and discuss your questions about the Fund by contacting the
Fund at:
FORUM SHAREHOLDER SERVICES, LLC
P.O. Box 446
Portland, Maine 04112
800-754-8759
207-879-0001
You can also review the Fund's SAI at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies, for a
fee, by writing to or calling the following:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-6009
Telephone: 800-SEC-0330
Free copies are available from the SEC's Internet website
207-879-0001 at http://www.sec.gov.
Investment Company Act File No. 811-3023.
</TABLE>
[Logo]
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1999
INVESTORS HIGH GRADE BOND FUND
INVESTORS BOND FUND
TAXSAVER BOND FUND
MAINE MUNICIPAL BOND FUND
NEW HAMPSHIRE BOND FUND
INVESTMENT ADVISER:
Forum Investment Advisers, LLC
Two Portland Square
Portland, Maine 04101
ACCOUNT INFORMATION AND SHAREHOLDER SERVICES:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
(207) 879-0001
(800) 94FORUM
(800) 943-6786
This Statement of Additional Information (the "SAI") supplements the
Prospectuses dated August 1, 1999, as may be amended from time to time, offering
shares of Investors High Grade Bond Fund, Investors Bond Fund, TaxSaver Bond
Fund, Maine Municipal Bond Fund, and New Hampshire Bond Fund, five separate
series of Forum Funds, a registered, open-end management investment company (the
"Trust"). This SAI is not a prospectus and should only be read in conjunction
with the Prospectus applicable to each Fund. You may obtain any Prospectus
relating to a Fund without charge by contacting Forum Shareholder Services, LLC
at the address or telephone number listed above.
Financial Statements for each Fund for the year ended March 31, 1999, included
in the Annual Report to shareholders, are incorporated into this SAI by
reference. Copies of the Annual Report may be obtained, without charge, upon
request by contacting Forum Shareholder Services, LLC at the address or
telephone number listed above.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Glossary..................................................................................1
1. Investment Policies And Risks.........................................................2
2. Certain Information Concerning The States Of Maine And New Hampshire.................13
3. Investment Limitations...............................................................20
4. Performance Data And Advertising.....................................................31
5. Management...........................................................................35
6. Portfolio Transactions...............................................................40
7. Additional Purchase And Redemption Information.......................................43
8. Taxation.............................................................................46
9. Other Matters........................................................................51
Appendix A - Description Of Securities Ratings..........................................A-1
Appendix B - Miscellaneous Tables.......................................................B-1
Appendix C - Performance Data...........................................................C-1
Appendix D - Additional Advertising Materials...........................................D-1
</TABLE>
<PAGE>
GLOSSARY
As used in this SAI, the following terms have the meanings listed.
"Adviser" means Forum Investment Advisers, LLC.
"Board" means the Board of Trustees of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Custodian" means the custodian of each Fund's assets.
"FAdS" means Forum Administrative Services, LLC, the administrator of
each Fund.
"Fitch" means Fitch IBCA, Inc.
"FAcS" means Forum Accounting Services, LLC, the fund accountant of
each Fund.
"FFS" means Forum Fund Services, LLC, the distributor of each Fund's
shares.
"FFSI" means Forum Financial Services, Inc., the distributor of each
Fund's shares prior to August 1, 1999.
"FSS" means Forum Shareholder Services, LLC, the transfer agent of each
fund.
"Fund" means each of Investors High Grade Bond Fund, Investors Bond
Fund, TaxSaver Bond Fund, Maine Municipal Bond Fund and New Hampshire
Bond Fund.
"Moody's" means Moody's Investors Service.
"NRSRO" means a nationally recognized statistical rating organization.
"NAV" means net asset value per share.
"SEC" means the U.S. Securities and Exchange Commission.
"S&P" means Standard & Poor's, A Division of the McGraw Hill Companies.
"Transfer Agent" means Forum Shareholder Services, LLC, the transfer
agent of each Fund.
"Trust" means Forum Funds.
"U.S. Government Securities" means obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
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1. INVESTMENT POLICIES AND RISKS
Investors High Grade Bond Fund is a diversified series of the Trust, and each of
Investors Bond Fund, TaxSaver Bond Fund, Maine Municipal Bond Fund, and New
Hampshire Bond Fund is a non-diversified series of the Trust. This section
discusses in greater detail than each Fund's Prospectus certain investments that
the Fund may make. A Fund will make only those investments described below that
are in accordance with its investment objectives and policies.
A. SECURITY RATINGS INFORMATION
A Fund's investments in debt securities are subject to credit risk relating to
the financial condition of the issuers of the securities that the Fund holds. To
limit credit risk, Investors High Grade Bond Fund may only invest in debt
securities rated in one of the three highest rating categories by an NRSRO. The
lowest rated corporate bond in which Investors High Grade Bond may invest is "A"
in the case of Moody's, S&P, and Fitch and the lowest rated preferred stock in
which the Fund may invest is "a" in the case of Moody's and "A" in the case of
S&P. Each other Fund primarily invests in debt securities considered to be
investment grade. Investment grade securities are rated in the top four
long-term rating categories or the two highest short-term categories by an NRSRO
or are unrated and determined by the Adviser to be of comparable quality. The
lowest ratings that are investment grade for corporate bonds, including
convertible bonds, are "Baa" in the case of Moody's and "BBB" in the case of S&P
and Fitch; for preferred stock are "Baa" in the case of Moody's and "BBB" in the
case of S&P.
Investors Bond Fund may invest up to 10% of its total assets, TaxSaver Bond Fund
may invest up to 25% of its total assets, and Maine Municipal Bond Fund and New
Hampshire Bond Fund may each invest up to 20% of their total assets in
securities rated below investment grade. Non-investment grade securities
(commonly known as "junk bonds") have significant speculative characteristics
and generally involve greater volatility of price than investment grade
securities. Unrated securities may not be as actively traded as rated
securities. A Fund may retain securities whose rating has been lowered below the
lowest permissible rating category (or that are unrated and determined by the
Adviser to be of comparable quality to securities whose rating has been lowered
below the lowest permissible rating category) if the Adviser determines that
retaining such security is in the best interests of the Fund. Because a
downgrade often results in a reduction in the market price of the security, sale
of a downgraded security may result in a loss.
Moody's, S&P and other 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 SAI. A Fund may
use these ratings to determine whether to purchase, sell or hold a security.
Ratings are general and are not absolute standards of quality. 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 Adviser will determine whether the Fund should
continue to hold the obligation. To the extent that the ratings given by a NRSRO
may change as a result of changes in such organizations or their rating systems,
the Adviser will attempt to substitute comparable ratings. Credit ratings
attempt to evaluate the safety of principal and interest payments and do not
evaluate the risks of fluctuations in market value. Also, rating agencies may
fail to make timely changes in credit ratings. An issuer's current financial
condition may be better or worse than a rating indicates. Finally, if two or
more NRSROs rate a security differently, the Adviser may rely on the higher
rating.
B. DEBT SECURITIES
1. GENERAL
CORPORATE DEBT OBLIGATIONS. Investors High Grade Bond Fund, Investors Bond Fund
and TaxSaver Bond Fund may invest in corporate debt obligations. Corporate debt
obligations include corporate bonds, debentures, notes, commercial paper and
other similar corporate debt instruments. These instruments are used by
companies to borrow money from investors. The issuer pays the investor a fixed
or variable rate of interest and must repay the
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amount borrowed at maturity. Commercial paper (short-term unsecured promissory
notes) is issued by companies to finance their current obligations and normally
has a maturity of less than 9 months. Each Fund may also invest in corporate
debt securities registered and sold in the United States by foreign issuers
(Yankee bonds) and those sold outside the United States by foreign or U.S.
issuers (Eurobonds). Each Fund restricts its purchases of these securities to
issues denominated and payable in United States dollars. All obligations of
non-U.S. issuers purchased by a Fund will be issued or guaranteed by a sovereign
government, by a supranational agency whose members are sovereign governments,
or by a U.S. issuer in whose debt securities the Fund can invest.
U.S. GOVERNMENT SECURITIES. Investors High Grade Bond Fund, Investors Bond Fund
and TaxSaver Bond Fund may invest in U.S. Government Securities. U.S. Government
Securities include securities issued by the U.S. Treasury and by U.S. Government
agencies and instrumentalities. U.S. Government Securities may be supported by
the full faith and credit of the United States (such as mortgage-related
securities and certificates of the Government National Mortgage Association and
securities of the Small Business Administration); by the right of the issuer to
borrow from the U.S. Treasury (for example, Federal Home Loan Bank securities);
by the discretionary authority of the U.S. Treasury to lend to the issuer (for
example, Fannie Mae (formerly the Federal National Mortgage Association)
securities); or solely by the creditworthiness of the issuer (for example,
Federal Home Loan Mortgage Corporation securities).
Holders of U.S. Government Securities not backed by the full faith and credit of
the United States must look principally to the agency or instrumentality issuing
the obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment. No assurance can be given that the U.S. Government would provide
support if it were not obligated to do so by law. Neither the U.S. Government
nor any of its agencies or instrumentalities guarantees the market value of the
securities they issue.
MORTGAGE-RELATED SECURITIES. Investors High Grade Bond Fund and Investors Bond
Fund may invest in mortgage-related securities. Mortgage-related securities
represent interests in a pool of mortgage loans originated by lenders such as
commercial banks, savings associations and mortgage bankers and brokers.
Mortgage-related securities may be issued by governmental or government-related
entities or by non-governmental entities such as special purpose trusts created
by commercial lenders.
Pools of mortgages consist of whole mortgage loans or participations in mortgage
loans. The majority of these loans are made to purchasers of 1-4 family homes.
The terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of adjustable-rate mortgages,
growing equity mortgages, graduated payment mortgages and other types. Mortgage
poolers apply qualification standards to lending institutions which originate
mortgages for the pools as well as credit standards and underwriting criteria
for individual mortgages included in the pools. In addition, many mortgages
included in pools are insured through private mortgage insurance companies.
Mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or on specified call dates. Most mortgage-related
securities, however, are pass-through securities, which means that investors
receive payments consisting of a pro-rata share of both principal and interest
(less servicing and other fees), as well as unscheduled prepayments, as loans in
the underlying mortgage pool are paid off by the borrowers. Additional
prepayments to holders of these securities are caused by prepayments resulting
from the sale or foreclosure of the underlying property or refinancing of the
underlying loans. As prepayment rates of individual pools of mortgage loans vary
widely, it is not possible to predict accurately the average life of a
particular mortgage-related security. Although mortgage-related securities are
issued with stated maturities of up to forty years, unscheduled or early
payments of principal and interest on the mortgages may shorten considerably the
securities' effective maturities.
GOVERNMENT AND AGENCY MORTGAGE-RELATED SECURITIES. The principal issuers or
guarantors of mortgage-related securities are the Government National Mortgage
Association ("GNMA"), Fannie Mae ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). GNMA, a wholly-owned U.S. Government corporation
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within the Department of Housing and Urban Development ("HUD"), creates
pass-through securities from pools of government guaranteed (Federal Housing
Authority or Veterans Administration) mortgages. The principal and interest on
GNMA pass-through securities are backed by the full faith and credit of the U.S.
Government.
FNMA, which is a U.S. Government-sponsored corporation owned entirely by private
stockholders that is subject to regulation by the Secretary of HUD, and FHLMC, a
corporate instrumentality of the U.S. Government, issue pass-through securities
from pools of conventional and federally insured and/or guaranteed residential
mortgages. FNMA guarantees full and timely payment of all interest and
principal, and FHMLC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Mortgage-related
securities from FNMA and FHLMC are not backed by the full faith and credit of
the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Investors Bond Fund may invest in
privately issued mortgage-related securities. Mortgage-related securities
offered by private issuers include pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds, which are
considered to be debt obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations that are collateralized by mortgage-related securities issued by
GNMA, FNMA or FHLMC or by pools of conventional mortgages of multi-family or of
commercial mortgage loans.
Privately-issued mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than securities issued by
U.S. Government issuers because there are no direct or indirect governmental
guarantees of payment. Many non-governmental issuers or servicers of
mortgage-related securities guarantee or provide insurance for timely payment of
interest and principal on the securities. The market for privately-issued
mortgage-related securities is smaller and less liquid than the market for
mortgage-related securities issued by U.S. government issuers.
STRIPPED MORTGAGE-RELATED SECURITIES. Investors Bond Fund may invest in stripped
mortgage-related securities. Stripped mortgage-related securities are
multi-class mortgage-related securities that are created by separating the
securities into their principal and interest components and selling each piece
separately. Stripped mortgage-related securities are usually structured with two
classes that receive different proportions of the interest and principal
distributions in a pool of mortgage assets.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMs") are pass-through securities representing interests in pools of mortgage
loans with adjustable interest rates that are reset at periodic intervals,
usually by reference to some interest rate index or market interest rate, and
that may be subject to certain limits. Although the rate adjustment feature may
reduce sharp changes in the value of adjustable rate securities, these
securities can change in value based on changes in market interest rates or
changes in the issuer's creditworthiness. Changes in the interest rates on ARMs
may lag behind changes in prevailing market interest rates. This may result in a
slightly lower net value until the interest rate resets to market rates. Thus, a
Fund could suffer some principal loss if the Fund sold the securities before the
interest rates on the underlying mortgages were adjusted to reflect current
market rates. Some adjustable rate securities (or the underlying mortgages) are
subject to caps or floors, that limit the maximum change in interest rates
during a specified period or over the life of the security.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are multiple-class debt obligations that are fully collateralized by
mortgage-related pass-through securities or by pools of mortgages ("Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets are passed
through to the holders of the CMOs as they are received, although certain
classes (often referred to as "tranches") of CMOs have priority over other
classes with respect to the receipt of mortgage prepayments.
Multi-class mortgage pass-through securities are interests in trusts that hold
Mortgage Assets and that have multiple classes similar to those of CMOs.
Payments of principal of and interest on the underlying Mortgage Assets (and in
the case of CMOs, any reinvestment income thereon) provide funds to pay debt
service on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities. Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous
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payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. Planned amortization class mortgage-related securities ("PAC
Bonds") are a form of parallel pay CMO. PAC Bonds are designed to provide
relatively predictable payments of principal provided that, among other things,
the actual prepayment experience on the underlying mortgage loans falls within a
contemplated range. CMOs may have complicated structures and generally involve
more risks than simpler forms of mortgage-related securities.
ASSET-BACKED SECURITIES. Investors High Grade Bond Fund and Investors Bond Fund
may invest in asset-backed securities. Asset-backed securities, which have
structural characteristics similar to mortgage-related securities but have
underlying assets that are not mortgage loans or interests in mortgage loans.
Asset-backed securities represent fractional interests in, or are secured by and
payable from, pools of 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 (for example, credit card)
agreements. Assets are securitized through the use of trusts and special purpose
corporations that issue securities that are often backed by a pool of assets
representing the obligations of a number of different parties. Asset-backed
securities have structures and characteristics similar to those of
mortgage-related securities and, accordingly, are subject to many of the same
risks, although often, to a greater extent.
MUNICIPAL SECURITIES. TaxSaver Bond Fund, Maine Municipal Bond Fund and New
Hampshire Bond Fund may invest in municipal securities. Municipal securities are
issued by the states, territories and possessions of the United States, their
political subdivisions (such as cities, counties and towns) and various
authorities (such as public housing or redevelopment authorities),
instrumentalities, public corporations and special districts (such as water,
sewer or sanitary districts) of the states, territories and possessions of the
United States or their political subdivisions. In addition, municipal securities
include securities issued by or on behalf of public authorities to finance
various privately operated facilities, such as industrial development bonds,
that are backed only by the assets and revenues of the non-governmental user
(such as hospitals and airports).
Municipal securities are issued to obtain funds for a variety of public
purposes, including general financing for state and local governments, or
financing for specific projects or public facilities. Municipal securities are
classified as general obligation or revenue bonds or notes. General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable from revenue derived from a particular facility, class of facilities or
the proceeds of a special excise tax or other specific revenue source but not
from the issuer's general taxing power. Private activity bonds and industrial
revenue bonds do not carry the pledge of the credit of the issuing municipality,
but generally are guaranteed by the corporate entity on whose behalf they are
issued.
Municipal leases are entered into by state and local governments and authorities
to acquire equipment and facilities such as fire and sanitation vehicles,
telecommunications equipment and other assets. Municipal leases (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.
VARIABLE AND FLOATING RATE SECURITIES. Each Fund may invest in variable and
floating rate secuirties. Debt securities have variable or floating rates of
interest and, under certain limited circumstances, may have varying principal
amounts. These securities pay interest at rates that are adjusted periodically
according to a specified formula, usually with reference to one or more interest
rate indices or market interest rates (the "underlying index"). The interest
paid on these securities is a function primarily of the underlying index upon
which the interest rate adjustments are based. These adjustments minimize
changes in the market value of the obligation. Similar to fixed rate debt
instruments, variable and floating rate instruments are subject to changes in
value based on changes in market interest rates or changes in the issuer's
creditworthiness. The rate of interest on securities
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may be tied to U.S. Government Securities or indices on those securities as well
as any other rate of interest or index. Certain variable rate securities pay
interest at a rate that varies inversely to prevailing short-term interest rates
(sometimes referred to as "inverse floaters"). Certain inverse floaters may have
an interest rate reset mechanism that multiplies the effects of changes in the
underlying index. This mechanism may increase the volatility of the security's
market value while increasing the security's yield.
Variable and floating rate demand notes of corporations are redeemable upon a
specified period of notice. These obligations include master demand notes that
permit investment of fluctuating amounts at varying interest rates under direct
arrangements with the issuer of the instrument. The issuer of these obligations
often has the right, after a given period, to prepay the outstanding principal
amount of the obligations upon a specified number of days' notice.
Certain securities may have an initial principal amount that varies over time
based on an interest rate index, and, accordingly, a Fund might be entitled to
less than the initial principal amount of the security upon the security's
maturity. A Fund intends to purchase these securities only when the Adviser
believes the interest income from the instrument justifies any principal risks
associated with the instrument. The Adviser may attempt to limit any potential
loss of principal by purchasing similar instruments that are intended to provide
an offsetting increase in principal. There can be no assurance that the Adviser
will be able to limit the effects of principal fluctuations and, accordingly, a
Fund may incur losses on those securities even if held to maturity without
issuer default.
There may not be an active secondary market for any particular floating or
variable rate instruments, which could make it difficult for a Fund to dispose
of the instrument during periods that the Fund is not entitled to exercise any
demand rights it may have. A Fund could, for this or other reasons, suffer a
loss with respect to those instruments. The Adviser monitors the liquidity of
each Fund's investment in variable and floating rate instruments, but there can
be no guarantee that an active secondary market will exist.
STAND-BY COMMITMENTS. TaxSaver Bond Fund, Maine Municipal Bond Fund and New
Hampshire Bond Fund may purchase municipal securities on a stand-by commitment
basis. A stand-by commitment is the right to resell a security to the seller at
an agreed upon price or yield within a specified period prior to its maturity
date. Securities with a stand-by commitment are generally more expensive if the
same securities were without the commitment. Stand-by commitments allow a Fund
to invest in a security while preserving its liquidity to meet unanticipated
redemptions. A Fund will enter into stand-by commitments only with banks or
municipal security dealers that the Adviser believes have minimal credit risk.
The value of a stand-by commitment is dependent on the ability of the writer to
meet its repurchase obligation.
PARTICIPATION INTERESTS. TaxSaver Bond Fund, Maine Municipal Bond Fund and New
Hampshire Bond Fund may invest in participation interests. Participation
interests are interests in loans or securities in which a Fund may invest
directly that are owned by banks or other institutions. A participation interest
gives a Fund an undivided proportionate interest in a loan or security
determined by the Fund's investment. Participation interests may carry a demand
feature permitting the holder to tender the interests back to the bank or other
institution. Participation interests, however, do not provide the Fund with any
right to enforce compliance by the borrower, nor any rights of set-off against
the borrower and the Portfolio may not directly benefit from any collateral
supporting the loan in which it purchased a participation interest. As a result,
the Fund will assume the credit risk of both the borrower and the lender that is
selling the participation interest.
2. RISKS
GENERAL. The market value of the interest-bearing debt securities held by a Fund
will be affected by changes in interest rates. There is normally an inverse
relationship between the market value of securities sensitive to prevailing
interest rates and actual changes in interest rates. The longer the remaining
maturity (and duration) of a security, the more sensitive the security is to
changes in interest rates. All debt securities, including U.S. Government
Securities, can change in value when there is a change in interest rates.
Changes in the ability of an issuer to make payments of interest and principal
and in the markets' perception of an issuer's creditworthiness will also affect
the market value of that issuer's debt securities. As a result, an investment in
a Fund is subject to
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risk even if all debt securities in the Fund's investment portfolio are paid in
full at maturity. In addition, certain debt securities may be subject to
extension risk, which refers to the change in total return on a security
resulting from an extension or abbreviation of the security's maturity.
Yields on debt securities, including municipal securities, are dependent on a
variety of factors, including the general conditions of the debt securities
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. Debt securities with longer maturities tend to produce
higher yields and are generally subject to greater price movements than
obligations with shorter maturities. A portion of the municipal securities held
by a Fund may be supported by credit and liquidity enhancements, such as letters
of credit (which are not covered by federal deposit insurance) or puts or demand
features of third party financial institutions, generally domestic and foreign
banks.
The issuers of debt securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors that
may restrict the ability of the issuer to pay, when due, the principal of and
interest on its debt securities. The possibility exists therefore, that, as a
result of bankruptcy, litigation or other conditions, the ability of an issuer
to pay, when due, the principal of and interest on its debt securities may
become impaired.
CREDIT RISK. Each Fund's investments in debt securities are subject to credit
risk relating to the financial condition of the issuers of the securities that
each Fund holds. To limit credit risk, Investors High Grade Bond Fund generally
invests in debt securities rated in the three highest rating categories by an
NRSRO and each other generally buys debt securities that are rated in the top
four long-term rating categories by an NRSRO or in the top two short-term rating
categories by an NRSRO. Moody's, Standard & Poor's and other 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 securities by several NRSROs is included in Appendix B. The
Adviser may use these ratings to determine whether to purchase, sell or hold a
security. Ratings are not, however, absolute standards of quality. Credit
ratings attempt to evaluate the safety of principal and interest payments and do
not evaluate the risks of fluctuations in market value. Consequently, similar
securities with the same rating may have different market prices. In addition,
rating agencies may fail to make timely changes in credit ratings and the
issuer's current financial condition may be better or worse than a rating
indicates.
Each Fund may retain a security that ceases to be rated or whose rating has been
lowered below the Fund's lowest permissible rating category if the Adviser
determines that retaining the security is in the best interests of the Fund.
Because a downgrade often results in a reduction in the market price of the
security, sale of a downgraded security may result in a loss.
Each Fund may purchase unrated securities if the Adviser determines that the
security is of comparable quality to a rated security that the Fund may
purchase. Unrated securities may not be as actively traded as rated securities.
MORTGAGE-RELATED SECURITIES. The value of mortgage-related securities may be
significantly affected by changes in interest rates, the markets' perception of
issuers, the structure of the securities and the creditworthiness of the parties
involved. The ability of a Fund to successfully utilize mortgage-related
securities depends in part upon the ability of the Advisers to forecast interest
rates and other economic factors correctly. Some mortgage-related securities
have structures that make their reaction to interest rate changes and other
factors difficult to predict.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related
securities. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location and age of the mortgages and other social and demographic conditions.
In periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool. The volume of prepayments of principal on
the mortgages underlying a particular mortgage-related security will influence
the yield of that security, affecting the Fund's yield. Because prepayments of
principal generally occur when interest rates are
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declining, it is likely that a Fund, to the extent it retains the same
percentage of debt securities, may have to reinvest the proceeds of prepayments
at lower interest rates than those of their previous investments. If this
occurs, a Fund's yield will correspondingly decline. Thus, mortgage-related
securities may have less potential for capital appreciation in periods of
falling interest rates (when prepayment of principal is more likely) than other
debt securities of comparable duration, although they may have a comparable risk
of decline in market value in periods of rising interest rates. A decrease in
the rate of prepayments may extend the effective maturities of mortgage-related
securities, reducing their sensitivity to changes in market interest rates. To
the extent that a Fund's purchase mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, result in a loss equal to any
unamortized premium.
To lessen the effect of the failures by obligors on Mortgage Assets to make
payments, CMOs and other mortgage-related securities may contain elements of
credit enhancement, consisting of either (1) liquidity protection or (2)
protection against losses resulting after default by an obligor on the
underlying assets and allocation of all amounts recoverable directly from the
obligor and through liquidation of the collateral. This protection may be
provided through guarantees, insurance policies or letters of credit obtained by
the issuer or sponsor from third parties, through various means of structuring
the transaction or through a combination of these. A Fund will not pay any
additional fees for credit enhancements for mortgage-related securities,
although the credit enhancement may increase the costs of the mortgage-related
securities.
ASSET-BACKED SECURITIES. Like mortgages underlying mortgage-related securities,
the collateral underlying asset-backed securities are subject to prepayment,
which may reduce the overall return to holders of asset-backed securities.
Asset-backed securities present certain additional and unique risks. Primarily,
these securities do not always have the benefit of a security interest in
collateral comparable to the security interests associated with mortgage-related
securities. 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 by automobiles. 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 the 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. As a result, the
risk that recovery on repossessed collateral might be unavailable or inadequate
to support payments on asset-backed securities is greater for asset-backed
securities than for mortgage-related securities. In addition, because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of an interest rate or economic cycle has not been tested.
NON-INVESTMENT GRADE SECURITIES. Each Fund except Investors High Grade Bond Fund
may invest in securities rated below the fourth highest rating category by an
NRSRO or which are unrated and judged by the Adviser to be comparable quality.
Such high risk securities (commonly referred to as "junk bonds") are not
considered to be investment grade and have speculative or predominantly
speculative characteristics. Non-investment grade, high risk securities provide
poor protection for payment of principal and interest but may have greater
potential for capital appreciation than do higher quality securities. These
lower rated securities involve greater risk of default or price changes due to
changes in the issuers' creditworthiness than do higher quality securities. The
market for these securities may be thinner and less active than that for higher
quality securities, which may affect the price at which the lower rated
securities can be sold. In addition, the market prices of lower rated securities
may fluctuate more than the market prices of higher quality securities and may
decline significantly in periods of general economic difficulty or rising
interest rates.
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A Fund may also assume a temporary defensive position and may invest without
limit in commercial paper and other money market instruments that are of prime
quality. Prime quality instruments are those instruments that are rated in one
of the two highest short-term rating categories by an NRSRO or, if not rated,
determined by the Adviser to be of comparable quality.
Money market instruments usually have maturities of one year or less and fixed
rates of return. The money market instruments in which a Fund may invest include
U.S. Government Securities, time deposits, bankers acceptances and certificates
of deposit corporate notes and short-term bonds and money market mutual funds.
The money market instruments in which a Fund may invest have variable and
floating rates of interest.
C. OPTIONS AND FUTURES
1. GENERAL
Investors High Grade Bond Fund, Investors Bond Fund and TaxSaver Bond Fund do
not currently invest in options and futures contracts. In the future, each Fund
may seek to hedge against a decline in the value of securities it owns or an
increase in the price of securities that it plans to purchase by purchasing
options and writing (selling) covered options. Each Fund may purchase or write
options on securities in which it invests and on any securities index based in
whole or in part on securities in which it may invest.
A Fund may buy and sell interest rate futures contracts on Treasury bills,
Treasury bonds and on other financial instruments. TaxSaver Bond Fund may also
purchase and sell municipal bond index futures contracts. A Fund may write put
and call options and purchase options on permissible futures contracts. A Fund
may only invest in options traded on an exchange or in an over-the-counter
market.
2. OPTIONS AND FUTURES STRATEGIES
OPTIONS ON SECURITIES. A call option is a contract under which the purchaser of
the call option, in return for a premium paid, has the right to buy the security
(or index) underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price. A put option gives
its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy, upon exercise of the
option, the underlying security (or a cash amount equal to the value of the
index) at the exercise price. The amount of a premium received or paid for an
option is based upon certain factors, including the market price of the
underlying security, the relationship of the exercise price to the market price,
the historical price volatility of the underlying security, the option period,
and interest rates.
OPTIONS ON INDICES. An index assigns relative values to the securities in the
index, and the index fluctuates with changes in the market values of the
securities included in the index. Index options operate in the same way as the
more traditional options on securities except that index options are settled
exclusively in cash and do not involve delivery of securities. Thus, upon
exercise of index options, the purchaser will realize and the writer will pay an
amount based on the differences between the exercise price and the closing price
of the index.
OPTIONS ON FUTURES. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell security, at a specified exercise price
at any time during the period of the option. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by transfer to the holder of an accumulated balance representing the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future.
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FUTURES CONTRACTS AND INDEX FUTURES CONTRACTS. A futures contract is a bilateral
agreement where one party agrees to accept, and the other party agrees to make,
delivery of cash, an underlying debt security or a currency, as called for in
the contract, at a specified date and at an agreed upon price. A bond index
futures contract involves the delivery of an amount of cash equal to a specified
dollar amount multiplied by the difference between the bond index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, these futures contracts are closed out prior to the
expiration date of the contracts.
3. LIMITATIONS ON OPTIONS AND FUTURES
The Fund will not hedge more than 30% of its total assets by selling futures
contracts, buying put options and writing call options. In addition, the Fund
will not buy futures contracts or write put options whose underlying value
exceed 5% of a Fund's total assets. A Fund will also not purchase call options
if the underlying value of all such options would exceed 5% of the Fund's total
assets. A Fund will not enter into futures contracts and options, if immediately
thereafter, more than 5% of the Fund's total assets would be invested in these
options or committed to margin on futures contracts.
4. RISKS
There are certain investment risks associated with options and futures
transactions. 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 correlations between movements in the
prices of options and movements in the price of the securities (or indices)
hedged or used for cover which may cause a given hedge not to achieve its
objective; (3) the fact that the skills and techniques needed to trade these
instruments are different from those needed to select the securities in which a
Fund invest; and (4) lack of assurance that a liquid secondary market will exist
for any particular instrument at any particular time, which, among other things,
may hinder a Fund's ability to limit exposures by closing its positions.
Other risks include the inability of a Fund, as the writer of covered call
options, to benefit from any appreciation of the underlying securities above the
exercise price, and the possible loss of the entire premium paid for options
purchased by the Fund. In addition, the futures exchanges may limit the amount
of fluctuation permitted in certain futures contract prices on related options
during a single trading day. A Fund may be forced, therefore, to liquidate or
close out a futures contract position at a disadvantageous price. There is no
assurance that a counterparty in an over-the-counter option transaction will be
able to perform its obligations. A Fund may use various futures contracts that
are relatively new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market in those
contracts will develop or continue to exist. A Fund's activities in the futures
and options markets may result in higher portfolio turnover rates and additional
brokerage costs, which could reduce a Fund's yield or return.
D. ILLIQUID AND RESTRICTED SECURITIES
1. GENERAL
No Fund may acquire securities or invest in repurchase agreements if, as a
result, more than 15% of the Fund's net assets (taken at current value) would be
invested in illiquid securities.
The term "illiquid securities" means securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which a Fund has valued the securities. Illiquid securities include: (1)
repurchase agreements not entitling the holder to payment of principal within
seven days (2) purchased over-the-counter options; (3) securities which are not
readily marketable; and (4) except as otherwise determined by the Adviser,
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act ("restricted securities").
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2. RISKS
Limitations on resale may have an adverse effect on the marketability of a
security and a Fund might also have to register a restricted security in order
to dispose of it, resulting in expense and delay. A Fund might not be able to
dispose of restricted or illiquid securities promptly or at reasonable prices
and might thereby experience difficulty in satisfying redemptions. There can be
no assurance that a liquid market will exist for any security at any particular
time. Any security, including securities determined by the Adviser to be liquid,
can become illiquid.
3. DETERMINATION OF LIQUIDITY
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid and has delegated the function of making
determinations of liquidity to the Adviser, pursuant to guidelines approved by
the Board. The Adviser determines and monitors the liquidity of the portfolio
securities and reports periodically on its decisions to the Board. The Adviser
takes into account a number of factors in reaching liquidity decisions,
including but not limited to: (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer.
An institutional market has developed for certain restricted securities.
Accordingly, contractual or legal restrictions on the resale of a security may
not be indicative of the liquidity of the security. If such securities are
eligible for purchase by institutional buyers in accordance with Rule 144A under
the 1933 Act or other exemptions, the Adviser may determine that the securities
are not illiquid.
E. REPURCHASE AGREEMENTS
1. GENERAL
Each Fund may enter into repurchase agreements. Repurchase agreements are
transactions in which a Fund purchases securities from a bank or securities
dealer and simultaneously commits to resell the securities to the bank or dealer
at an agreed-upon date and at a price reflecting a market rate of interest
unrelated to the purchased security. During the term of a repurchase agreement,
each Fund's custodian maintains possession of the purchased securities and any
underlying collateral, which is maintained at not less than 100% of the
repurchase price. Repurchase agreements allow a Fund to earn income on its
uninvested cash for periods as short as overnight, while retaining the
flexibility to pursue longer-term investments.
2. RISKS
Repurchase Agreements involve credit risk. Credit risk is the risk that a
counterparty to a transaction will be unable to honor its financial obligation.
In the event that bankruptcy, insolvency or similar proceedings are commenced
against a counterparty, a Fund may have difficulties in exercising its rights to
the underlying securities or currencies, as applicable. A Fund may incur costs
and expensive time delays in disposing of the underlying securities and it may
suffer a loss. Failure by the other party to deliver a security or currency
purchased by a Fund may result in a missed opportunity to make an alternative
investment. Favorable insolvency laws that allow a Fund, among other things, to
liquidate the collateral held in the event of the bankruptcy of the counterparty
reduce counterparty insolvency risk with respect to repurchase agreements
F. LEVERAGE TRANSACTIONS
1. GENERAL
Each Fund may use leverage to increase potential returns. Leverage involves
special risks and may involve speculative investment techniques. Leverage exists
when cash made available to a Fund through an investment
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technique is used to make additional Fund investments. Borrowing for other than
temporary or emergency purposes, lending portfolio securities, entering into
reverse repurchase agreements, purchasing securities on a when-issued, delayed
delivery or forward commitment basis and the use of swaps and related agreements
are transactions that result in leverage. A Fund uses these investment
techniques only when the Advisers believe that the leveraging and the returns
available to the Fund from investing the cash will provide investors a
potentially higher return.
BORROWING. Each Fund may borrow money from banks for temporary or emergency
purposes in an amount up to 33 1/3% of the Fund's total assets. Each Fund may
borrow money for any other purposes so long as such borrowings do not exceed 10%
of the Fund's total assets. The purchase of securities is prohibited if a Fund's
borrowing exceeds 10% or more of the Fund's total assets.
SECURITIES LENDING. As a fundamental policy, each Fund may lend portfolio
securities in an amount up to 10% of its total assets to brokers, dealers and
other financial institutions. Securities loans must be continuously
collateralized and the collateral must have market value at least equal to the
value of the Fund's loaned securities, plus accrued interest. In a portfolio
securities lending transaction, a 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 as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. The Fund may share the interest it receives on the
collateral securities with the borrower. The terms of a Fund's loans permit the
Fund to reacquire loaned securities on five business days' notice or in time to
vote on any important matter. Loans are subject to termination at the option of
a Fund or the borrower at any time, and the borrowed securities must be returned
when the loan is terminated.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. A Fund may purchase securities
offered on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. When these transactions are negotiated, the price,
which is generally expressed in yield terms, is fixed at the time the commitment
is made, but delivery and payment for the securities take place at a later date.
Normally, the settlement date occurs within two months after the transaction,
but delayed settlements beyond two months may be negotiated. During the period
between a commitment and settlement, no payment is made for the securities
purchased by the purchaser and thus, no interest accrues to the purchaser from
the transaction. At the time a Fund makes the commitment to purchase securities
on a when-issued or delayed delivery basis, the Fund will record the transaction
as a purchase and thereafter reflect the value each day of such securities in
determining its net asset value.
No Fund will enter into a when-issued or forward commitment if, as a result,
more than 15% of the Fund's total assets would be committed to such
transactions.
SWAPS, CAPS FLOORS AND COLLARS. Investors Bond Fund and TaxSaver Bond Fund may
enter into interest rate, currency and mortgage (or other asset) swaps, and may
purchase and sell interest rate "caps," "floors" and "collars." Interest rate
swaps involve the exchange by a Fund and a counterparty of their respective
commitments to pay or receive interest (e.g., an exchange of floating rate
payments for fixed rate payments). Mortgage swaps are similar to interest rate
swap agreements, except that the contractually-based principal amount (the
"notional principal amount") is tied to a reference pool of mortgages. Currency
swaps' notional principal amount is tied to one or more currencies, and the
exchange commitments can involve payments in the same or different currencies.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on the notional principal amount from the party selling the cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling such floor. A collar entitles
the purchaser to receive payments to the extent a specified interest rate falls
outside an agreed range.
A Fund will enter into these transactions primarily to preserve a return or a
spread on a particular investment or portion of its portfolio or to protect
against any interest rate fluctuations or increase in the price of securities it
anticipates purchasing at a later date. A Fund use these transactions as a hedge
and not as a speculative investment, and will enter into the transactions in
order to shift the Fund's investment exposure from one type of investment to
another.
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The use of interest rate protection transactions is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If an Adviser
incorrectly forecasts market values, interest rates and other applicable
factors, there may be considerable impact on a Fund's performance. Even if the
Advisers are correct in their forecasts, there is a risk that the transaction
may correlate imperfectly with the price of the asset or liability being hedged.
2. RISKS
Leverage creates the risk of magnified capital losses. Losses incurred by a Fund
may be magnified by borrowings and other liabilities that exceed the equity base
of the Fund. Leverage may involve the creation of a liability that requires a
Fund to pay interest (for instance, reverse repurchase agreements) or the
creation of a liability that does not entail any interest costs (for instance,
forward commitment costs).
The risks of leverage include a higher volatility of the net asset value of the
Fund's securities and the relatively greater effect on the net asset value of
the securities caused by favorable or adverse market movements or changes in the
cost of cash obtained by leveraging and the yield from invested cash. So long as
a Fund is able to realize a net return on its investment portfolio that is
higher than interest expense incurred, if any, leverage will result in higher
current net investment income for the Fund than if the Fund were not leveraged.
Changes in interest rates and related economic factors could cause the
relationship between the cost of leveraging and the yield to change so that
rates involved in the leveraging arrangement may substantially increase relative
to the yield on the obligations in which the proceeds of the leveraging have
been invested. To the extent that the interest expense involved in leveraging
approaches the net return on a Fund's investment portfolio, the benefit of
leveraging will be reduced, and, if the interest expense on borrowings were to
exceed the net return to investors, the Fund's use of leverage would result in a
lower rate of return than if the Fund were not leveraged. In an extreme case, if
a Fund's current investment income were not sufficient to meet the interest
expense of leveraging, it could be necessary for the Fund to liquidate certain
of its investments at an inappropriate time.
SEGREGATED ACCOUNTS. In order to attempt to reduce the risks involved in various
transactions involving leverage, each Fund's custodian will set aside and
maintain, in a segregated account, cash and liquid securities. The account's
value, which is marked to market daily, will be at least equal to a Fund's
commitments under these transactions.
G. CORE AND GATEWAY(R)
Each Fund may seek to achieve its investment objective by converting to a Core
and Gateway(R) structure. A Fund operating under a Core and Gateway(R) structure
holds, as its only investment, shares of another investment company having
substantially the same investment objective and policies. The Board will not
authorize conversion to a Core and Gateway(R) structure if it would materially
increase costs to a Fund's shareholders. The Board will not convert a Fund to a
Core and Gateway(R) structure without notice to the shareholders.
H. TEMPORARY DEFENSIVE POSITION
A Fund may hold cash or cash equivalents, such as high quality money market
instruments, pending investment and to provide flexibility in meeting
redemptions and paying expenses. Maine Municipal Bond Fund may invest up to 20%
of its net assets in cash or cash equivalents.
2. CERTAIN INFORMATION CONCERNING THE STATES OF MAINE AND NEW HAMPSHIRE
A. STATE OF MAINE
Material in this section has been compiled from numerous sources including "The
Maine Economy: Year-End Review and Outlook, 1998" prepared and published by the
Economics Division of the Maine State Planning Office; "State of Maine, Bureau
of the Budget, Presentation to Bond Rating Agencies, May 1999;" and "State of
Maine Presentation to Moody's Investors Service, May 21, 1999." In addition,
certain information was obtained from the Final Official Statement of the State
of Maine dated June 8, 1999, and published in connection with the issuance on
June 22, 1999 of $71,285,000 State of Maine general obligation bonds dated June
1, 1999. 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
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Administrative and Financial Services, the Office of Fiscal and Program Review
of the Maine Legislature, the Maine State Planning Office, and the Maine State
Retirement System. The most recent information concerning credit ratings on debt
issued by or on behalf of the State of Maine and its subordinate agencies was
obtained from credit reports for the State of Maine published by S&P on June 16,
1999, by Moody's on June 7, 1999, and by Fitch on June 7, 1999.
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 that 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 recently has become more pronounced.. In the words of the
Economics Division of the Maine State Planning Office, "Maine economic
performance in 1998 was the best in a decade, with virtually all major
indicators describing improvement over a strong 1997.....The Maine economic
outlook calls for continued steady growth, with coastal and southern I-95
corridor counties outperforming the balance of the State. The major dampers on
Maine economic performance continue to be slow population growth and ongoing
structural shifts in employment patterns from higher wage paying industries to
lower paying industries."
Specifically, despite consistent economic growth in recent years, Maine's
population grew by only 2% during the last decade. This has caused relatively
tight labor markets in certain parts of the State, and, in the opinion of the
State Planning Office, such labor shortages are inhibiting the ability of the
State's economy to grow at a faster rate. By September of 1998, 75% of Maine
coastal communities and Maine communities south of the I-95 corridor had
umemployment rates of less than 4%. In addition, during 1998, four of Maine's 16
counties had average unemployment rates in the 3% range, with York County at
3.1%, Sagadahoc County at 3.1%, Knox County at 3.2%, and Lincoln County at 3.3%.
Also, during 1987, one county, Cumberland, had an average unemployment rate of
only 2.4%. These are almost incompressibly-low unemployment rates. In short,
almost everyone in these counties who wants a job can find one, and employers in
these counties often actively compete for the same workers. Overall, Maine's
unemployment rate, during 1998, shrank from 5.4% to 4.3%. Also, during 1998 the
number of Maine payroll
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jobs expanded by more than 15,900, more than in any year since 1998. Virtually
all of this net increase in Maine jobs, however, was in non-manufacturing
sectors such as service industries and retail sales. During 1998, Maine
experienced a net loss of 900 jobs in the manufacturing sector, continuing a
trend that has been evident for several years. Accordingly, while it is accurate
that in many Maine counties almost everyone who wants a job can find one, such
jobs increasing tend to be lower-paying service industry jobs rather than higher
paying manufacturing jobs.
Despite the negative factors cited above, almost all other indicators of the
Maine economy during 1998 were positive. For example, Maine payroll employment
growth in 1998 was 2.9%, the best in a decade. Employment in the services sector
grew almost twice as fast as total employment, and accounted for over half of
all new jobs during the year. The retail and wholesale trades sector accounted
for another quarter of all new jobs in Maine during 1998. The Maine construction
sector had the fastest job growth during 1998 at 6.5%, over twice the growth
rate of total employment in Maine. Regionally, job markets were strongest in the
south-coast and mid-coast counties of Maine, weaker in the central counties
(Androscoggin, Kennebec, Penobscot), and weakest in the "rim" counties comprised
of the natural-resource based counties which border upon Canada. This is a
pattern which has persisted in Maine for many years.
Certain sectors of the Maine economy performed unusually well during 1998. The
dollar value of construction contracts in Maine increased by 44.7% during 1998,
compared to a relatively strong 16.5% increase in the dollar value of such
contracts during 1997. Much of this growth in the value of Maine construction
contracts during 1998 was in the non-residential sector, but the value of Maine
residential construction contracts also increased by 17.3% during 1998, on top
of a 6.9% increase in such contracts for 1997. Maine Taxable Consumer Sales
increase by 8.9% during 1998, the greatest yearly increase in such taxable sales
in a decade, and the increase in the building supply and general merchandise
sale groups of such taxable consumer sales was the best since 1987. Also,
taxable Restaurant/Lodging sales grew 7.6% during 1998, the highest growth rate
for such sales since 1988.
The rate of increase in Maine taxable consumer retail sales (including, among
other items, taxable retail sales related to the tourist industry) is
particularly significant for State of Maine credit purposes. Since over
one-third of Maine State government General Fund revenues are derived from a 6%
retail sales tax, the performance of taxable retail sales in Maine is directly
related to the ability of Maine State government to fund necessary governmental
expenditures, and to repay its debt. Prior to October 1, 1998, the rate of tax
on the value of most such taxable retail sales (the "General Sales Tax Rate")
was 6%. On October 1, 1998, the General Sales Tax Rate was reduced by 0.5% to
its current rate of 5.5% as a result of an automatic adjustment to the General
Sales Tax Rate enacted in 1993 and set forth at 36 MRSA ss.1811 (the "Automatic
Adjustment Act"). The Automatic Adjustment Act provides that, if General Fund
revenues for a fiscal year, as determined by the State Controller at the close
of that fiscal year, exceed General Fund revenues for the prior fiscal year by
8% or more, on a base-to-base comparison excluding one-time revenue gains and
losses, then the General Sales Tax Rate shall be reduced by 0.5% on the
subsequent October 1. Legislation enacted June 4, 1999 provided, however: (i)
that, effective July 1, 2000, the General Sales Tax Rate will be reduced from
its current rate of 5.5% to 5%; and (ii) for the repeal, retroactive to May 15,
1999, of provisions in the Automatic Adjustment Act which effect an automatic
reduction of the General Sales Tax Rate if General Fund revenues for a fiscal
year exceed General Fund revenues for the prior fiscal year by 8% or more.
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 divisive that it
caused a shutdown of State government in 1992. Since that time, however, the
Maine Legislature has created the Maine Employers' Mutual Insurance Co. and has
passed numerous reforms in Maine's workers' compensation laws. As a result,
workers' compensation loss ratios declined 79% during the 1991-1998 period, and
workers' compensation insurance rates in Maine declined 41% during the 1994-1998
period. Another positive step concerning workers' compensation insurance rates
in Maine has been that the Maine Legislature, at the request of the Governor,
has refused, thus far, to accede to efforts by organized labor to repeal many of
the reforms in Maine's workers' compensation laws enacted since 1992.
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
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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: (1) $6,000,000 of revenue bonds of the Maine School Building
Authority; (2) $4,000,000 of loans to Maine students attending institutions of
higher education; (3) $1,000,000 of mortgage loans for Indian housing; (4)
$4,000,000 of mortgage loans to resident Maine veterans including businesses
owned by resident Maine veterans; and (5) $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 avoided 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, has recently been criticized, and the State
is becoming more conservative with regard to the issuance of TANS . This has
been made possible largely by the continued imposition of tightly conservative
State fiscal policies that allowed the State to end the last three fiscal years
with significant revenue surpluses. No TANs were issued in the 1998 or 1999
fiscal years, and no TANs currently are planned for issuance in fiscal year
2000.
As of April 30, 1999, there were outstanding general obligation bonds of the
State in the principal amount of $424,585,000. On June 22,1999, the State issued
$71,285,000 of general obligation bonds dated June 1, 1999. As of 1999, there
were no outstanding bond anticipation notes of the State. As of June 8, 1999,
there were authorized by the voters of the State for certain purposes but
unissued, general obligation bonds of the State in the aggregate principal
amount of $117,790,316, including the $71,285,000 in general obligation bonds
issued on June 22, 1999. As of June 8, 1999, there were authorized by the
Constitution of the State and implementing legislation but unissued, general
obligation bonds of the State in the aggregate principal amount of $99,000,000.
Various other Maine governmental agencies and quasi-governmental agencies
including, but not limited to, the Maine Municipal Bond Bank, the Maine Court
Facilities Authority, the Maine Health and Higher Educational Facilities
Authority, Maine Turnpike Authority, the Maine State Housing Authority, the
Maine Public Utility Financing Bank, and the Maine Educational Loan Authority,
issue debt for Maine governmental purposes, but this debt does not pledge the
credit of the State.
The strength of Maine's economy during the 1980's enabled the State to
accumulate relatively large unappropriated surpluses of general fund revenues.
During the economic recession of 1989 through 1992, however, Maine State
government repeatedly reduced its expenditures in order to comply with the
requirement of the Maine Constitution that State government operate on a
balanced budget. Such cuts in General Fund expenditures, other fiscal cost
reductions, and a continuing policy by the current Governor not to allow the
creation of significant new State governmental programs or the taxes to fund
such programs, have allowed the Governor and Legislature most recently to enact
a series of balanced budgets funding State services for fiscal years 1999, 2000,
and 2001.
Laws authorizing budgeted expenditures for fiscal year 1999 have been enacted
and provide for General Fund expenditures of $2,201,734,442 and Highway Fund
expenditures of $215,167,045. Laws authorizing certain expenditures to maintain
current services for fiscal years 2000 and 2001 also have been enacted and
provide, for fiscal year 2000 General Fund expenditures of $2,159,897,758 and
Highway Fund expenditures of $237,526,837 and, for fiscal year 2001, General
Fund expenditures of $2,241,357,100 and Highway Fund expenditures of
$238,848,325. In addition, as of June 8, 1999, the Governor had proposed to the
first regular session of the Legislature in 1999, for fiscal year 2000,
supplemental General Fund expenditures of $77,725,430 and supplemental Highway
Fund expenditures of $27,372,877 and, for fiscal year 2001, supplemental General
Fund expenditures of $92,392,457 and supplemental Highway Fund expenditures of
$29,470,736.
The State also maintains a "Rainy Day Fund" to be used for significant
unforeseen capital and operational expenditures. As of May 21, 1999 the balance
in the State's Rainy Day Fund was approximately $98.7 million, the highest
amount
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ever. There can be no assurance, however, that the budget acts for fiscal years
2000 and 2001, 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 and
continuing problem for Maine State government. The State's independent actuaries
certified this unfunded liability to be approximately $2.5 billion as of June
30, 1998. Because of this, the State has adopted a constitutional amendment (Me.
Const. art. IX, ss.18-B) that required the Maine Legislature, beginning in
fiscal year 1997, annually to appropriate funds that will retire in 31 years or
less the System's unfunded liability attributable to State employees and
teachers. In the Second Regular Session of the 118th Maine Legislature, the
State reduced by statute the amount of time to retire the unfunded liability to
25 years from June 30, 1998. The State also has adopted a separate
constitutional amendment (Me. Const. art. IX, ss.18-A) that requires the Maine
Legislature, beginning in fiscal year 1998, annually to appropriate monies to
fund the System on an actuarially sound basis. Under Article IX, ss.18-B of the
Maine Constitution, unfunded liabilities henceforth may not be created for the
System except those resulting from experience losses, and such unfunded
liabilities resulting from experience losses must be retired over a period not
exceeding 10 years.
During the next several years, Maine may be the recipient of certain additional
revenues. Pursuant a settlement agreement (the "Settlement Agreement"), the
State of Maine is one of forty-six states that recently settled litigation
against certain manufacturers of cigarettes and other tobacco products (the
"Manufacturers"). The forty-six states (the "Settling States") had sued to
recover smoking related Medicaid costs (the "Claims"). Pursuant to the
Settlement Agreement, the Manufacturers have agreed to make certain payments to
the Settling States and the Settling States have agreed to relinquish the
Claims, subject to certain conditions set forth in the Settlement Agreement.
Commencing in January 1999, certain initial payments were made by the
Manufacturers for the benefit of the State of Maine to a national escrow account
in accordance with the Settlement Agreement. The initial payments are expected
to continue through 2003. The State of Maine expects to receive the initial
payments to the national escrow account no later than June 30, 2000. Certain
annual payments by the Manufacturers to the State of Maine pursuant to the
Settlement Agreement are expected to commence in April 2000 and to continue for
as long as the Manufacturers remain in business. The Maine State Treasurer has
estimated the maximum amount of such payments to be made to the State of Maine
at $1.58 billion.
The monies expected to be received by the State of Maine pursuant to the
Settlement Agreement are subject to decreases, offsets, and reductions,
including a possible claim by the Federal government that up to sixty-six
percent (66%) of the settlement payments should be paid to the Federal
government as compensation for extra costs paid by the Federal government for
smoking related Medicaid costs. Accordingly, there can be no assurance as to the
amount of monies that will be received by the State of Maine pursuant to the
Settlement Agreement or as to when, if ever, such monies will be received.
Because of Maine's conservative debt policies and its constitutional requirement
that the State government operate under a balanced budget, Maine general
obligation bonds had been rated AAA by S&P and Aa1 by Moody's for many years.
On June 6, 1991, however, S&P lowered its credit rating for Maine general
obligation bonds from AAA to AA+, and at the same time lowered its credit rating
on bonds issued by the Maine Municipal Bond Bank and the Maine Court Facilities
Authority, and on State of Maine Certificates of Participation for highway
equipment, from AA to A+. In taking this action, S&P said, "The rating action is
a result of declines in key financial indicators, and continued softness in the
state economy. The new rating continues to reflect the low debt burden of the
state, an economic base that has gained greater income levels and diversity over
the 1980's, and a legislative history of dealing effectively with financial
difficulties." These ratings have remained unchanged since June 6, 1991. Because
of continuing improvements in the State of Maine economy, S&P currently views
the State's financial outlook as "stable," stating in its most recent June 9,
1999 credit report: "Led by strong growth in the financial, services, and trade
sectors, Maine's economic performance has improved considerably in recent years
with employment growth of 2.1% in 1997 and 2.9% in 1998. The strong growth
follows 0.8% growth in 1996. Projections indicate continued strong growth in
1999 (2.5%). However, according to Standard & Poor's DRI, and based on projected
limited growth in its labor force, Maine will have slower employment growth
(closer to 1%) through the end of the decade and beyond."
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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. On May 13, 1997, Moody's "confirmed and
refined from Aa to Aa3" the State's general obligation bond rating. Moody's
refinement of the State's bond rating on May 13, 1997 was part of a general
redefinition by Moody's of its bond rating symbols published on January 13,
1997, and was not a substantive rating change. On June 5, 1998, however, citing
an "increased pace of economic recovery," Moody's raised the State's general
obligation bond rating to Aa2. In its most recent June 7, 1999 credit report,
however, Moody's reaffirmed its credit rating for Maine general obligation bonds
at Aa2, stating: "The rating reflects continued steady improvement in fund
balances and spending control, an economy displaying healthy annual growth, and
moderate debt ratios. The rating also acknowledges the ongoing fixed costs
associated with the state's large, but improving, unfunded pension liability."
For the past several years, Maine general obligation bond issuesalso have been
rated by Fitch. In its most recent credit report dated June 7, 1999, Fitch
reaffirmed its a rating of AA for Maine general obligation bonds, saying: "The
State of Maine's general obligation bonds are well secured with strength
especially in the low burden that debt places on resources and in the unusually
rapid rate of amortization. The economy is again growing and financial
operations have been very successful in the past two years. Institutionalization
of financial reforms, including accounting, the revenue estimation process and
debt control is of benefit, and the reserve level continues to increase."
B. STATE OF NEW HAMPSHIRE
Material in this section has been abstracted from the State of New Hampshire
Information Statement dated December 1, 1998, compiled by the Treasurer of the
State of New Hampshire and provided to prospective purchasers of debt securities
offered by the State. While information in the Information Statement is believed
to be accurate, none of that information has been independently verified. Also,
it does not reflect economic conditions or developments that may have occurred
or trends that may have materialized since the date of the Information
Statement. Additionally, economic and fiscal conditions in individual
municipalities within the State may vary from general economic and fiscal
conditions.
New Hampshire is located in the New England Region and is bordered by the states
of Maine, Massachusetts, and Vermont and the Province of Quebec, Canada. New
Hampshire's geographic area is 9,304 square miles and its July 1, 1997
population was 1,173,000, representing a 0.99% increase from 1996 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 1997 was 109% of the national level, ranking 8th in
the United States.
In 1997, New Hampshire's largest employment sector was the service sector (29%
of employment), followed by retail and wholesale trade (26% of employment).
Manufacturing was the third largest sector (18.8% of employment).
Non-agricultural employment levels have remained fairly stable. The unemployment
rate declined to 2.4% in September 1998, less than the national average of 4.6%.
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 in each of the subsequent years through 1997,
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 1995,
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State and local taxes amounted to $97 per $1,000 of personal income, which was
the third lowest in the United States. However, because local property taxes are
the principal source of funding for municipal operations and primary and
secondary education, New Hampshire was highest among all states in local
property tax collections per $1,000 of personal income. See the concluding
paragraph of this section for a description of litigation challenging the
constitutionality of the State's statutory system of financing operation of
elementary and secondary public schools primarily through local taxes.
New Hampshire State government's budget is enacted to cover a biennial period
through a series of legislative bills that establish appropriations and
estimated revenues for each sub-unit of State government, along with
supplemental and special legislation. By statute, the budget process is
initiated by the Governor, who is required to submit operating and capital
budget proposals to the Legislature by February 15 in each odd-numbered year.
While the Governor is required to state the means through which all expenditures
will be financed, there is no constitutional or statutory requirement that the
Governor propose or the Legislature adopt a budget without resorting to
borrowing. There is no line item veto.
State government funds include the General Fund, four special purpose funds and
three enterprise funds, as well as certain "fiduciary" funds. All obligations of
the State are paid from the State Treasury, and must be authorized by a warrant
signed by the Governor and approved by the Executive Council, except for
payments of debt obligations, which are paid by the State Treasurer under
statutory authority.
By statute, at the close of each fiscal biennium of any General Fund
undesignated fund balance must be deposited in a Revenue Stabilization Reserve
Account ("Rainy Day Fund") which may contain up to 5% of General Fund
unrestricted revenue for the fiscal year just ended. 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, in an amount equal to the lesser of the deficit
or revenue shortfall. 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, 1998 there was a designated
balance of $20 million in the Rainy Day Fund.
The Department of Administrative Services is responsible for maintenance of
State government's accounting system, annual reports and general budget
oversight. Expenditures are controlled against appropriations through an
integrated accounting system, which compares the amount of an appropriation to
expenditures, and encumbrances previously charged against that appropriation
before creating an expenditure. By law, with certain exceptions unexpended and
unencumbered balances of appropriations lapse to surplus in the applicable fund
at the end of each fiscal year, along with unappropriated revenues in excess of
legislative estimates. Legislative financial controls involve the Office of
Legislative Budget Assistant ("LBA") which acts under supervision of the
Legislative Fiscal Committee and Joint Legislative Capital Budget Overview
Committee. LBA conducts overall post-audit and review of the budgetary process.
State government financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") and are independently audited annually.
During the 1992-1993 biennium, State revenues began recovering from the decline
that had characterized the recession years of 1989, 1990 and 1991. The General
Fund undesignated fund balance at June 30, 1994, was $12.0 Million. For the
fiscal year ended June 30, 1995, the General Fund undesignated fund balance was
zero, after transferring $35.1 Million from the Healthcare Transition Fund to
offset a delay in receipt of federal funds from disproportionate share
expenditures under the Medicaid program. At June 30, 1996, the General Fund
undesignated fund balance was ($44.2 Million) after a net transfer to the
Healthcare Transition Fund of $21.9 Million, and was ($1.2 million) at June 30,
1997.
There is no constitutional limit on the State's power to issue obligations or
incur indebtedness, and no constitutional requirement for referendum to
authorize incurrence of indebtedness by the State. Authorization and issuance of
debt is governed entirely by statute. New Hampshire pursues a debt management
program designed to minimize use of short-term debt for operating purposes and
to coordinate issuance of tax-exempt securities by the State and its agencies.
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State-guaranteed bonded indebtedness is authorized not only for general purposes
of State government, but also for the New Hampshire Turnpike System, University
System of New Hampshire, water supply and pollution control, water resources
acquisition and construction, School Building Authority, Pease Development
Authority, Business Finance Authority, Municipal Bond Bank and cleanup of
municipal Super Fund sites and landfills. In addition, the Housing Finance
Authority and Higher Education and Health Facilities Authority are authorized to
issue bonds that do not constitute debts or obligations of the State.
Procedure for incurrence of bonded indebtedness by individual municipalities is
governed by State statutes, which prescribe actions that must be pursued by
municipalities in incurring bonded indebtedness and limitations on the amount of
such indebtedness. In general, incurrence of bonded indebtedness by a
municipality must be for a statutorily authorized purpose and requires a
two-thirds majority vote of the municipality's legislative body.
On December 17, 1997, the New Hampshire Supreme Court ruled that the State's
system of financing public elementary and secondary schools primarily through
local property taxes violated the New Hampshire Constitution, because (1)
providing an adequate public education is a duty of State government; (2) local
school property taxes are levied to fulfill a State purpose; and (3) local
school property taxes, levied at different rates in different localities, are
not proportional and reasonable throughout the State. The court also indicated
that a State-funded, constitutionally adequate elementary and secondary
education is a fundamental constitutional right. However, the court stayed all
further proceedings in the case "until the end of the [1998] legislative session
and further order of this court to permit the legislature to address the issues
involved in this case." The court allowed the present funding mechanism to
remain in effect "during the 1998 tax year" i.e. through March 31, 1999. On June
23, 1998, responding to a request for an advisory opinion from the New Hampshire
Senate, the court advised that certain legislation passed by the New Hampshire
House of Representatives to address the court's December 1997 decision would
violate State constitutional requirements by failing to provide funding of
adequate public elementary and secondary education at a uniform tax rate
throughout the State. On November 25, 1998, the court denied the State's motion
to extend the effective date of the court's decision of the previous December
and confirmed that pursuant to that decision, in the absence of legislative
action, the State's Commissioner of Revenue Administration did not have legal
authority to approve local property tax rates for school purposes. On March 11,
1999, the court ruled that the Legislature could not constitutionally submit the
choice of replacement tax plans to a binding referendum vote of the people. On
April 29, 1999, the State enacted Chapter 17 of the Laws of 1999 "establishing a
uniform education property tax and a utility property tax, increasing the
business profit and real estate transfer taxes and including other sources of
revenue to provide funding for an adequate public education and making an
appropriation therefore." This statute established formulae for determining
distribution of funds to local school districts in support of adequate public
education. The immediate effect of the statute was to restore the authority of
New Hampshire municipalities to collect property taxes for school purposes.
However, the statute did not provide revenue sources sufficient to defray the
full amount of the authorized distributions. Whether and when such additional
revenue sources will be enacted remains unresolved. Under the statute's
formulae, some New Hampshire municipalities will sustain increased property
taxes, and certain of these municipalities have initiated legal proceedings to
challenge the constitutionality of the statute. In addition, certain other
municipalities whose earlier litigation prompted the court's decision of
December 17, 1997, have publicly stated their intention to pursue further legal
proceedings asserting that the statute does not comply with the requirements
established by Court in that decision. The outcome of such proceedings and their
impact on the State's finances cannot be predicted.
3. INVESTMENT LIMITATIONS
For purposes of all investment policies of a Fund: (1) the term 1940 Act
includes the rules thereunder, SEC interpretations and any exemptive order upon
which the Fund may rely; and (2) the term Code includes the rules thereunder,
IRS interpretations and any private letter ruling or similar authority upon
which the Fund may rely.
Except as required by the 1940 Act or the Code, 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 a Fund's assets or purchases and redemptions of shares will not be considered
a violation of the limitation.
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A fundamental policy of a Fund and the Fund's investment objective, cannot be
changed without the affirmative vote of the lesser of: (1) 50% of the
outstanding shares of the Fund; or (2) 67% of the shares of the Fund present or
represented at a shareholders meeting at which the holders of more than 50% of
the outstanding shares of the Fund are present or represented. The Board without
shareholder approval may change a nonfundamental policy of a Fund.
A. INVESTORS HIGH GRADE BOND FUND
1. FUNDAMENTAL LIMITATIONS
The Fund may not:
BORROWING
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).
UNDERWRITING ACTIVITIES
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 1933 Act.
MAKING LOANS
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.
PURCHASES AND SALES OF REAL ESTATE
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.
PURCHASES AND SALES OF COMMODITIES
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.
ISSUANCE OF SENIOR SECURITIES
Issue senior securities except pursuant to Section 18 of the 1940 Act
and except that the Fund may borrow money subject to investment
limitations specified in the Fund's Prospectus.
OIL, GAS & MINERAL EXPLORATION
Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
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<PAGE>
DIVERSIFICATION
With respect to 75% of its assets, purchase securities, other than U.S.
Government Securities, of any one issuer, if: (1) 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 (2) such purchase
would at the time of purchase cause the Fund to hold more than 10% of
the outstanding voting securities of that issuer.
CONCENTRATION
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.
2. NON-FUNDAMENTAL LIMITATIONS
The Fund may not:
PLEDGING
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.
INVESTMENT IN OTHER INVESTMENT COMPANIES
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.
MARGIN AND SHORT SALES
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.
BORROWING
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.
ILLIQUID SECURITIES
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.
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<PAGE>
INVESTMENTS IN REAL PROPERTY LEASES
Purchase or sell real property leases (including limited partnership
interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies that
invest in real estate.)
SECURITIES WITH VOTING RIGHTS
Purchase securities having voting rights except securities of other
investment companies.
B. INVESTORS BOND FUND
1. FUNDAMENTAL LIMITATIONS
The Fund may not:
BORROWING
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).
UNDERWRITING ACTIVITIES
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 1933 Act.
MAKING LOANS
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.
PURCHASES AND SALES OF REAL ESTATE
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.
PURCHASES AND SALES OF COMMODITIES
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.
ISSUANCE OF SENIOR SECURITIES
Issue senior securities except pursuant to Section 18 of the 1940 Act
and except that the Fund may borrow money subject to investment
limitations specified in the Fund's Prospectus.
23
<PAGE>
OIL, GAS & MINERAL EXPLORATION
Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
NON-DIVERSIFICATION
Purchase securities, other than U.S. Government Securities, of any one
issuer, if: (1) 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 (2) such purchase would at the time of purchase cause
the Fund to hold more than 10% of the outstanding voting securities of
that issuer. Up to 50% of the Fund's total assets may be invested
without regard to this limitation. These limitations do not apply to
securities of an issuer payable solely from the proceeds of escrowed
U.S. Government Securities.
CONCENTRATION
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.
2. NON-FUNDAMENTAL LIMITATIONS
The Fund may not:
PLEDGING
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.
INVESTMENT IN OTHER INVESTMENT COMPANIES
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.
MARGIN AND SHORT SALES
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.
BORROWING
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.
ILLIQUID SECURITIES
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
24
<PAGE>
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.
INVESTMENTS IN REAL PROPERTY LEASES
Purchase or sell real property leases (including limited partnership
interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies that
invest in real estate.)
SECURITIES WITH VOTING RIGHTS
Purchase securities having voting rights except securities of other
investment companies.
C. TAXSAVER BOND FUND
1. FUNDAMENTAL LIMITATIONS
The Fund may not:
BORROWING
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).
UNDERWRITING ACTIVITIES
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 1933 Act.
MAKING LOANS
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.
PURCHASES AND SALES OF REAL ESTATE
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.
PURCHASES AND SALES OF COMMODITIES
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.
25
<PAGE>
ISSUANCE OF SENIOR SECURITIES
Issue senior securities except pursuant to Section 18 of the 1940 Act
and except that the Fund may borrow money subject to investment
limitations specified in the Fund's Prospectus.
OIL, GAS & MINERAL EXPLORATION
Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
NON-DIVERSIFICATION
Purchase securities, other than U.S. Government Securities, of any one
issuer, if: (1) 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 (2) such purchase would at the time of purchase cause
the Fund to hold more than 10% of the outstanding voting securities of
that issuer. Up to 50% of the Fund's total assets may be invested
without regard to this limitation. These limitations do not apply to
securities of an issuer payable solely from the proceeds of escrowed
U.S. Government Securities.
CONCENTRATION
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 purposes of the Fund's diversification policy, 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 only the assets and
revenues of the nongovernmental user back the bond, 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.
2. NON-FUNDAMENTAL LIMITATIONS
The Fund may not:
PLEDGING
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.
INVESTMENT IN OTHER INVESTMENT COMPANIES
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.
26
<PAGE>
MARGIN AND SHORT SALES
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.
BORROWING
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.
ILLIQUID SECURITIES
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.
INVESTMENTS IN REAL PROPERTY LEASES
Purchase or sell real property leases (including limited partnership
interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies that
invest in real estate.)
SECURITIES WITH VOTING RIGHTS
Purchase securities having voting rights except securities of other
investment companies.
D. MAINE MUNICIPAL BOND FUND
1. FUNDAMENTAL LIMITATIONS
The Fund may not:
BORROWING
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).
UNDERWRITING ACTIVITIES
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 1933 Act.
27
<PAGE>
MAKING LOANS
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.
PURCHASES AND SALES OF REAL ESTATE
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.
PURCHASES AND SALES OF COMMODITIES
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.
ISSUANCE OF SENIOR SECURITIES
Issue senior securities except pursuant to Section 18 of the 1940 Act
and except that the Fund may borrow money subject to investment
limitations specified in the Fund's Prospectus.
OIL, GAS & MINERAL EXPLORATION
Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
CONCENTRATION
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.
VOTING RIGHTS
Purchase securities having voting rights except securities of other
investment companies.
2. NON-FUNDAMENTAL LIMITATIONS
The Fund may not:
PLEDGING
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.
28
<PAGE>
INVESTMENT IN OTHER INVESTMENT COMPANIES
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.
MARGIN AND SHORT SALES
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.
BORROWING
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.
ILLIQUID SECURITIES
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.
INVESTMENTS IN REAL PROPERTY LEASES
Purchase or sell real property leases (including limited partnership
interests, but excluding readily
E. NEW HAMPSHIRE BOND FUND
1. FUNDAMENTAL LIMITATIONS
The Fund may not:
BORROWING
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.
UNDERWRITING ACTIVITIES
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.
MAKING LOANS
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.
29
<PAGE>
PURCHASES AND SALES OF REAL ESTATE
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.
PURCHASES AND SALES OF COMMODITIES
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.
ISSUANCE OF SENIOR SECURITIES
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.
NON-DIVERSIFICATION
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.
CONCENTRATION
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.
2. NON-FUNDAMENTAL LIMITATIONS
BORROWING
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.
SECURITIES WITH VOTING RIGHTS
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").
MARGIN AND SHORT SALES
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.
30
<PAGE>
ILLIQUID SECURITIES
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.
INVESTMENT IN REAL PROPERTY
Purchase or sell real property (including limited partnership
interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities of companies that
invest in real estate.)
CONCENTRATION
No more than 25% of a Fund's total assets may be invested in the
securities of one issuer. This limitation, however, does not apply to
securities of an issuer payable solely from the proceeds of U.S.
Government Securities.
4. PERFORMANCE DATA AND ADVERTISING
A. PERFORMANCE DATA
A Fund may quote performance in various ways. All performance information
supplied in advertising, sales literature, shareholder reports or other
materials is historical and is not intended to indicate future returns.
A Fund may compare any of its performance information with:
o Data published by independent evaluators such as Morningstar, Inc.,
Lipper, Inc., IBC Financial Data, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment
companies ("Fund Tracking Companies").
o The performance of other mutual funds.
o The performance of recognized stock, bond and other indices, including
but not limited to the Standard & Poor's 500(R) Index, the Russell
2000(R) Index, the Russell MidcapTM Index, the Russell 1000(R) Value
Index, the Russell 2500(R) Index, the Morgan Stanley - Europe,
Australia and Far East Index, the Dow Jones Industrial Average, the
Salomon Brothers Bond Index, the Shearson Lehman Bond Index, U.S.
Treasury bonds, bills or notes and changes in the Consumer Price Index
as published by the U.S. Department of Commerce.
Performance information may be presented numerically or in a table, graph, or
similar illustration.
Indices are not used in the management of a Fund but rather are standards by
which the Fund's Adviser and shareholders may compare the performance of the
Fund to an unmanaged composite of securities with similar, but not identical,
characteristics as the Fund.
A Fund may refer to: (1) general market performances over past time periods such
as those published by Ibbotson Associates (for instance, its "Stocks, Bonds,
Bills and Inflation Yearbook"); (2) mutual fund performance
31
<PAGE>
rankings and other data published by Fund Tracking Companies; and (3)
material and comparative mutual fund data and ratings reported in
independent periodicals, such as newspapers and financial magazines.
A Fund's performance will fluctuate in response to market conditions and other
factors.
B. PERFORMANCE CALCULATIONS
The Fund's performance may be quoted in terms of yield or total return. Table 1
in Appendix C includes performance information for each Fund.
1. SEC YIELD
Standardized SEC yields for a Fund used in advertising are computed by dividing
the Fund's interest income (in accordance with specific standardized rules) for
a given 30 day or one month period, net of expenses, by the average number of
shares entitled to receive income 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 accordance with
specific standardized rules) in order to arrive at an annual percentage rate.
Capital gains and losses 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 of income from the Fund 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 fluctuates
from day to day and that the 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. Financial intermediaries may charge their customers that
invest in a Fund fees in connection with that investment. This will have the
effect of reducing the Fund's after-fee yield to those shareholders.
The yields of a Fund are not fixed or guaranteed, and an investment in a Fund is
not insured or guaranteed. Accordingly, yield information should not 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.
Yield quotations are based on amounts invested in a Fund net of any applicable
sales charges that may be paid by an investor. A computation of yield that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
Yield is calculated according to the following formula:
a - b
Yield = 2[(------ + 1)6 - 1]
cd
Where:
a = dividends and interest earned during the
period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the
last day of the period
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<PAGE>
2. TOTAL RETURN CALCULATIONS
A Fund's total return shows its overall change in value, including changes in
share price and assuming all of the Fund's distributions are reinvested.
Total return figures may be based on amounts invested in a Fund net of sales
charges that may be paid by an investor. A computation of total return that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is calculated using a
formula prescribed by the SEC. To calculate standard average annual total
returns a Fund: (1) determines the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period; and (2) calculates the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. For
example, a cumulative return of 100% over ten years would produce an average
annual total return of 7.18%. While average annual returns are a convenient
means of comparing investment alternatives, investors should realize that
performance is not constant over time but changes from year to year, and that
average annual returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.
Average annual total return is calculated 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
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
Because average annual returns tend to smooth out variations in the Fund's
returns, shareholders should recognize that they are not the same as actual
year-by-year results.
OTHER MEASURES OF TOTAL RETURN. Standardized total return quotes may be
accompanied by non-standardized total return figures calculated by alternative
methods.
A Fund may quote unaveraged or cumulative total returns that reflect a
Fund's performance over a stated period of time.
Total returns may be stated in their components of income and capital
(including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to
total return.
Any total return may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over any time period. Total returns may be quoted with or without
taking into consideration a Fund's front-end sales charge or contingent deferred
sales charge (if applicable).
Period total return is calculated according to the following formula:
33
<PAGE>
PT = (ERV/P-1)
Where:
PT = period total return
The other definitions are the same as in average annual total
return above
C. OTHER MATTERS
A Fund may also include various information in its advertising, sales
literature, shareholder reports or other materials including, but not limited
to: (1) portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer or by maturity; (2) statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
by an investor to meet specific financial goals, such as funding retirement,
paying for children's education and financially supporting aging parents; (3)
information (including charts and illustrations) showing the effects of
compounding interest (compounding is the process of earning interest on
principal plus interest that was earned earlier; interest can be compounded at
different intervals, such as annually, quarterly or daily); (4) information
relating to inflation and its effects on the dollar; (for example, after ten
years the purchasing power of $25,000 would shrink to $16,621, $14,968, $13,465
and $12,100, respectively, if the annual rates of inflation were 4%, 5%, 6% and
7%, respectively); (5) information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar-cost
averaging; (6) biographical descriptions of the Fund's portfolio managers and
the portfolio management staff of the Fund's investment adviser, summaries of
the views of the portfolio managers with respect to the financial markets, or
descriptions of the nature of the Adviser's and its staff's management
techniques; (7) the results of a hypothetical investment in the Fund over a
given number of years, including the amount that the investment would be at the
end of the period; (8) the effects of investing in a tax-deferred account, such
as an individual retirement account or Section 401(k) pension plan; (9) the net
asset value, net assets or number of shareholders of the Fund as of one or more
dates; and (10) a comparison of the Fund's operations to the operations of other
funds or similar investment products, such as a comparison of the nature and
scope of regulation of the products and the products' weighted average maturity,
liquidity, investment policies, and the manner of calculating and reporting
performance.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,188 at the end
of the second year (an increase of $98). The extra $8 that was earned on the $90
interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of a Fund's performance.
A Fund may advertise information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar cost
averaging. In a dollar-cost averaging program, an investor invests a fixed
dollar amount in a Fund at periodic intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not insure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in a Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
34
<PAGE>
<TABLE>
<S> <C> <C> <C>
SYSTEMATIC SHARE SHARES
PERIOD INVESTMENT PRICE PURCHASED
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
TOTAL AVERAGE TOTAL
INVESTED $600 PRICE $15.17 SHARES 41.81
</TABLE>
In connection with its advertisements, a Fund may provide "shareholder's
letters" which serve to provide shareholders or investors with an introduction
into the Fund's, the Trust's or any of the Trust's service provider's policies
or business practice.
5. MANAGEMENT
A. TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Trust, their positions with the
Trust, address, date of birth and 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 (*).
<TABLE>
<S> <C>
- -------------------------------------------- ----------------------------------------------------------------------
NAME, POSITION WITH THE TRUST, PRINCIPAL OCCUPATION(S) DURING
DATE OF BIRTH AND ADDRESS PAST 5 YEARS
- -------------------------------------------- ----------------------------------------------------------------------
John Y. Keffer*, Chairman and President President, Forum Financial Group, LLC (a mutual fund services
Born: July 15, 1942 holding company)
Two Portland Square President, Forum Fund Services, LLC. (Trust's underwriter)
Portland, Maine 04101 Chairman and President*, Core Trust (Delaware) (registered
investment company)
- -------------------------------------------- ----------------------------------------------------------------------
Costas Azariadas, Trustee Professor of Economics, University of California-Los Angeles
Born: February 15, 1943 Trustee, Core Trust (Delaware)
Department of Economics
University of California
Los Angeles, CA 90024
- -------------------------------------------- ----------------------------------------------------------------------
James C. Cheng, Trustee President, Technology Marketing Associates
Born: July 26, 1942 (marketing company for small and medium size businesses in New
27 Temple Street England)
Belmont, MA 02718 Trustee, Core Trust (Delaware)
- -------------------------------------------- ----------------------------------------------------------------------
J. Michael Parish, Trustee Partner-Thelen Reid & Priest LLP (law firm) since 1995
Born: November 9, 1943 Partner-Winthrop Stimson Putnam & Roberts (law firm) from 1989-1995
40 West 57th Street Trustee, Core Trust (Delaware)
New York, NY 10019
- -------------------------------------------- ----------------------------------------------------------------------
David I. Goldstein, Vice President General Counsel, Forum Financial Group
Born: August 3, 1961 Secretary, Forum Fund Services, Inc. (Trust's underwriter)
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
35
<PAGE>
- -------------------------------------------- ----------------------------------------------------------------------
Stacey Hong, Treasurer Director, Fund Accounting, Forum Financial Group, LLC
Born: May 10, 1966 Treasurer, Core Trust (Delaware)
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Dawn Taylor, Asst. Treasurer Manager/Senior Tax Specialist, Tax Department, Forum Financial
Born: May 14, 1964 Group, LLC since 1997
Two Portland Square Senior Tax Accountant, Pardy Bingham &Burrell during 1997
Portland, Maine 04101 Senior Tax Specialist, Forum Financial Group, LLC from 1994 to 1997
- -------------------------------------------- ----------------------------------------------------------------------
Leslie K. Klenk, Secretary Assistant Counsel, Forum Financial Group, LLC since 1998
Born: August 24, 1964 Vice President/Associate General Counsel, Smith Barney Inc.
Two Portland Square (brokerage firm) from 1993 through 1998
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Pamela Stutch, Asst. Secretary Fund Administrator, Forum Financial Group, LLC since 1998
Born: June 29, 1967 Law Student, Temple University from 1994-1997
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
</TABLE>
B. COMPENSATION OF TRUSTEES AND OFFICERS
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 $1,000 for each audit committee
meeting attended on a date when a Board meeting is not held. In addition to the
$1,000 for each Board meeting attended, each Trustee is paid $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.
Trustees that are affiliated with the Adviser receive no compensation for their
services or reimbursement for their associated expenses. No officer of the Trust
is compensated by the Trust.
The following table sets forth the fees paid to each Trustee by the Trust for
the fiscal year ended March 31, 1999.
<TABLE>
<S> <C> <C> <C> <C>
Total Compensation from
Compensation from Funds
Trustee the Funds Benefits Retirement and Fund Complex
- -----------------------------------------------------------------------------------------------------------------------------
John Y. Keffer $0 $0 $0 $0
Costas Azariadis $3,555.13 $0 $0 $3,555.13
James C. Cheng $3,555.13 $0 $0 $3,555.13
J. Michael Parish $3,555.13 $0 $0 $3,555.13
</TABLE>
C. INVESTMENT ADVISER
1. SERVICES OF ADVISER
The Adviser serves as investment adviser to each Fund pursuant to an investment
advisory agreement (the "Agreement") with the Trust. Under the Agreement, the
Adviser furnishes at its own expense all services, facilities and personnel
necessary in connection with managing a Fund's investments and effecting
portfolio transactions for a Fund.
36
<PAGE>
2. OWNERSHIP OF ADVISER
The Adviser is 99% owned by Forum Trust LLC and 1% owned by Forum Holdings Corp.
I. Forum Investment Advisors, LLC is registered as an investment adviser with
the SEC under the 1940 Act.
3. FEES
The Adviser's fee is calculated as a percentage of the applicable Fund's average
net assets. The fee is accrued daily by each Fund and is paid monthly based on
average net assets for the previous month.
In addition to receiving its advisory fee from each Fund, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets they invested in a Fund. If you have a separately managed account with
the Adviser with assets invested in a Fund, the Adviser will credit an amount
equal to all or a portion of the fees received by the Adviser against any
investment management fee received from the client.
Table 1 in Appendix B shows the dollar amount of the fees payable by each Fund
to the Adviser, the amount of fees waived by the Adviser, and the actual fees
received by the Adviser. The data are for the past three fiscal years (or
shorter period depending on a Fund's commencement of operations).
4. OTHER PROVISIONS OF ADVISER'S AGREEMENT
The Agreement remains in effect for a period of two years from the date of its
effectiveness. Subsequently, the Agreement must be approved at least annually by
the Board or by majority vote of the shareholders, and in either case by a
majority of the Trustees who are not parties to the Agreement or interested
persons of any such party.
The Agreement is terminable without penalty by the Trust regarding a Fund on 30
days' written notice when authorized either by vote of the Fund's shareholders
or by a majority vote of the Board, or by the Adviser on 90 days' written notice
to the Trust. The Agreement terminates immediately upon assignment.
Under the Agreement, the Adviser is not liable for any mistake of judgment or in
any event whatsoever except for breach of fiduciary duty, 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 agreement.
D. DISTRIBUTOR
1. DISTRIBUTOR; SERVICES AND COMPENSATION OF DISTRIBUTOR
FFS, the distributor (also known as principal underwriter) of the shares of each
Fund, is located at Two Portland Square, Portland, Maine 04101. FFS is a
registered broker-dealer and is a member of the National Association of
Securities Dealers, Inc. Prior to August 1, 1999, Forum Financial Services, Inc.
("FFSI") was the distributor of each Fund pursuant to similar terms and
compensation.
FFS, FAdS, FAcS and the Transfer Agent are each controlled indirectly by Forum
Financial Group, LLC. John Y. Keffer controls forum Financial Group, LLC.
Under a distribution agreement with the Trust (the "Distribution Agreement"),
FFS acts as the agent of the Trust in connection with the offering of shares of
each Fund. FFS continually distributes shares of each Fund on a best efforts
basis. FFS has no obligation to sell any specific quantity of Fund shares.
FFS may enter into arrangements with various financial institutions through
which you may purchase or redeem shares. FFS may, at its own expense and from
its own resources, compensate certain persons who provide services in connection
with the sale or expected sale of shares of each Fund.
37
<PAGE>
FFS may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of each Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of each Fund are sold with a sales charge. These
financial institutions may otherwise act as processing agents, and will be
responsible for promptly transmitting purchase, redemption and other requests to
each 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 a Fund in this manner should acquaint themselves with their
institution's procedures and should read the Prospectus in conjunction with any
materials and information provided by their institution. The financial
institution and not its customers will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
Pursuant to the Distribution Agreement, FFS receives, and may reallow to certain
financial institutions, the sales charge paid by the purchasers of each Fund's
shares.
Table 2 in Appendix B shows the aggregate sales charges paid to FFSI, the amount
of sales charge reallowed by FFSI, and the amount of sales charge retained by
FFSI. The data are for the past three years (or shorter depending on a Fund's
commencement of operations).
2. OTHER PROVISIONS OF DISTRIBUTOR'S AGREEMENT
The Distribution Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party.
The Distribution 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 majority vote of the Board, or by FFS on 60
days' written notice to the Trust.
Under the Distribution Agreement, FFS is not liable to the Trust or the Trust's
shareholders for any error of judgment or mistake of law, for any loss arising
out of any investment or for any act or omission in the performance of its
duties to a Fund, except for willful misfeasance, bad faith or gross negligence
in the performance of its duties or by reason of reckless disregard of its
obligations and duties under the agreement.
Under the Distribution Agreement, FFS and certain related parties (such as FFS's
officers and persons that control FFS) are indemnified by the Trust against all
claims and expenses in any way related to alleged untrue statements of material
fact contained in a Fund's Registration Statement or any alleged omission of a
material fact required to be stated in the Registration Statement to make
statements contained therein not misleading. The Trust, however, will not
indemnify FSS for any such misstatements or omissions if they were made in
reliance upon information provided in writing by FSS in connection with the
preparation of the Registration Statement.
E. OTHER FUND SERVICE PROVIDERS
1. ADMINISTRATOR
As administrator, pursuant to an administration agreement with the Trust (the
"Administration Agreement"), FAdS is responsible for the supervision of the
overall management of the Trust, providing the Trust with general office
facilities and providing persons satisfactory to the Board to serve as officers
of the Trust.
38
<PAGE>
For its services, FAdS receives a fee from a Fund at an annual rate of 0.20% of
the average daily net assets of each Fund. The fee is accrued daily by each Fund
and is paid monthly based on average net assets for the previous month.
The Administration Agreement must be approved at least annually by the Board or
by majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Administration Agreement is terminable without penalty by the Trust
or by FAdS with respect to a Fund on 60 days' written notice.
Under the Administration Agreement, FAdS is not liable to the Trust or the
Trust's shareholders for any act or omission, 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 agreement. Under the
Admnistration Agreement, FAdS and certain related parties (such as FAdS's
officers and persons who control FAdS) are indemnified by the Trust against any
and all claims and expenses related to FAdS's actions or omissions that are
consistent with FAdS's contractual standard of care.
Table 3 in Appendix B shows the dollar amount of the fees payable by each Fund
to FAdS, the amount of the fee waived by FAdS, and the actual fees received by
FAdS. The data are for the past three fiscal years.
2. FUND ACCOUNTANT
As fund accountant, pursuant to an accounting agreement with the Trust (the
"Accounting Agreement"), FAcS provides fund accounting services to each Fund.
These services include calculating the NAV per share of each Fund (and class)
and preparing each Fund's financial statements and tax returns.
For its services, FAcS receives a fee from each Fund at an annual rate of
$36,000 and certain surcharges based upon the number and type of a Fund's
portfolio transactions and positions. The fee is accrued daily by each Fund and
is paid monthly based on the transactions and positions for the previous month.
The Accounting Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Accounting Agreement is terminable without penalty by the Trust or by
FAcS with respect to a Fund on 60 days' written notice.
Under the Accounting Agreement, FAcS is not liable for any action or inaction in
the performance of its duties to a Fund, except for willful misfeasance, bad
faith, gross negligence or by reason of reckless disregard of its obligations
and duties under the agreement. Under the Accounting Agreement, FAcS and certain
related parties (such as FAcS's officers and persons who control FAcS) are
indemnified by the Trust against any and all claims and expenses related to
FAcS's actions or omissions that are consistent with FAcS's contractual standard
of care.
Under the Accounting Agreement, in calculating a Fund's NAV per share, FAcS is
deemed not to have committed an error if the NAV per share it calculates is
within 1/10 of 1% of the actual NAV per share (after recalculation). The
Accounting Agreement also provides that FAcS will not be liable to a shareholder
for any loss incurred due to an NAV difference if such difference is less than
or equal 1/2 of 1% or less than or equal to $10.00. In addition, FAcS is not
liable for the errors of others, including the companies that supply securities
prices to FAcS and each Fund.
Table 4 in Appendix B shows the dollar amount of the fees payable by each Fund
to FAcS, the amount of the fee waived by FAcS, and the actual fees received by
FAcS. The data are for the past three fiscal years.
3. TRANSFER AGENT
As transfer agent and distribution paying agent, pursuant to a transfer agent
agreement with the Trust (the "Transfer Agent Agreement"), the Transfer Agent
maintains an account for each shareholder of record of a Fund
39
<PAGE>
and is responsible for processing purchase and redemption requests and paying
distributions to shareholders of record. The Transfer Agent is located at Two
Portland Square, Portland, Maine 04101 and is registered as a transfer agent
with the SEC.
For its services, the Transfer Agent receives with respect to each Fund 0.25% of
the average daily net assets of the Fund, an annual fee of $12,000 plus $18 per
shareholder account.
The Transfer Agent Agreement must be approved at least annually by the Board or
by majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Transfer Agent Agreement is terminable without penalty by the Trust
or by the Transfer Agent with respect to a Fund on 60 days' written notice.
Under the Transfer Agent Agreement, the Transfer Agent is not liable for any act
or inaction in the performance of its duties to a Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its duties
under the agreement. Under the Transfer Agent Agreement, the Transfer Agent and
certain related parties (such as the Transfer Agent's officers and persons who
control the Transfer Agent) are indemnified by the Trust against any and all
claims and expenses related to FAdS's actions or omissions that are consistent
with FAdS's contractual standard of care.
Table 5 in Appendix B shows the dollar amount of the fees payable by each Fund
to FSS, the amount of the fee waived by FSS, and the actual fees received by
FSS. The data are for the past three fiscal years.
4. CUSTODIAN
As custodian, pursuant to an agreement with the Trust, Forum Trust, LLC
safeguards and controls each Fund's cash and securities, determines income and
collects interest on Fund investments. The Custodian may employ subcustodians to
provide custody of a Fund's domestic and foreign assets. The Custodian is
located at Two Portland Square, Portland, Maine 04101.
For its services, the Custodian receives an annualized percentage of the average
daily net assets of a Fund. Each Fund also pays an annual domestic custody fee
as well as certain other transaction fees. These fees are accrued daily by each
Fund and are paid monthly based on average net assets and transactions for the
previous month.
5. LEGAL COUNSEL
Seward & Kissel LLP, 1200 G Street, N.W., Washington, D.C. 20005 passes upon
legal matters in connection with the issuance of shares of the Trust.
6. INDEPENDENT AUDITORS
Deloitte & Touche LLP, 200 Berkeley Street, 14th Floor, Boston, Massachusetts,
02116-5022, independent auditors, have been selected as auditors for each Fund.
The auditors audit the annual financial statements of each Fund and provide the
Funds with an audit opinion. The auditors also review certain regulatory filings
of each Fund and each Fund's tax returns.
6. PORTFOLIO TRANSACTIONS
A. HOW SECURITIES ARE PURCHASED AND SOLD
Purchases and sales of portfolio securities that are debt securities (for
instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom the Fund
purchases or to whom the Fund sells is acting on its own behalf (and not as the
agent of some other party
40
<PAGE>
such as its customers). These securities normally are purchased directly from
the issuer or from an underwriter or market maker for the securities. There
usually are no brokerage commissions paid for these securities.
Purchases and sales of portfolio securities that are equity securities (for
instance common stock and preferred stock) are generally effected; (1) if the
security is traded on an exchange, through brokers who charge commissions; and
(2) if the security is traded in the "over-the-counter" markets, in a principal
transaction directly from a market maker. In transactions on stock exchanges,
commissions are negotiated. When transactions are executed in an
over-the-counter market, the Adviser will seek to deal with the primary market
makers; but when necessary in order to obtain best execution, the Adviser will
utilize the services of others.
Purchases of securities from underwriters of the securities include a disclosed
fixed 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 price.
In the case debt and equity securities traded in the over-the-counter markets,
there is generally no stated commission, but the price usually includes an
undisclosed commission or markup.
B. COMMISSIONS PAID
Table 6 in Appendix B shows the aggregate brokerage commissions with respect to
each Fund. The data presented are for the past three fiscal years. The table
also indicates the reason for any material change in the last two years in the
amount of brokerage commissions paid by a Fund, if any.
C. ADVISER RESPONSIBILITY FOR PURCHASES AND SALES
The Adviser places orders for the purchase and sale of securities with brokers
and dealers selected by and in the discretion of the Adviser. No Fund has any
obligation to deal with any specific broker or dealer in the execution of
portfolio transactions. 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 each Fund rather than by
any formula.
The Adviser seeks "best execution" for all portfolio transactions. This means
that the Adviser seeks the most favorable price and execution available. The
Adviser's primary consideration in executing transactions for a Fund is prompt
execution of orders in an effective manner and at the most favorable price
available.
1. CHOOSING BROKER-DEALERS
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commissions (including certain dealer spreads) paid in
connection with securities transactions, the Adviser takes into account factors
such as size of the order, difficulty of execution, efficiency of the executing
broker's facilities (including the research services described below) and any
risk assumed by the executing broker.
Consistent with applicable rules and the Adviser's duties, the Adviser may: (1)
consider sales of shares of a Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund; and (2) take into
account payments made by brokers effecting transactions for a Fund (these
payments may be made to the Fund or to other persons on behalf of the Fund for
services provided to the Fund for which those other persons would be obligated
to pay.)
2. OBTAINING RESEARCH FROM BROKERS
The Adviser may give consideration to research services furnished by brokers 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. This research is
designed to augment the Adviser's own internal research and investment strategy
capabilities. This
41
<PAGE>
research may be used by the Adviser in connection with services to clients other
than a Fund, and not all research services may be used by the Adviser in
connection with the Fund. The Adviser's fees are not reduced by reason of the
Adviser's receipt of research services.
The Adviser has full brokerage discretion. It evaluates the range and quality of
a broker's services in placing trades including securing best price,
confidentiality, clearance and settlement capabilities, promptness of execution
and the financial stability of the broker-dealer. Under certain circumstances,
the value of research provided by a broker-dealer may be a factor in the
selection of a broker. This research would include reports that are common in
the industry. Typically, the research will be used to service all of the
Adviser's accounts although a particular client may not benefit from all the
research received on each occasion. The nature of the services purchased for
clients include industry research reports and periodicals, quotation systems,
software for portfolio management and formal databases.
Occasionally, the Adviser may execute a transaction with a broker and pay a
slightly higher commission than another broker may charge. The higher commission
is paid because of the Adviser's need for specific research, for specific
expertise a firm may have in a particular type of transaction (due to factors
such as size or difficulty), or for speed/efficiency in execution. Since most of
the Adviser's brokerage commissions for research are for economic research on
specific companies or industries, and since the Adviser is involved with a
limited number of securities, most of the commission dollars spent for industry
and stock research directly benefit the clients.
There are occasions on which portfolio transactions may be executed as part of
concurrent authorizations to purchase or sell the same securities for more than
one account served by the Adviser, some of which accounts may have similar
investment objectives. Although such concurrent authorizations potentially could
be either advantageous or disadvantageous to any one or more particular
accounts, they will be effected only when the Adviser believes that to do so
will be in the best interest of the affected accounts. When such concurrent
authorizations occur, the objective will be to allocate the execution in a
manner equitable to the accounts involved. Clients are typically allocated
securities with prices averaged on a per-share or per-bond basis.
3. COUNTERPARTY RISK
The Adviser monitors the creditworthiness of counterparties to each Fund's
transactions and intends to enter into a transaction only when it believes that
the counterparty presents minimal and appropriate credit risks.
4. TRANSACTIONS THROUGH AFFILIATES
The Adviser may effect brokerage transactions through affiliates of the Adviser
(or affiliates of those persons) pursuant to procedures adopted by the Trust.
5. OTHER ACCOUNTS OF THE ADVISER
Investment decisions for each Fund are made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. Investment decisions are the product of many
factors, including 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. In addition two or more clients may
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 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 a portfolio
security for one client could have an adverse effect on another client that has
a position in that security. In addition, when purchases or sales of the same
security for a Fund and other client accounts managed by the Adviser occurs
contemporaneously, the
42
<PAGE>
purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales.
6. PORTFOLIO TURNOVER
The frequency of portfolio transactions of a Fund (the portfolio turnover rate)
will vary from year to year depending on many factors. From time to time a Fund
may engage in active short-term trading to take advantage of price movements
affecting individual issues, groups of issues or markets. An annual portfolio
turnover rate of 100% would occur if all of the securities in a Fund were
replaced once in a period of one year. Higher portfolio turnover rates may
result in increased brokerage costs to a Fund and a possible increase in
short-term capital gains or losses.
For the fiscal year ended March 31, 1999, Investors High Grade Bond Fund's
portfolio turnover was 172.60%. The turnover was due to the Fund's recent
inception (March 16, 1998) and the maturity of shorter term instruments like
commercial paper. The Fund invests a portion of its portfolio in short-term
instruments in order to keep the portfolio maturity at seven years or less.
D. SECURITIES OF REGULAR BROKER-DEALERS
From time to time a Fund may acquire and hold securities issued by its "regular
brokers and dealers" or the parents of those brokers and dealers. For this
purpose, regular brokers and dealers are the 10 brokers or dealers that: (1)
received the greatest amount of brokerage commissions during the Fund's last
fiscal year; (2) engaged in the largest amount of principal transactions for
portfolio transactions of the Fund during the Fund's last fiscal year; or (3)
sold the largest amount of the Fund's shares during the Fund's last fiscal year.
Table 7 in Appendix B lists the regular brokers and dealers of each fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of each Fund's holdings of those
securities as of the Fund's most recent fiscal year.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A. GENERAL INFORMATION
You may effect purchases or redemptions or request any shareholder privilege in
person at the Transfer Agent's offices located at Two Portland Square, Portland,
Maine 04101.
Each Fund accept orders for the purchase or redemption of shares on any weekday
except days when the New York Stock Exchange is closed.
B. ADDITIONAL PURCHASE INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor at net
asset value ("NAV") per share plus the applicable sales charge.
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 March 31, 1999.
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<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------- ---------------- ----------------- -----------------
Investors High
Grade Bond Fund Investors Bond TaxSaver Bond
Fund Fund
- ---------------------------------------------- ---------------- ----------------- -----------------
Net Asset Value per Share $9.92 $10.32 $10.61
- ---------------------------------------------- ---------------- ----------------- -----------------
Shares Charge, 3.75% of offering price $0.39 $0.40 $0.41
(3.90% of net asset value per share)
- ---------------------------------------------- ---------------- ----------------- -----------------
Offering to Public $10.31 $10.72 $11.02
- ---------------------------------------------- ---------------- ----------------- -----------------
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------- ---------------- -----------------
Maine New Hampshire
Municipal Bond Bond Fund
Fund
- ---------------------------------------------- ---------------- -----------------
Net Asset Value per Share $11.07 $10.80
- ---------------------------------------------- ---------------- -----------------
Shares Charge, 3.00% of offering price $0.34 $0.33
(3.09% of net asset value per share)
- ---------------------------------------------- ---------------- -----------------
Offering to Public $11.41 $11.13
- ---------------------------------------------- ---------------- -----------------
</TABLE>
Each Fund reserve the right to refuse any purchase request.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, a Fund may accept portfolio securities that meet the investment
objective and policies of a Fund as payment for Fund shares. A Fund will only
accept securities that: (1) are not restricted as to transfer by law and are not
illiquid; and (2) have a value that is readily ascertainable (and not
established only by valuation procedures).
1. IRAS
All contributions into an IRA through the automatic investing service are
treated as IRA contributions made during the year the investment is received.
2. UGMAS/UTMAS
If the trustee's name is not in the account registration of a gift or transfer
to minor ("UGMA/UTMA") account, the investor must provide a copy of the trust
document.
3. PURCHASES THROUGH FINANCIAL INSTITUTIONS
You may purchase and redeem shares through certain broker-dealers, banks and
other financial institutions. Financial institutions may charge their customers
a fee for their services and are responsible for promptly transmitting purchase,
redemption and other requests to a Fund.
If you purchase shares through a financial institution, you will be subject to
the institution's procedures, which may include charges, limitations, investment
minimums, cutoff times and restrictions in addition to, or different from, those
applicable when you invest in a Fund directly. When you purchase a Fund's shares
through a financial institution, you may
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<PAGE>
or may not be the shareholder of record and, subject to your institution's
procedures, you may have Fund shares transferred into your name. There is
typically a three-day settlement period for purchases and redemptions through
broker-dealers. Certain financial institutions may also enter purchase orders
with payment to follow.
You may not be eligible for certain shareholder services when you purchase
shares through a financial institution. Contact your institution for further
information. If you hold shares through a financial institution, a Fund may
confirm purchases and redemptions to the financial institution, which will
provide you with confirmations and periodic statements. A Fund is not
responsible for the failure of any financial institution to carry out its
obligations.
Investors purchasing shares of a Fund through a financial institution should
read any materials and information provided by the financial institution to
acquaint themselves with its procedures and any fees that the institution may
charge.
C. ADDITIONAL REDEMPTION INFORMATION
A Fund may redeem shares involuntarily to reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to
transactions effected for the benefit of a shareholder which is applicable to a
Fund's shares as provided in the Prospectus.
1. SUSPENSION OF RIGHT OF REDEMPTION
The right of redemption may not be suspended, except for any period during
which: (1) the New York Stock Exchange, Inc. is closed (other than customary
weekend and holiday closings) or during which the Securities and Exchange
Commission determines that trading thereon is restricted; (2) an emergency (as
determined by the SEC) exists as a result of which disposal by a Fund of its
securities is not reasonably practicable or as a result of which it is not
reasonably practicable for a Fund fairly to determine the value of its net
assets; or (3) the SEC may by order permit for the protection of the
shareholders of a Fund.
2. REDEMPTION-IN-KIND
Redemption proceeds normally are paid in cash. Payments may be made wholly or
partly in portfolio securities, however, if the Board determines conditions
exist which would make payment in cash detrimental to the best interests of a
Fund. If redemption proceeds are paid wholly or partly in portfolio securities,
brokerage costs may be incurred by the shareholder in converting the securities
to cash. The Trust has filed an election with the SEC pursuant to which a Fund
may only effect a redemption in portfolio securities if the particular
shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
D. NAV DETERMINATION
In determining a Fund's NAV per share, securities for which market quotations
are readily available are valued at current market value using the last reported
sales price. If no sale price is reported, the average of the last bid and ask
price is used. If no average price is available, the last bid price is used. If
market quotations are not readily available, then securities are valued at fair
value as determined by the Board (or its delegate).
E. DISTRIBUTIONS
Distributions of net investment income will be reinvested at a Fund's NAV per
share as of the last day of the period with respect to which the distribution is
paid. Distributions of capital gain will be reinvested at the NAV per share of a
Fund on the payment date for the distribution. Cash payments may be made more
than seven days following the date on which distributions would otherwise be
reinvested.
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<PAGE>
F. SALES CHARGES
1. REDUCED SALES CHARGES
You may qualify for a reduced sales charge on Fund purchases under rights of
accumulation or a letter of intent. If you qualify for Rights of Accumulation
("ROA"), the sales charge you pay is based on the total of your current purchase
and the net asset value (at the end of the previous fund business day) of shares
that you already hold. To qualify for ROA on a purchase, you must inform the
transfer agent and supply sufficient information to verify that each purchase
qualifies for the privilege or discount. You may also enter into a written
Letter of Intent ("LOI"), which expresses your intent to invest $100,000 or more
in a Fund within a period of 13 months. Each purchase under a LOI will be made
at the public offering price applicable at the time of the purchase to a single
transaction of the dollar amount indicated in the LOI. If you do not purchase
the minimum investment referenced in the LOI, you must pay the Fund an amount
equal to the difference between the dollar value of the sales charges paid under
the LOI and the dollar value of the sales charges due on the aggregrate
purchases of the Fund as if such purchases were executed in a single
transaction.
2. ELIMINATION OF SALES CHARGES
No sales charge is assessed on the reinvestment of Fund distributions. No sales
charge is assessed on purchases made for investment purposes or on redemptions
by:
o any bank, trust company, savings association or similar institution with
whom the distributor has entered into a share purchase agreement acting on
behalf of the institution's fiduciary customer accounts or any account
maintained by its trust department (including a pension, profit sharing or
other employee benefit trust created pursuant to a qualified retirement
plan)
o any registered investment adviser with whom the distributor has entered
into a share purchase agreement and which is acting on behalf of its
fiduciary customer accounts
o any broker-dealer with whom the distributor has entered into a Fee-Based
Wrap Account Agreement or similar agreement and which is acting on behalf
of its fee-based program clients
o Trustees and officers of the Trust; directors, officers and full-time
employees of the Advisor, the distributor, any of their affiliates or any
organization with which the distributor has entered into a Selected Dealer
or similar agreement; the spouse, sibling, direct ancestor or direct
descendent (collectively, "relatives") of any such person; any trust or
individual retirement account or self-employed retirement plan for the
benefit of any such person or relative; or the estate of any such person or
relative
o any person who has, within the preceding 90 days, redeemed Fund shares (but
only on purchases in amounts not exceeding the redeemed amounts) and
completes a reinstatement form upon investment
o persons who exchange into a Fund from a mutual fund other than a fund of
the Trust that participates in the Trust's exchange program
o employee benefit plans qualified under Section 401 of the Internal Revenue
Code of 1986, as amended.
The Fund requires appropriate documentation of an investor's eligibility to
purchase or redeem Fund shares without a sales charge. Any shares so purchased
may not be resold except to the Fund.
8. TAXATION
The tax information set forth in the Prospectus and the information in this
section relates solely to U.S. federal income tax law and assumes that each Fund
qualifies as a regulated investment company (as discussed below). Such
information is only a summary of certain key federal income tax considerations
affecting each Fund and its shareholders that are not described in the
Prospectus. No attempt has been made to present a complete explanation of the
federal tax treatment of a Fund or the implications to shareholders. The
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
46
<PAGE>
This "Taxation" section is based on the Code and applicable regulations in
effect on the date hereof. Future legislative or administrative changes or court
decisions may significantly change the tax rules applicable to a Fund and its
shareholders. Any of these changes or court decisions may have a retroactive
effect.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX PROVISIONS APPLICABLE TO THEM.
A. QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund intends for each tax year to qualify as a "regulated investment
company" under the Code. This qualification does not involve governmental
supervision of management or investment practices or policies of a Fund.
The tax year end of each Fund is March 31 (the same as the Fund's fiscal year
end).
1. MEANING OF QUALIFICATION
As a regulated investment company, a Fund will not be subject to federal income
tax on the portion of its investment company taxable income (that is, taxable
interest, dividends net short-term capital gains, and other taxable ordinary
income, net of expenses) and net capital gain (that is, the excess of net
long-term capital gains over net short-term capital losses) that it distributes
to shareholders. In order to qualify to be taxed as a regulated investment
company a Fund must satisfy the following requirements:
o The Fund must distribute at least 90% of its investment company taxable
income for the tax year. (Certain distributions made by a Fund after
the close of its tax year are considered distributions attributable to
the previous tax year for purposes of satisfying this requirement.)
o The Fund must derive at least 90% of its gross income from certain
types of income derived with respect to its business of investing in
securities.
o The Fund must satisfy the following asset diversification test at the
close of each quarter of the Fund's tax year: (1) at least 50% of the
value of the Fund's assets must consist of cash and cash items, U.S.
government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in
securities of the issuer and as to which the Fund does not hold more
than 10% of the outstanding voting securities of the issuer); and (2)
no more than 25% of the value of the Fund's total assets may be
invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which
are engaged in the same or similar trades or businesses.
Each Fund generally intends to operate in a manner such that it will not be
liable for federal income tax.
2. FAILURE TO QUALIFY
If for any tax year a Fund does not qualify as a regulated investment company,
all of its taxable income (including its net capital gain) will be subject to
tax at regular corporate rates without any deduction for dividends to
shareholders, and the dividends will be taxable to the shareholders as ordinary
income to the extent of a Fund's current and accumulated earnings and profits. A
portion of these distributions generally may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Failure to qualify as a regulated investment company would thus have a negative
impact on a Fund's income and performance. It is possible that a Fund will not
qualify as a regulated investment company in any given tax year.
47
<PAGE>
B. FUND DISTRIBUTIONS
Each Fund anticipates distributing substantially all of its investment company
taxable income for each tax year. These distributions are taxable to you as
ordinary income. These distributions may qualify for the 70% dividends-received
deduction for corporate shareholders.
Each Fund anticipates distributing substantially all of its net capital gain for
each tax year. These distributions generally are made only once a year, usually
in November or December, but a Fund may make additional distributions of net
capital gain at any time during the year. These distributions are taxable to you
as long-term capital gain, regardless of how long you have held shares. These
distributions do not qualify for the dividends-received deduction.
Each Fund may have capital loss carryovers (unutilized capital losses from prior
years). These capital loss carryovers (which can be used for up to eight years)
may be used to offset any current capital gain (whether short- or long-term).
All capital loss carryovers are listed in a Fund's financial statements. Any
such losses may not be carried back.
Distributions by a Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital. Return of capital
distributions reduces your tax basis in the shares and are treated as gain from
the sale of the shares to the extent your basis would be reduced below zero.
All distributions by a Fund will be treated in the manner described above
regardless of whether the distribution is paid in cash or reinvested in
additional shares of the Fund (or of another Fund). If you receive distribution
in the form of additional shares, it will be treated as receiving a distribution
in an amount equal to the fair market value of the shares received, determined
as of the reinvestment date.
You may purchase shares whose net asset value at the time reflects undistributed
net investment income or recognized capital gain, or unrealized appreciation in
the value of the assets of a Fund. Distributions of these amounts are taxable to
you in the manner described above, although the distribution economically
constitutes a return of capital to you.
If you purchase shares of a Fund just prior to the ex-dividend date of a
distribution, you will be taxed on the entire amount of the distribution
received, even though the net asset value per share on the date of the purchase
reflected the amount of the distribution.
Ordinarily, you are required to take distributions by a Fund into account in the
year in which they are made. A distribution declared in October, November or
December of any year and payable to you on a specified date in those months,
however, is deemed to be received by you (and made by the Fund) on December 31
of that calendar year if the distribution is actually paid in January of the
following year.
You will be advised annually as to the U.S. federal income tax consequences of
distributions made (or deemed made) to them during the year.
C. CERTAIN TAX RULES APPLICABLE TO THE FUNDS TRANSACTIONS
For federal income tax purposes, when put and call options purchased by a Fund
expire unexercised, the premiums paid by the Fund give rise to short- or
long-term capital losses at the time of expiration (depending on the length of
the respective exercise periods for the options). When put and call options
written by a Fund expire unexercised, the premiums received by the Fund give
rise to short-term capital gains at the time of expiration. When a Fund
exercises a call, the purchase price of the underlying security is increased by
the amount of the premium paid by the Fund. When a Fund exercises a put, the
proceeds from the sale of the underlying security are decreased by the premium
paid. When a put or call written by a Fund is exercised, the purchase price
(selling price in the case of a call) of the underlying security is decreased
(increased in the case of a call) for tax purposes by the premium received.
48
<PAGE>
Certain listed options, regulated futures contracts and forward currency
contracts are considered "Section 1256 contracts" for federal income tax
purposes. Section 1256 contracts held by a Fund at the end of each tax year are
"marked to market" and treated for federal income tax purposes as though sold
for fair market value on the last business day of the tax year. Gains or losses
realized by a Fund on Section 1256 contracts generally is considered 60%
long-term and 40% short-term capital gains or losses. Each Fund can elect to
exempt its Section 1256 contracts, which are part of a "mixed straddle" (as
described below) from the application of Section 1256.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by the Fund may constitute a
"straddle" for federal income tax purposes. A straddle of which at least one,
but not all, of the positions are Section 1256 contracts, may constitute a
"mixed straddle". In general, straddles are subject to certain rules that may
affect the character and timing of a Fund's gains and losses with respect to
straddle positions by requiring, among other things, that: (1) the loss realized
on disposition of one position of a straddle may not be recognized to the extent
that the Fund has unrealized gains with respect to the other position in such
straddle; (2) the Fund's holding period in straddle positions be suspended while
the straddle exists (possibly resulting in gain being treated as short-term
capital gain rather than long-term capital gain); (3) the losses recognized with
respect to certain straddle positions which are part of a mixed straddle and
which are non-Section 1256 positions be treated as 60% long-term and 40%
short-term capital loss; (4) losses recognized with respect to certain straddle
positions which would otherwise constitute short-term capital losses be treated
as long-term capital losses; and (5) the deduction of interest and carrying
charges attributable to certain straddle positions may be deferred. Various
elections are available to a Fund, which may mitigate the effects of the
straddle rules, particularly with respect to mixed straddles. In general, the
straddle rules described above do not apply to any straddles held by a Fund all
of the offsetting positions of which consist of Section 1256 contracts.
If a Fund invests in the securities of foreign issuers, the Fund's income may be
subject to foreign withholding taxes.
D. FEDERAL EXCISE TAX
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to: (1) 98% of its
ordinary taxable income for the calendar year; and (2) 98% of its capital gain
net income for the one-year period ended on October 31 of the calendar year. The
balance of the Fund's income must be distributed during the next calendar year.
A Fund will be treated as having distributed any amount on which it is subject
to income tax for any tax year.
For purposes of calculating the excise tax, each Fund: (1) reduces its capital
gain net income (but not below its net capital gain) by the amount of any net
ordinary loss for the calendar year; and (2) excludes foreign currency gains and
losses incurred after October 31 of any year (or December 31 if it has made the
election described above) in determining the amount of ordinary taxable income
for the current calendar year. The Fund will include foreign currency gains and
losses incurred after October 31 in determining ordinary taxable income for the
succeeding calendar year.
Each Fund intends to make sufficient distributions of its ordinary taxable
income and capital gain net income prior to the end of each calendar year to
avoid liability for the excise tax. Investors should note, however, that a Fund
might in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.
E. SALE OR REDEMPTION OF SHARES
In general, a shareholder will recognize gain or loss on the sale or redemption
of shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases (for example, by reinvesting dividends) other shares of the Fund
within 30 days before or after the sale or redemption (a so called "wash sale").
In general, any gain or loss arising from the sale or redemption of shares of a
Fund will
49
<PAGE>
be considered capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. Any capital loss arising from the
sale or redemption of shares held for six months or less, however, is treated as
a long-term capital loss to the extent of the amount of capital gain
distributions received on such shares. In determining the holding period of such
shares for this purpose, any period during which a shareholder's risk of loss is
offset by means of options, short sales or similar transactions is not counted.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
F. BACKUP WITHHOLDING
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of distributions, and the proceeds of redemptions of shares, paid
to any shareholder: (1) who has failed to provide correct tax payer
identification number; (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly; or (3)
who has failed to certify to a Fund that it is not subject to backup withholding
or that it is a corporation or other "exempt recipient." Backup withholding is
not an additional tax; any amounts so withheld may be credited against a
shareholder's federal income tax liability or refunded.
G. FOREIGN SHAREHOLDERS
Taxation of a shareholder who under the Code is a nonresident alien individual,
foreign trust or estate, foreign corporation, or foreign partnership ("foreign
shareholder"), depends on whether the income from a Fund is "effectively
connected" with a U.S. trade or business carried on by the foreign shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income distributions paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) upon the gross amount of the distribution.
The foreign shareholder generally would be exempt from U.S. federal income tax
on gain realized on the sale of shares of a Fund, capital gain distributions
from a Fund and amounts retained by a Fund that are designated as undistributed
capital gain.
If the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then ordinary income distributions, capital
gain distributions, and any gain realized upon the sale of shares of a Fund will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
or U.S. corporations.
In the case of a noncorporate foreign shareholder, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding (or taxable at a reduced treaty rate), unless
the shareholder furnishes the Fund with proper notification of its foreign
status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty might be different from those described herein.
The tax rules of other countries with respect to distributions from a Fund can
differ from the U.S. federal income taxation rules described above. These
foreign rules are not discussed herein. Foreign shareholders are urged to
consult their own tax advisers as to the consequences of foreign tax rules with
respect to an investment in a Fund.
H. STATE AND LOCAL TAXES
The tax rules of the various states of the U.S. and local jurisdictions with
respect to distributions from a Fund can differ from the U.S. federal income
taxation rules described above. These state and local rules are not discussed
herein. Shareholders are urged to consult their tax advisers as to the
consequences of state and local tax rules with respect to an investment in a
Fund.
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9. OTHER MATTERS
A. THE TRUST AND ITS SHAREHOLDERS
1. GENERAL INFORMATION
Forum Funds 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.
The Trust is registered as an open-end, management investment company under the
1940 Act. The Trust offers shares of beneficial interest in its series. As of
the date hereof, the Trust consisted of the following shares of beneficial
interest:
Austin Global Equity Fund Investors Equity Fund
BIA Growth Equity Fund Investors Growth Fund
BIA Small-Cap Growth Fund Investors High Grade Bond Fund
Daily Assets Cash Fund(1) Maine Municipal Bond Fund
Daily Assets Government Fund(1) New Hampshire Bond Fund
Daily Assets Government Obligations Fund(1) Payson Balanced Fund
Daily Asset Municipal Fund(1) Payson Value Fund
Daily Assets Treasury Obligations Fund(1) Polaris Global Value Fund
Equity Index Fund TaxSaver Bond Fund
Investors Bond Fund
(1) The Trust offers shares of beneficial interest in an institutional,
institutional service, and investor share class of these series.
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 series and may divide series into classes of
shares; the costs of doing so will be borne by the Trust.
The Fund reserves the right to invest in one or more other investment companies
in a Core and Gateway(R) structure.
The Trust and each Fund will continue indefinitely until terminated.
2. SERIES AND CLASSES OF THE TRUST
Each series or class of the Trust may have a different expense ratio and its
expenses will affect each class' performance. For more information on any other
class of shares of the Fund, you may contact the Transfer Agent.
3. SHAREHOLDER VOTING AND OTHER RIGHTS
Each share of each series 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, shareholder service and administration expenses) are borne
solely by those shares. Each class votes separately with respect to the
provisions of any Rule 12b-1 plan which pertains to the class and other matters
for which separate class voting is appropriate under applicable law. Generally,
shares will be voted separately by individual series except if: (1) the 1940 Act
requires shares to be voted in the aggregate and not by individual series; and
(2) when the Trustees determine that the matter affects more than one series and
all affected series must vote. The Trustees may also determine that a matter
only affects certain classes of the Trust and thus only those classes are
entitled to vote on
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<PAGE>
the matter. 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. 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.
A shareholder in a series is entitled to the shareholder's pro rata share of all
distributions arising from that series' assets and, upon redeeming shares, will
receive the portion of the series' net assets represented by the redeemed
shares.
A shareholder or shareholders representing 33 1/3% or more the outstanding
shares entitled to vote may, as set forth in the Trust Instrument, call meetings
of the Trust (or series) for any purpose related to the Trust (or series),
including, in the case of a meeting of the Trust, the purpose of voting on
removal of one or more Trustees.
4. CERTAIN REORGANIZATION TRANSACTIONS
The Trust or any series may be terminated upon the sale of its assets to, or
merger with, another open-end, management investment company or series thereof,
or upon liquidation and distribution of its assets. Generally such terminations
must be approved by the vote of the holders of a majority of the outstanding
shares of the Trust or a Fund. The Trustees may, without prior shareholder
approval, change the form of organization of the Trust by merger, consolidation
or incorporation. Under the Trust Instrument, the Trustees may, without
shareholder vote, cause the Trust or certain series to merge or consolidate into
one or more trusts, partnerships or corporations or cause the Trust to be
incorporated under Delaware law, so long as the surviving entity is an open-end,
management investment company that will succeed to or assume the Trust's
registration statement.
B. FUND OWNERSHIP
As of July 1, 1999, the percentage of shares owned by all officers and trustees
of the Trust as a group was as follows. To the extent officers and trustees own
less than 1% of the shares of each class of shares of a Fund (or of the Trust),
the table reflects "N/A" for not applicable.
PERCENTAGE OF SHARES
FUND (OR TRUST) OWNED
The Trust N/A
Investors High Grade Bond Fund N/A
Investors Bond Fund N/A
TaxSaver Fund N/A
Maine Municipal Bond Fund N/A
New Hampshire Bond Fund N/A
Also as of that date, certain shareholders of record owned 5% or more of a class
of shares of a Fund. Shareholders known by a Fund to own beneficially 5% or more
of a class of shares of the Fund are listed in Table 8 in Appendix B.
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 of July 1, 1999, the following
persons beneficially owned 25% or more of the shares of a Fund (or of the Trust)
and may be deemed to control the Fund (or the Trust). For each person listed
that is a company, the jurisdiction under the laws of which the company is
organized (if applicable) and the company's parents are listed.
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<TABLE>
<S> <C> <C>
CONTROLLING PERSON INFORMATION
PERCENTAGE OF
FUND (OR TRUST) SHAREHOLDER SHARES OWNED
- -------------------------------------------------------------------------------------------------------------
Investors High Grade Bond Fund Babb & Co.
C/O Bank of New hampshire
PO Box 477
Concord, NH 03302 98.81%
Investors Bond Fund FirsTrust
National City Bank Trust Dept.
227 Main Street
Evansville, IN 47708 40.21%
FirsTrust
National City Bank Trust Dept.
227 Main Street
Evansville, IN 47708 28.05%
TaxSaver Fund FirsTrust
National City Bank Trust Dept.
227 Main Street
Evansville, IN 47708 35.43%
New Hampshire Bond Fund Independence Trust (organized in New Hampshire)
The Atrium Building
1001 Elm Street Suite 205
Manchester, NH 03101 40.21%
</TABLE>
C. LIMITATIONS ON SHAREHOLDERS' AND TRUSTEES' LIABILITY
Delaware law provides that Fund shareholders are entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. In the past, the securities regulators of some states,
however, have indicated that they and the courts in their state may decline to
apply Delaware law on this point. The Forum Funds' Trust Instrument (the
document that governs the operations of the Trust) contains an express
disclaimer of shareholder liability for the debts, liabilities, obligations and
expenses of the Trust and requires that a disclaimer be given in each bond, note
or contract, or other undertaking entered into or executed by the Trust or the
Trustees. The Trust Instrument provides for indemnification out of each series'
property of any shareholder or former shareholder held personally liable for the
obligations of the series if held to be personally liable solely by reason of
being or having been a shareholder of a series. The Trust Instrument also
provides that each series shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the series and satisfy
any judgment thereon. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which
Delaware law does not apply, no contractual limitation of liability was in
effect, and the portfolio is unable to meet its obligations. FAdS believes that,
in view of the above, there is no risk of personal liability to shareholders.
The Trust Instrument provides that the Trustees shall not be liable to any
person other than the Trust and its shareholders. In addition, the Trust
Instrument provides that the Trustees shall not be liable for any conduct
whatsoever, provided that a Trustee is not protected against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
53
<PAGE>
D. REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby. The registration statement, including
the exhibits filed therewith, may be examined at the office of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents are not necessarily complete, and, in each instance,
are qualified by, the copy of such contract or other documents filed as exhibits
to the registration statement.
FINANCIAL STATEMENTS
The financial statements of each of Investors High Grade Bond Fund, Investors
Bond Fund, TaxSaver Fund, Maine Municipal Bond Fund, and New Hampshire Bond Fund
for the year ended March 31, 1999, which are included in the Annual Report to
Shareholders of each Fund, are incorporated herein by reference. These financial
statements include the schedules of investments, statements of assets and
liabilities, statements of operations, statements of changes in net assets,
financial highlights, notes and independent auditors' reports.
54
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
A. CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
1. MOODY'S INVESTORS SERVICE
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." 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.
AA 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 risk
appear somewhat larger than the Aaa securities.
A 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.
BAA Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments 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.
BA 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.
B 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.
CAA 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. Ca 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.
C 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
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
A-1
<PAGE>
2. STANDARD AND POOR'S CORPORATION
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
NOTE Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
NOTE Plus (+) or minus (-). 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.
The "r" symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
A-2
<PAGE>
currencies, or commodities; obligations exposed to severe prepayment
risk-such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse
floaters.
3. DUFF & PHELPS CREDIT RATING CO.
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+
AA High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A+
A, A- Protection factors are average but adequate. However, risk factors are
more variable in periods of greater economic stress.
BBB+
BBB
BBB- Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
BB+
BB
BB- Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according
to industry conditions. Overall quality may move up or down frequently
within this category.
B+
B, B- Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
4. FITCH IBCA, INC.
INVESTMENT GRADE
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A-3
<PAGE>
A High credit quality. `A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC
CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates
that default of some kind appears probable. `C' ratings signal imminent
default.
DDD
DD, D Default. Securities are not meeting current obligations and are
extremely speculative. `DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, `DD' indicates expected recovery of 50%
- 90% of such outstandings, and `D' the lowest recovery potential, i.e.
below 50%.
B. PREFERRED STOCK
1. MOODY'S INVESTORS SERVICE
AAA An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
A An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in
the "aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA An issue which is rated "baa" is considered to be 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.
BA An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
A-4
<PAGE>
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
B 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.
CAA 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.
CA 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 payments.
C This is the lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor prospects of
ever attaining any real investment standing.
NOTE Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: 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
issue ranks in the lower end of its generic rating category.
2. STANDARD & POOR'S
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA 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.
A 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.
BBB 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.
BB
B, CCC Preferred stock rated BB, B, and CCC is 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. While such issues will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating CC is reserved for a preferred stock issue that is in
arrears on dividends or sinking fund payments, but that is currently
paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in
default on debt instruments.
A-5
<PAGE>
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
NOTE Plus (+) or minus (-). To provide more detailed indications of
preferred stock quality, 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.
C. SHORT TERM RATINGS
1. MOODY'S INVESTORS SERVICE
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) 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.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above 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.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
NOT
PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.
2. STANDARD AND POOR'S
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-6
<PAGE>
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
3. FITCH IBCA, INC.
F1 Obligations assigned this rating have the highest capacity for timely
repayment under Fitch IBCA's national rating scale for that country,
relative to other obligations in the same country. This rating is
automatically assigned to all obligations issued or guaranteed by the
sovereign state. Where issues possess a particularly strong credit
feature, a "+" is added to the assigned rating.
F2 Obligations supported by a strong capacity for timely repayment
relative to other obligors in the same country. However, the relative
degree of risk is slightly higher than for issues classified as `A1'
and capacity for timely repayment may be susceptible to adverse changes
in business, economic, or financial conditions.
F3 Obligations supported by an adequate capacity for timely repayment
relative to other obligors in the same country. Such capacity is more
susceptible to adverse changes in business, economic, or financial
conditions than for obligations in higher categories.
B Obligations for which the capacity for timely repayment is uncertain
relative to other obligors in the same country. The capacity for timely
repayment is susceptible to adverse changes in business, economic, or
financial conditions.
C Obligations for which there is a high risk of default to other obligors
in the same country or which are in default.
A-7
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
The following table shows the dollar amount of fees payable to the Adviser with
respect to each Fund.
INVESTORS HIGH GRADE BOND FUND
ADVISORY FEE
Year Ended March 31, 1999 $140,442
Year Ended March 31, 1998 $5,970
INVESTORS BOND FUND ADVISORY FEE
Year Ended March 31, 1999 $328,113
Year Ended March 31, 1998 $171,777
Year Ended March 31, 1997 $100,163
TAXSAVER BOND FUND ADVISORY FEE
Year Ended March 31, 1999 $157,824
Year Ended March 31, 1998 $102,003
Year Ended March 31, 1997 $70,634
MAINE MUNICIPAL BOND FUND ADVISORY FEE
Year Ended March 31, 1999 $119,844
Year Ended March 31, 1998 $107,471
Year Ended March 31, 1997 $101,549
NEW HAMPSHIRE BOND FUND ADVISORY FEE
Year Ended March 31, 1999 $57,031
Year Ended March 31, 1998 $43,782
Year Ended March 31, 1997 $31,774
B-1
<PAGE>
TABLE 2 - SALES CHARGES
<TABLE>
<S> <C> <C> <C>
INVESTORS HIGH GRADE BOND FUND
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED MARCH 31
AGGREGATE SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
1999 $150 $150 $0
1998 $0 $0 $0
1997 N/A N/A N/A
INVESTORS BOND FUND
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED MARCH 31
AGGREGATE SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
1999 $119 $119 $0
1998 $0 $0 $0
1997 $1,951 $274 $1,677
TAXSAVER BOND FUND
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED MARCH 31
AGGREGATE SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
1999 $8 $8 $0
1998 $162 $162 $0
1997 $16 $2 $14
MAINE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED MARCH 31
AGGREGATE SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
1999 $19,170 $146 $19,024
1998 $16,890 $376 $16,514
1997 $117,032 $10,264 $106,768
NEW HAMPSHIRE BOND FUND
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED MARCH 31
AGGREGATE SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
1999 $771 $141 $630
1998 $4,041 $0 $4,041
1997 $54,094 $4,557 $49,537
</TABLE>
B-2
<PAGE>
TABLE 3 - ADMINISTRATION FEES
The following table shows the dollar amount of fees payable to FAdS with respect
to each Fund, the amount of fee that was waived by FAdS, if any, and the actual
fee received by FAdS.
<TABLE>
<S> <C> <C> <C>
ADMINISTRATION FEE ADMINISTRATION FEE WAIVED ADMINISTRATION FEE
INVESTORS HIGH GRADE BOND FUND PAYABLE RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $70,221 $70,221 $0
Year Ended March 31, 1998 $2,985 $2,985 $0
ADMINISTRATION FEE ADMINISTRATION FEE WAIVED ADMINISTRATION FEE
INVESTORS BOND FUND PAYABLE RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $164,056 $164,056 $0
Year Ended March 31, 1998 $108,198 $180,198 $0
Year Ended March 31, 1997 $75,122 $75,122 $0
ADMINISTRATION FEE ADMINISTRATION FEE WAIVED ADMINISTRATION FEE
TAXSAVER BOND FUND PAYABLE RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $78,912 $78,912 $0
Year Ended March 31, 1998 $66,898 $66,898 $0
Year Ended March 31, 1997 $52,975 $52,975 $0
ADMINISTRATION FEE ADMINISTRATION FEE WAIVED ADMINISTRATION FEE
MAINE MUNICIPAL BOND FUND PAYABLE RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $59,922 $59,922 $0
Year Ended March 31, 1998 $73,724 $73,164 $0
Year Ended March 31, 1997 $76,162 $76,162 $0
ADMINISTRATION FEE ADMINISTRATION FEE ADMINISTRATION FEE
NEW HAMPSHIRE BOND FUND PAYABLE WAIVED RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $28,516 $28,516 $0
Year Ended March 31, 1998 $29,727 $29,727 $0
Year Ended March 31, 1997 $23,831 $23,831 $0
</TABLE>
B-3
<PAGE>
TABLE 4 - ACCOUNTING FEES
The following able shows the dollar amount of fees payable to FAcS with respect
to each Fund, the amount of fee that was waived by FAcS, if any, and the actual
fee received by FAcS.
<TABLE>
<S> <C> <C> <C>
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE
INVESTORS HIGH GRADE BOND FUND RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $40,000 $0 $40,000
Year Ended March 31, 1998 $3,548 $3,548 $0
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE
INVESTORS BOND FUND RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $40,000 $0 $40,000
Year Ended March 31, 1998 $41,000 $0 $41,000
Year Ended March 31, 1997 $41,000 $0 $41,000
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE
TAXSAVER BOND FUND RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $38,000 $0 $38,000
Year Ended March 31, 1998 $41,000 $0 $41,000
Year Ended March 31, 1997 $36,000 $0 $36,000
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE
MAINE MUNICIPAL BOND FUND RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $48,000 $48,000 $0
Year Ended March 31, 1998 $48,000 $0 $48,000
Year Ended March 31, 1997 $48,000 $48,000 $48,000
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE PAYABLE
NEW HAMPSHIRE BOND FUND
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $37,000 $37,000 $0
Year Ended March 31, 1998 $36,000 $0 $36,000
Year Ended March 31, 1997 $37,000 $0 $37,000
</TABLE>
B-4
<PAGE>
TABLE 5 - TRANSFER AGENCY FEES
The following table shows the dollar amount of shareholder service fees payable
to the Transfer Agent with respect to Shares of each Fund.
<TABLE>
<S> <C> <C> <C>
INVESTORS HIGH GRADE BOND FUND TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
PAYABLE WAIVED RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $99,845 $76,092 $23,753
Year Ended March 31, 1998 $4,248 $3,731 $517
TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
INVESTORS BOND FUND PAYABLE WAIVED RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $218,175 $96,856 $121,319
Year Ended March 31, 1998 $120,533 $102,298 $18,235
Year Ended March 31, 1997 $76,562 $58,271 $18,291
TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
TAXSAVER BOND FUND PAYABLE WAIVED RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $111,354 $97,734 $13,620
Year Ended March 31, 1998 $76,553 $59,098 $17,455
Year Ended March 31, 1997 $57,010 $40,248 $16,762
TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
MAINE MUNICIPAL BOND FUND PAYABLE WAIVED RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $96,618 $74,804 $21,814
Year Ended March 31, 1998 $86,179 $43,753 $42,426
Year Ended March 31, 1997 $82,456 $39,581 $42,875
TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
NEW HAMPSHIRE BOND FUND PAYABLE WAIVED RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $50,028 $36,422 $13,606
Year Ended March 31, 1998 $40,793 $11,618 $29,175
Year Ended March 31, 1997 $33,317 $6,539 $26,778
</TABLE>
B-5
<PAGE>
TABLE 6 - COMMISSIONS
The following table shows the aggregate brokerage commissions with respect to
each Fund that incurred brokerage costs. The data are for the past three fiscal
years or shorter period if the Fund has been in operation for a shorter period.
<TABLE>
<S> <C> <C> <C> <C> <C>
INVESTORS HIGH MAINE MUNICIPAL NEW HAMPSHIRE
GRADE BOND FUND INVESTORS BOND FUND TAXSAVER BOND BOND FUND BOND FUND
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED FUND
March 31, 1999 $0 $0 $0 $0 $0
March 31, 1998 $0 $0 $0 $0 $0
March 31, 1997 $0 $0 $0 $0 $0
</TABLE>
TABLE 7 - SECURITIES OF REGULAR BROKERS OR DEALERS
The following table lists the regular brokers and dealers of each fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of a Fund's holdings of those
securities as of the Fund's most recent fiscal year.
<TABLE>
<S> <C> <C> <C> <C> <C>
INVESTORS MAINE NEW
HIGH GRADE INVESTORS BOND TAXSAVER MUNICIPAL BOND HAMPSHIRE
REGULAR BROKER OR DEALER BOND FUND FUND BOND FUND FUND BOND FUND
BankAmerica Corp. $528,000 $0 $0 $0 $0
Dean Witter Discover $504,000 $0 $0 $0 $0
Dreyfus Cash Management $815,000 $257,000 $0 $0 $0
Lehman Brothers Holdings, Inc. $2,145,000 $2,529,000 $0 $0 $0
Paine Webber, Inc. $0 $536,000 $0 $0 $0
JP Morgan & Co. $0 $1,530,000 $0 $0 $0
Chase Manhattan Bank, N.A. $0 $548,000 $0 $0 $0
Merrill Lynch & Co. $0 $1,220,000 $0 $0 $0
Morgan Stanley Group, Inc. $0 $515,000 $0 $0 $0
Bear Stearns Cos., Inc. $0 $508,000 $0 $0 $0
</TABLE>
B-6
<PAGE>
TABLE 8 - 5% SHAREHOLDERS
The following table lists (1) the persons who owned of record 5% or more of the
outstanding shares of a class of shares of a Fund and (2) any person known by a
Fund to own beneficially 5% or more of a class of shares of a Fund, as of July
1, 1999.
<TABLE>
<S> <C> <C> <C>
% OF FUND
FUND/CLASS OF SHARES NAME AND ADDRESS SHARES
- --------------------------------------------------------------------------------------------------------------
Investors Bond Fund SEI Trust Company
C/O Irwin Union Bank & Trust
One Freedom Valley Drive
Oaks, PA 19456 752,395.509 11.55%
SEI Trust Company
C/O Irwin Union Bank & Trust
One Freedom Valley Drive
Oaks, PA 19456 671,765.332 10.32%
TaxSaver Bond Fund SEI Trust Company
C/O Irwin Union Bank & Trust
One Freedom Valley Drive
Oaks, PA 19456 675,398.441 20.48%
Leonore Zusman Living Trust
6439 Woodacre Ct
Englewood, OH 45322 208,406.472 6.77%
SEI Trust Company
C/O Irwin Union Bank & Trust
One Freedom Valley Drive
Oaks, PA 19456 208,406.472 6.32%
Lawrence L Zusman Living Trust
6439 Woodacre Ct
Englewood, OH 45322 171,775.276 5.21%
Mitchell Singer
5045 North Main Street
Suite 250
Dayton, OH 45415 165,128.915 5.01%
</TABLE>
B-7
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - TOTAL RETURNS (WITHOUT SALES CHARGES)
The average annual total return without sales charges of each Fund for the
period ended March 31, 1999, was as follows.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALENDAR YEAR
ONE MONTH THREE MONTHS TO DATE ONE YEAR THREE FIVE YEARS TEN YEARS SINCE INCEPTION
YEARS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------------------
INVESTORS HIGH
GRADE BOND FUND
0.57% (0.82)% (0.82)% 6.12% N/A N/A N/A 5.70%
INVESTORS BOND FUND
1.04% (0.28)% (0.28)% 4.45% 7.50% 7.36% N/A 8.66%
TAXSAVER BOND FUND
(0.09)% 0.45% 0.45% 4.95% 5.94% 6.27% N/A 7.16%
MAINE MUNICIPAL
BOND FUND
(0.08)% 0.54% 0.54% 5.19% 6.03% 6.34% N/A 6.62%
NEW HAMPSHIRE BOND
FUND (0.10)% 0.49% 0.49% 5.61% 6.32% 6.53% N/A 6.20%
TABLE 2 - TOTAL RETURNS (WITH SALES CHARGES)
The average annual total return with sales charges of each Fund for the period
ended March 31, 1999, was as follows.
CALENDAR YEAR
ONE MONTH THREE MONTHS TO DATE ONE YEAR THREE FIVE TEN YEARS SINCE INCEPTION
YEARS YEARS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTORS HIGH
GRADE
BOND FUND (3.20)% (4.54)% (4.54)% 2.14% N/A N/A N/A 1.90%
INVESTORS BOND FUND
(2.75)% (4.02)% (4.02)% 0.53% 6.14% 6.55% N/A 8.22%
TAXSAVER BOND FUND
(3.84)% (3.31)% (3.31)% 1.01% 4.60% 5.46% N/A 6.73%
MAINE MUNICIPAL
BOND FUND
(2.58)% (1.98)% (1.98)% 2.56% 5.14% 5.81% N/A 6.25%
NEW HAMPSHIRE BOND
FUND (2.60)% (2.02)% (2.02)% 2.97% 5.43% 5.99% N/A 5.77%
</TABLE>
C-1
<PAGE>
APPENDIX D - ADDITIONAL ADVERTISING MATERIALS
TEXT OF FORUM BROCHURE
In connection with its advertisements, a Fund may provide a description of the
Fund's investment adviser and its affiliates, which are service providers to the
Fund. Text, which is currently in use, is set forth below.
"FORUM FINANCIAL GROUP OF COMPANIES
Forum Financial Group of Companies represent more than a decade of diversified
experience with every aspect of mutual funds. The Forum Family of Funds has
benefited from the informed, sharply focused perspective on mutual funds that
experience makes possible.
The Forum Family of Funds has been created and managed by affiliated companies
of Portland-based Forum Financial Group, among the nation's largest mutual fund
administrators providing clients with a full line of services for every type of
mutual fund.
The Forum Family of Funds is designed to give investment representatives and
investors a broad choice of carefully structured and diversified portfolios,
portfolios that can satisfy a wide variety of immediate as well as long-term
investment goals.
Forum Financial Group has developed its "brand name" family of mutual funds and
has made them available to the investment public and to institutions on both the
national and regional levels.
For more than a decade Forum has had direct experience with mutual funds from a
different perspective, a perspective made possible by Forum's position as a
leading designer and full-service administrator and manager of mutual funds of
all types.
Today Forum Financial Group administers and provides services for over 181
mutual funds for 17 different fund managers, with more than $70 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 390 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.
D-1
<PAGE>
Fund sponsors understand that even the most efficiently and creatively designed
fund can disappoint shareholders if it is inadequately serviced. That is the
reason why fund sponsors have relied on Forum to meet all of a fund's complex
compliance, regulatory, and filing needs.
Forum's full service commitment includes providing state-of-the-art accounting
support (Forum has 7 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 wit 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 $1.25 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 $1.95 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.
D-2
<PAGE>
The Forum Family of Funds provides conservative investment opportunities that
reduce the risk of loss of capital, using underlying money market investments
U.S. Government securities (although the shares of the Forum Funds are neither
insured nor guaranteed by the U.S. Government or its agencies), thus cushioning
the investment against market volatility. These funds offer regular income,
ready access to your money, and flexibility to buy or sell at any time.
In the less conservative but still not aggressive category are funds in the
Forum Family that seek to provide steady income and, in certain cases, tax-free
earnings. Such investments provide important diversification to an investment
portfolio.
Growth funds in the Forum Family more aggressively pursue a high return at the
risk of market volatility. These funds include domestic and international stock
mutual funds."
D-3
<PAGE>
TEXT OF PEOPLES HERITAGE NEWS RELEASE
Peoples Heritage Financial Group, Inc. (NASDAQ:PHBK) announced today that it has
formed an alliance with a major mutual fund provider and an investment advisory
firm to expand its mutual fund offerings. The alliance with Forum Financial
Group and H.M. Payson & Company will result in 18 funds, including the unique
Maine Municipal Bond Fund and New Hampshire Bond Fund, being offered through the
branches of Peoples' affiliate banks in Maine, New Hampshire and northern
Massachusetts and the Company's trust and investment subsidiaries
'There is no secret to where financial services are moving, under one roof,"
said William J. Ryan, Chairman, President and Chief Executive Officer of Peoples
Heritage. "One only has to watch the virtually daily announcements of
consolidations in the financial sector to understand that customers are
demanding and receiving 'one-stop' financial services.
"We think we are adding the additional competitive advantage of funds that are
managed and administered close to home."
Eighteen Forum funds will be offered including two Payson funds. The tax-free
Maine and New Hampshire state bond funds are the only two such funds available
and usually invest 80% of total assets in municipal securities. Other funds
being provided by the alliance include money market, debt and equity funds.
Forum Financial, based in Portland, Maine since 1987, administers 124 funds with
more than $29 billion in assets. Forum manages mutual funds for independent
investment advisers such as Payson and for banks. Forum Investment Advisors, LLC
an affiliate, is the largest Maine-based investment adviser with approximately
$1.95 billion in fund assets under management.
"We are providing a great product set to the customers served by Peoples' nearly
200 branches in northern New England," said John Y. Keffer, Forum Financial
president, "The key today is to link a wide variety of investment options with
convergent, easy access for customers. I believe this alliance does just that."
H.M. Payson & Co., founded in 1854, is one of the nation's oldest investment
firms with nearly $1.25 billion in assets under management and $412 million in
non-managed custodial accounts. The Payson Value Fund and Payson Balanced Fund
are among the 18 offerings.
"I believe we have all the ingredients of a tremendous alliance," said John
Walker, Payson President and Managing Director. "We have the region's premier
community banking company, a community-based investment adviser, and a local
mutual fund company that operates nationally and specializes in working with
banks. We are poised to provide solid investment performance and service."
Peoples Heritage Financial Group is a $10 billion multi-state bank and financial
services holding company headquartered in Portland, Maine. Its Maine banking
affiliate, Peoples Heritage Bank, has the state's leading deposit market share.
Its New Hampshire banking affiliate, Bank of New Hampshire, has the state's
leading deposit market share. Family Bank, the Company's Massachusetts banking
subsidiary, has the state's tenth largest deposit market share and the leading
market share in many of the northern Massachusetts communities it serves.
Peoples affiliate banks also operate subsidiaries in leasing, trust and
investment services and insurance.
D-4
<PAGE>
FORUM FINANCIAL GROUP:
Headquarters: Two Portland Square, Portland, Maine 04101
President: John Y. Keffer
Offices: Portland, Seattle, Warsaw, Bermuda
*Established in 1986 to administer mutual funds for independent investment
advisers and banks *Among the nation's largest third-party fund administrators
*Uses proprietary in-house systems and custom programming capabilities
*Administration and Distribution Services: Regulatory, compliance,
expense accounting, budgeting for all funds
*Fund Accounting Services: Portfolio valuation, accounting, dividend
declaration, and tax advice
*Shareholder Services: Preparation of statements, distribution support,
inquiries and processing of trades
*Client Assets under Administration and Distribution: $70.4 billion
*Client Assets Processed by Fund Accounting: $53 billion
*Client Funds under Administration and Distribution: 181 mutual funds with 89
share classes
*International Ventures:
Joint venture with Bank Handlowy in Warsaw, Poland, using Forum's
proprietary transfer agency and distribution systems Off-shore
investment fund administration, using Bermuda as Forum's center of
operations
*Forum Employees: United States -215, Poland - 180, Bermuda - 4
FORUM CONTACTS:John Burns, Director, Forum Investment Advisers, LLC, (207)
879-1900 X 6132 Tony Santaniello, Director of Marketing, (207) 879-1900 X 6175
<PAGE>
H.M. PAYSON & CO.:
Headquarters: One Portland Square, Portland, Maine
President and Managing Director: John Walker
Quality investment services and conservative wealth management since 1854
*Assets under Management: $1.25 Billion
*Non-managed Custody Assets: $412 Million
*Client Base: 85% individuals; 15% institutional
*Owned by 11 shareholders; 10 managing directors
*Payson Balanced Fund and Payson Value Fund (administrative and shareholder
services provided by Forum Financial Group)
*Employees: 45
H.M. PAYSON & CO. CONTACT:
Joel Harris, Marketing Coordinator, (207) 772-3761
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1999
INVESTORS GROWTH FUND
INVESTMENT ADVISER:
Forum Investment Advisors, LLC
Two Portland Square
Portland, Maine 04101
ACCOUNT INFORMATION AND SHAREHOLDER SERVICES:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
(800) 94FORUM
(800) 943-6786
(207) 879-0001
This Statement of Additional Information (the "SAI") supplements the Prospectus
dated August 1, 1999, as may be amended from time to time, offering shares of
Investors Growth Fund (the "Fund"), a separate series of Forum Funds, a
registered, open-end management investment company (the "Trust"). This SAI is
not a prospectus and should only be read in conjunction with the Prospectus. You
may obtain the Prospectus without charge by contacting Forum Shareholder
Services at the address or telephone number listed above.
Financial Statements for the Fund for the year ended March 31, 1999, included in
the Annual Report to shareholders, are incorporated into this SAI by reference.
Copies of the Annual Report may be obtained, without charge, upon request by
contacting Forum Shareholder Services, LLC at the address or telephone number
listed above.
<PAGE>
TABLE OF CONTENTS
Glossary....................................................................1
1. Investment Policies And Risks...........................................2
2. Investment Limitations.................................................11
3. Performance Data And Advertising.......................................13
4. Management.............................................................18
5. Portfolio Transactions.................................................23
6. Additional Purchase And Redemption Information.........................26
7. Taxation...............................................................29
8. Other Matters..........................................................33
Appendix A - Description Of Securities Ratings............................A-1
Appendix B - Miscellaneous Tables.........................................B-1
Appendix C - Performance Data.............................................C-1
Appendix D - Additional Advertising Materials.............................D-1
<PAGE>
GLOSSARY
As used in this SAI, the following terms have the meanings listed.
"Adviser" means Forum Investment Advisors, LLC.
"Board" means the Board of Trustees of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Custodian" means Forum Trust, LLC, the custodian of the Fund's assets.
"FAdS" means Forum Administrative Services, LLC, the administrator of
the Fund.
"Fitch" means Fitch IBCA, Inc.
"FAcS" means Forum Accounting Services, LLC, the fund accountant of the
Fund.
"FFS" means Forum Fund Services, LLC, the distributor of the Fund's
shares.
"FSS" means Forum Shareholder Services, LLC, the transfer agent of each
Fund.
"FFSI" means Forum Financial Services, Inc., the distributor of each
Fund's shares prior to August 1,1999.
"Fund" means Investors Growth Fund.
"Moody's" means Moody's Investors Service.
"NRSRO" means a nationally recognized statistical rating organization.
"NAV" means net asset value per share.
"SEC" means the U.S. Securities and Exchange Commission.
"S&P" means Standard & Poor's, A Division of the McGraw Hill Companies.
"Transfer Agent" means Forum Shareholder Services, LLC, the transfer
agent of the Fund.
"Trust" means Forum Funds.
"U.S. Government Securities" means obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
1
<PAGE>
1. INVESTMENT POLICIES AND RISKS
The Fund is a diversified series of the Trust. The section discusses in greater
detail than the Fund's Prospectus certain investments that the Fund may make.
A. SECURITY RATINGS INFORMATION
The Fund's investments in convertible securities are subject to credit risk
relating to the financial condition of the issuers of the securities that the
Fund holds. To limit credit risk, the Fund may only invest in convertible
securities that are considered investment grade. Investment grade securities are
rated in the top four long-term rating categories or the two highest short-term
rating categories by an NRSRO or are unrated and determined by the Adviser to be
of comparable quality. The Fund may purchase unrated convertible securities if,
at the time of purchase, the Adviser believes that they are of comparable
quality to rated securities that the Fund may purchase.
The lowest rated convertible bond in which the Fund may invest is "Baa" in the
case of Moody's and "BBB" in the case of S&P Fitch. The lowest rated preferred
stock in which the Fund may invest is "baa" in the case of Moody's and "BBB" in
the case of S&P. Unrated securities may not be as actively rated as rated
securities. The Fund may retain securities whose rating has been lowered below
the lowest permissible rating category (or that are unrated and determined by
the Adviser to be of comparable quality to securities whose rating has been
lowered below the lowest permissible rating category) if the Adviser determines
that retaining such security is in the best interests of the Fund. Because a
downgrade often results in a reduction in the market price of the security, sale
of a downgraded security may result in a loss.
B. EQUITY SECURITIES
1. COMMON AND PREFERRED STOCK
GENERAL. Common stock represents an equity (ownership) interest in a company,
and usually possesses voting rights and earns dividends. Dividends on common
stock are not fixed but are declared at the discretion of the issuer. Common
stock generally represents the riskiest investment in a company. In addition,
common stock generally has the greatest appreciation and depreciation potential
because increases and decreases in earnings are usually reflected in a company's
stock price.
Preferred stock is a class of stock having a preference over common stock as to
the payment of dividends and the recovery of investment should a company be
liquidated, although preferred stock is usually junior to the debt securities of
the issuer. Preferred stock typically does not possess voting rights and its
market value may change based on changes in interest rates.
RISKS. The fundamental risk of investing in common and preferred stock is the
risk that the value of the stock might decrease. Stock values fluctuate in
response to the activities of an individual company or in response to general
market and/or economic conditions. Historically, common stocks have provided
greater long-term returns and have entailed greater short-term risks than
preferred stocks, fixed-income and money market investments. The market value of
all securities, including common and preferred stocks, is based upon the
market's perception of value and not necessarily the book value of an issuer or
other objective measure of a company's worth. If you invest in the Fund, you
should be willing to accept the risks of the stock market and should consider an
investment in the Fund only as a part of your overall investment portfolio.
2. CONVERTIBLE SECURITIES
GENERAL. The Fund may invest in investment grade convertible debt securities.
Investment grade securities are those securities rated in the top four highest
rating categories by an NRSRO or if, unrated, are judged to be of comparable
quality by the adviser. Convertible securities include debt securities,
preferred stock or other securities
2
<PAGE>
that may be converted into or exchanged for a given amount of common stock of
the same or a different issuer during a specified period and at a specified
price in the future. A convertible security entitles the holder to receive
interest on debt or the dividend on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible securities
rank senior to common stock in a company's capital structure but are usually
subordinated to comparable nonconvertible securities. 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.
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 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.
RISKS. Investment in convertible securities generally entails less risk than an
investment in the issuer's common stock. Convertible securities are typically
issued by smaller capitalized companies whose stock price may be volatile.
Therefore, the price of a convertible security may reflect variations in the
price of the underlying common stock in a way that nonconvertible debt does not.
The extent to which such risk is reduced, however, depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
3. WARRANTS & STOCK RIGHTS
GENERAL. Warrants are securities, typically issued with preferred stock or
bonds, that give the holder the right to purchase a given number of shares of
common stock at a specified price and time. The price usually represents a
premium over the applicable market value of the common stock at the time of the
warrant's issuance. Warrants have no voting rights with respect to the common
stock, receive no dividends and have no rights with respect to the assets of the
issuer. The Fund will limit its purchases of warrants to not more than 5% of the
value of its total assets. The Fund may also invest up to 5% of its total asset
in stock rights. A stock rights is an an option given to a shareholder to buy
additional shares at a predetermined price during a specified time.
RISKS. Investments in warrants involve certain risks, including the possible
lack of a liquid market for the resale of the warrants, potential price
fluctuations due to adverse market conditions or other factors and failure of
the price of the common stock to rise. If the warrant is not exercised within
the specified time period, it becomes worthless.
4. DEPOSITARY RECEIPTS
GENERAL. A depositary receipt is a receipt for shares of a foreign-based company
that entitles the holder to distributions on the underlying security. Depositary
receipts include sponsored and unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and other similar global
instruments. ADRs typically are issued by a U.S. bank or trust company, evidence
ownership of underlying securities issued by a foreign company, and are designed
for use in U.S. securities markets. EDRs (sometimes called Continental
Depositary Receipts) are receipts issued by a European financial institution
evidencing an arrangement similar to that of ADRs, and are designed for use in
European securities markets. The Fund invests in depositary receipts in order to
obtain exposure to foreign securities markets.
RISKS. Unsponsored depositary receipts may be created without the participation
of the foreign issuer. Holders of these receipts generally bear all the costs of
the depositary receipt facility, whereas foreign issuers typically bear certain
costs in a sponsored depositary receipt. The bank or trust company depositary of
an unsponsored depositary receipt may be under no obligation to distribute
shareholder communications received from the foreign issuer or to pass through
voting rights. Accordingly, available information concerning the issuer may not
be current and the prices of unsponsored depositary receipts may be more
volatile than the prices of sponsored depositary receipts.
3
<PAGE>
C. FOREIGN SECURITIES
The Fund may invest in foreign securities but expects to limit investments in
foreign issuers to less than 15% of its total assets. Investments in the
securities of foreign issuers may involve risks in addition to those normally
associated with investments in the securities of U.S. issuers. All foreign
investments are subject to risks of: (1) foreign political and economic
instability; (2) adverse movements in foreign exchange rates; (3) the imposition
or tightening of exchange controls or other limitations on repatriation of
foreign capital; and (4) changes in foreign governmental attitudes towards
private investment, including potential nationalization, increased taxation or
confiscation of your assets.
Dividends payable on foreign securities may be subject to foreign withholding
taxes, thereby reducing the income available for distribution to you. Commission
rates payable on foreign transactions are generally higher than in the United
States. Foreign accounting, auditing and financial reporting standards differ
from those in the United States, and therefore, less information may be
available about foreign companies than is available about issuers of comparable
U.S. companies. Foreign securities also may trade less frequently and with lower
volume and may exhibit greater price volatility than United States securities.
Changes in foreign exchange rates will affect the U.S. dollar value of all
foreign currency-denominated securities held by the Fund. Exchange rates are
influenced generally by the forces of supply and demand in the foreign currency
markets and by numerous other political and economic events occurring outside
the United States, many of which may be difficult, if not impossible, to
predict.
Income from foreign securities will be received and realized in foreign
currencies, and the Fund is required to compute and distribute income in U.S.
dollars. Accordingly, a decline in the value of a particular foreign currency
against the U.S. dollar after the Fund's income has been earned and computed in
U.S. dollars may require the Fund to liquidate portfolio securities to acquire
sufficient U.S. dollars to make a distribution. Similarly, if the exchange rate
declines between the time the Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the Fund may be required to liquidate additional foreign
securities to purchase the U.S. dollars required to meet such expenses.
D. REPURCHASE AGREEMENTS
1. GENERAL
The Fund may enter into repurchase agreements. Repurchase agreements are
transactions in which the Fund purchases securities from a bank or securities
dealer and simultaneously commits to resell the securities to the bank or dealer
at an agreed-upon date and at a price reflecting a market rate of interest
unrelated to the purchased security. During the term of a repurchase agreement,
the Fund's custodian maintains possession of the purchased securities and any
underlying collateral, which is maintained at not less than 100% of the
repurchase price. Repurchase agreements allow the Fund to earn income on its
uninvested cash for periods as short as overnight, while retaining the
flexibility to pursue longer-term investments.
2. RISKS
The Fund may be exposed to the risks of financial failure or insolvency of
another party. To help reduce those risks, the Adviser, subject to the Board's
supervision, monitors and evaluates the creditworthiness of counterparties to
the Fund's transactions and intend to enter into a transaction only when it
believes that the counterparty presents minimal credit risks and the benefits
from the transaction justify the attendant risks.
4
<PAGE>
E. LEVERAGE
1. GENERAL
The Fund may use leverage to increase potential returns. Leverage involves
special risks and may involve speculative investment techniques. Leverage exists
when cash made available to the Fund through an investment technique is used to
make additional Fund investments. Lending portfolio securities are transactions
involving leverage. The Fund uses these investment techniques only when the
Adviser believes that the leveraging and the returns available to the Fund from
investing the cash will provide investors a potentially higher return.
2. SECURITIES LENDING
The Fund may lend portfolio securities or participate in repurchase agreements
in an amount up to 33 1/3% of its total assets to brokers, dealers and other
financial institutions. Securities loans must be continuously collateralized and
the collateral must have market value at least equal to the value of the Fund's
loaned securities, plus accrued interest. In a portfolio securities lending
transaction, 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 as well as the interest on the collateral securities, less any fees (such
as finders or administrative fees) the Fund pays in arranging the loan. The Fund
may share the interest it receives on the collateral securities with the
borrower. The terms of a Fund's loans permit the Fund to reacquire loaned
securities on five business days' notice or in time to vote on any important
matter. Loans are subject to termination at the option of a Fund or the borrower
at any time, and the borrowed securities must be returned when the loan is
terminated.
3. RISKS
Leverage creates the risk of magnified capital losses. Borrowings and other
liabilities that exceed the equity base of the Fund may magnify losses incurred
by a Fund. Leverage may involve the creation of a liability that requires a Fund
to pay interest (for instance, reverse repurchase agreements) or the creation of
a liability that does not entail any interest costs (for instance, forward
commitment costs).
The risks of leverage include a higher volatility of the net asset value of the
Fund's securities and the relatively greater effect on the net asset value of
the securities caused by favorable or adverse market movements or changes in the
cost of cash obtained by leveraging and the yield from invested cash. So long as
a Fund is able to realize a net return on its investment portfolio that is
higher than interest expense incurred, if any, leverage will result in higher
current net investment income for the Fund than if the Fund were not leveraged.
Changes in interest rates and related economic factors could cause the
relationship between the cost of leveraging and the yield to change so that
rates involved in the leveraging arrangement may substantially increase relative
to the yield on the obligations in which the proceeds of the leveraging have
been invested. To the extent that the interest expense involved in leveraging
approaches the net return on a Fund's investment portfolio, the benefit of
leveraging will be reduced, and, if the interest expense on borrowings were to
exceed the net return to investors, the Fund's use of leverage would result in a
lower rate of return than if the Fund were not leveraged. In an extreme case, if
a Fund's current investment income were not sufficient to meet the interest
expense of leveraging, it could be necessary for the Fund to liquidate certain
of its investments at an inappropriate time.
SEGREGATED ACCOUNTS. In order to attempt to reduce the risks involved in various
transactions involving leverage, each Fund's custodian will set aside and
maintain, in a segregated account, cash and liquid securities. The account's
value, which is marked to market daily, will be at least equal to a Fund's
commitments under these transactions.
5
<PAGE>
F. ILLIQUID AND RESTRICTED SECURITIES
1. GENERAL
The Fund may not acquire securities or invest in repurchase agreements if, as a
result, more than 15% of the Fund's net assets (taken at current value) would be
invested in illiquid securities.
The term "illiquid securities" 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. Illiquid securities include: (1)
repurchase agreements not entitling the holder to payment of principal within
seven days; (2) purchased over-the-counter options; (3) securities which are not
readily marketable; and (4) except as otherwise determined by the Adviser,
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act ("restricted securities").
2. RISKS
Limitations on resale may have an adverse effect on the marketability of a
security and the Fund might also have to register a restricted security in order
to dispose of it, resulting in expense and delay. The Fund might not be able to
dispose of restricted or illiquid securities promptly or at reasonable prices
and might thereby experience difficulty satisfying redemptions. There can be no
assurance that a liquid market will exist for any security at any particular
time. Any security, including securities determined by the Adviser to be liquid,
can become illiquid.
3. DETERMINATION OF LIQUIDITY
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid and has delegated the function of making
determinations of liquidity to the Adviser, pursuant to guidelines approved by
the Board. The Adviser determines and monitors the liquidity of the portfolio
securities and reports periodically on its decisions to the Board. The Adviser
takes into account a number of factors in reaching liquidity decisions,
including but not limited to: (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer.
An institutional market has developed for certain restricted securities.
Accordingly, contractual or legal restrictions on the resale of a security may
not be indicative of the liquidity of the security. If such securities are
eligible for purchase by institutional buyers in accordance with Rule 144A under
the 1933 Act or other exemptions, the Adviser may determine that the securities
are not illiquid.
G. U.S. GOVERNMENT SECURITIES
1. GENERAL
U.S. Government Securities include securities issued by the U.S. Treasury and by
U.S. Government agencies and instrumentalities. U.S. Government Securities may
be supported by the full faith and credit of the United States (e.g.,
mortgage-related securities and certificates of the Government National Mortgage
Association and securities of the Small Business Administration); by the right
of the issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Bank
securities); by the discretionary authority of the U.S. Treasury to lend to the
issuer (e.g., Fannie Mai (formerly the Federal National Mortgage Association)
securities); or solely by the creditworthiness of the issuer (e.g., Federal Home
Loan Mortgage Corporation securities).
2. RISKS
Holders of U.S. Government Securities not backed by the full faith and credit of
the United States must look principally to the agency or instrumentality issuing
the obligation for repayment and may not be able to assert a
6
<PAGE>
claim against the United States in the event that the agency or instrumentality
does not meet its commitment. No assurance can be given that the U.S. Government
would provide support if it is not obligated to do so by law. Neither the U.S.
Government nor any of its agencies or instrumentalities guarantees the market
value of the securities they issue.
H. BANK OBLIGATIONS
1. GENERAL
The Fund may invest in obligations of U.S. banks including certificates of
deposit, bankers' acceptances, having total assets at the time of purchase in
excess of $1 billion. Such banks must also be members of the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Insurance Corporation.
Certificates of deposit represent an institution's obligation to repay funds
deposited with it that earn a specified interest ate over a given period.
Bankers' acceptances are negotiable obligations of a bank to pay a draft which
has been drawn by a customer and are usually backed by goods in international
trade. Certificates of deposit which are payable at the stated maturity date and
bear a fixed rate of interest, generally may be withdrawn on demand by the Fund
but may be subject to early withdrawal penalties which could reduce the Fund's
performance.
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 bands which, in the view of its investment adviser and the
Trust's Trustees, are of credit-worthiness and financial stature in their
respective countries comparable to U.S. banks in which the Fund invests.
2. RISKS
Obligations of banks are debt securities. The value of debt securities may
fluctuate in response to charges in interest rates. An increase in interest
rates typically cause a fall in the value of the debt securities in which the
Fund may invest. Debt securities are also subject to the risk that the issuer's
financial condition may change. The issuer, for example, may default or become
unable to pay interest or principal due on the security.
I. CORE AND GATEWAY(R)
The Fund may seek to achieve its investment objective by converting to a Core
and Gateway(R) structure. The Fund operating under a Core and Gateway(R)
structure holds, as its only investment, shares of another investment company
having substantially the same investment objective and policies. The Board will
not authorize conversion to a Core and Gateway(R) structure if it would
materially increase costs to the Fund's shareholders. The Board will not convert
a Fund to a Core and Gateway(R) structure without notice to the shareholders.
7
<PAGE>
J. TEMPORARY DEFENSIVE POSITION
The Fund may assume a temporary defensive position and may invest without limit
in commercial paper and other money market instruments that are of prime
quality. Prime quality instruments are those instruments that are rated in one
of the two highest short-term rating categories by an NRSRO or, if not rated,
determined by the Adviser to be of comparable quality.
Money market instruments usually have maturities of one year or less and fixed
rates of return. The money market instruments in which the Fund may invest
include U.S. Government Securities, time deposits, bankers acceptances and
certificates of deposit of depository institutions (such as banks), corporate
notes and short-term bonds and money market mutual funds. The Fund may only
invest in money market mutual funds to the extent permitted by the 1940 Act.
The money market instruments in which the Fund may invest may have variable or
floating rates of interest. These obligations include master demand notes that
permit investment of fluctuating amounts at varying rates of interest pursuant
to direct arrangement with the issuer of the instrument. These obligations often
include the right, after a given period, to prepay the outstanding principal
amount of the obligations upon a specified number of days' notice. These
obligations generally are not traded, nor generally is there an established
secondary market for these obligations. To the extent a demand note does not
have a 7-day or shorter demand feature and there is no readily available market
for the obligation, it is treated as an illiquid security.
2. INVESTMENT LIMITATIONS
For purposes of all investment policies of the Fund: (1) the term 1940 Act
includes the rules thereunder, SEC interpretations and any exemptive order upon
which the Fund may rely; and (2) the term Code includes the rules thereunder,
IRS interpretations and any private letter ruling or similar authority upon
which the Fund may rely.
Except as required by the 1940 Act or the Code, 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.
A fundamental policy of the Fund, including the Fund's investment objective of
long-term capital appreciation, cannot be changed without the affirmative vote
of the lesser of: (1) 50% of the outstanding shares of the Fund; or (2) 67% of
the shares of the Fund present or represented at a shareholders meeting at which
the holders of more than 50% of the outstanding shares of the Fund are present
or represented. A nonfundamental policy of the Fund may be changed by the Board
without shareholder approval.
A. FUNDAMENTAL LIMITATIONS
The Fund has adopted the following investment limitations, which are
fundamental policies of the Fund.
The Fund:
1. DIVERSIFICATION
May not, with respect to 75% of its assets, purchase a security if as a
result: (1) more than 5% of its assets would be invested in the
securities of any single issuer; or (2) 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.
2. CONCENTRATION
Will not invest 25% or more of the value of its total assets in any one
industry.
3. UNDERWRITING ACTIVITIES
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.
4. BORROWING
May borrow money for temporary or emergency purposes, including the
meeting of redemption requests, but not in excess of 33 1/3% of the
value of the Fund's total assets (computed immediately after the
borrowing).
8
<PAGE>
5. MARGIN AND SHORT SALES
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.
6. INVESTING FOR CONTROL
May not make investments for the purpose of exercising control or
management.
7. REAL ESTATE
May not purchase or sell real estate, provided that the Fund may invest
in securities issued by companies that invest in real estate or
interests therein.
8. LENDING
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; the Fund
may also make loans of portfolio securities and enter into repurchase
agreements.
9. SENIOR SECURITIES
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.
10. PURCHASES AND SALES OF COMMODITIES
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).
11. OPTIONS AND FUTURES CONTRACTS
May not purchase or write puts or calls except as permitted by any of
its other fundamental investment policies.
B. NONFUNDAMENTAL LIMITATIONS
The Fund has adopted the following nonfundamental investment limitation that may
be changed by the Board without shareholder approval. The Fund may not:
1. ILLIQUID SECURITIES
Will not invest more than 15% of its net assets in "illiquid
securities", which are securities that cannot be disposed of within
seven days at their then current value. For purposes of this
limitation, "illiquid securities" includes, except in those
circumstances described below: (1) "restricted securities", which are
securities that cannot be resold to the public without registration
under the Federal securities laws; and (2) securities of issuers having
a record (together with all predecessors) of less than three years of
continuous operation.
9
<PAGE>
2. WARRANTS
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).
3. PLEDGING
May not purchase securities in margin; however, the Fund amy make
margin deposits in connection with any hedging instruments, which it
may use as permitted by any of its other fundamental policies.
3. PERFORMANCE DATA AND ADVERTISING
A. PERFORMANCE DATA
The Fund may quote performance in various ways. All performance information
supplied in advertising, sales literature, shareholder reports or other
materials is historical and is not intended to indicate future returns.
The Fund may compare any of its performance information with:
o Data published by independent evaluators such as Morningstar, Inc.,
Lipper, Inc., IBC Financial Data, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment
companies ("Fund Tracking Companies").
o The performance of other mutual funds.
o The performance of recognized stock, bond and other indices, including
but not limited to the Standard & Poor's 500(R) Index, the Russell
2000(R) Index, the Russell MidcapTM Index, the Russell 1000(R) Value
Index, the Russell 2500(R) Index, the Morgan Stanley - Europe,
Australia, Far East Index, the Dow Jones Industrial Average, the
Salomon Brothers Bond Index, the Shearson Lehman Bond Index, U.S.
Treasury bonds, bills or notes and changes in the Consumer Price Index
as published by the U.S. Department of Commerce.
Performance information may be presented numerically or in a table, graph, or
similar illustration.
Indices are not used in the management of the Fund but rather are standards by
which the Fund's Adviser and shareholders may compare the performance of the
Fund to an unmanaged composite of securities with similar, but not identical,
characteristics as the Fund.
The Fund may refer to: (1) general market performances over past time periods
such as those published by Ibbotson Associates (for instance, its "Stocks,
Bonds, Bills and Inflation Yearbook"); (2) mutual fund performance rankings and
other data published by Fund Tracking Companies; and (3) material and
comparative mutual fund data and ratings reported in independent periodicals,
such as newspapers and financial magazines.
The Fund's performance will fluctuate in response to market conditions and other
factors.
B. PERFORMANCE CALCULATIONS
The Fund's performance may be quoted in terms of yield or total return. Table 1
in Appendix C includes performance information for the Funds.
10
<PAGE>
1. SEC YIELD
Standardized SEC yields for the Fund used in advertising are computed by
dividing the Fund's interest income (in accordance with specific standardized
rules) for a given 30 day or one month period, net of expenses, by the average
number of shares entitled to receive income 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 accordance
with specific standardized rules) in order to arrive at an annual percentage
rate.
Capital gains and losses generally are excluded from these calculations.
Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for the Fund may differ from the rate of
distribution of income from the Fund 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 the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day and that the 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. Financial intermediaries may charge their customers that
invest in the Fund fees in connection with that investment. This will have the
effect of reducing the Fund's after-fee yield to those shareholders.
The yields of the Fund are not fixed or guaranteed, and an investment in the
Fund is not insured or guaranteed. Accordingly, yield information should not be
used to compare shares of the 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 the Fund's yield information directly
to similar information regarding investment alternatives which are insured or
guaranteed.
Yield quotations are based on amounts invested in the Fund net of any applicable
sales charges that may be paid by an investor. A computation of yield that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
Yield is calculated according to the following formula:
a - b
Yield = 2[(------ + 1)6 - 1]
cd
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
2. TOTAL RETURN CALCULATIONS
The Fund's total return shows its overall change in value, including changes in
share price and assuming all of the Fund's distributions are reinvested.
Total return figures may be based on amounts invested in the Fund net of sales
charges that may be paid by an investor. A computation of total return that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is calculated using a
formula prescribed by the SEC. To calculate standard average annual total
returns the Fund: (1) determines the growth or decline in value of a
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<PAGE>
hypothetical historical investment in the Fund over a stated period; and (2)
calculates the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. For example, a cumulative return of 100% over ten years would produce an
average annual total return of 7.18%. While average annual returns are a
convenient means of comparing investment alternatives, investors should realize
that performance is not constant over time but changes from year to year, and
that average annual returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.
Average annual total return is calculated 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
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
Because average annual returns tend to smooth out variations in the Fund's
returns, shareholders should recognize that they are not the same as actual
year-by-year results.
OTHER MEASURES OF TOTAL RETURN. Standardized total return quotes may be
accompanied by non-standardized total return figures calculated by alternative
methods.
The Fund may quote unaveraged or cumulative total returns which reflect
the Fund's performance over a stated period of time.
Total returns may be stated in their components of income and capital
(including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to
total return.
Any total return may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over any time period. Total returns may be quoted with or without
taking into consideration the Fund's front-end sales charge or contingent
deferred sales charge (if applicable).
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
C. OTHER MATTERS
The Fund may also include various information in its advertising, sales
literature, shareholder reports or other materials including, but not limited
to: (1) portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer or by maturity; (2) statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
by an investor to meet specific financial goals, such as funding retirement,
paying for children's education and financially supporting aging parents; (3)
information (including charts and illustrations) showing the effects of
compounding interest (compounding is the process of earning interest on
principal plus interest that was earned earlier; interest can be compounded at
different intervals, such as annually, quarterly or daily); (4) information
relating to inflation and its effects on the dollar; (for example, after ten
years the purchasing power of $25,000 would shrink to $16,621,
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<PAGE>
$14,968, $13,465 and $12,100, respectively, if the annual rates of inflation
were 4%, 5%, 6% and 7%, respectively); (5) information regarding the effects of
automatic investment and systematic withdrawal plans, including the principal of
dollar-cost averaging; (6) biographical descriptions of the Fund's portfolio
managers and the portfolio management staff of the Fund's investment adviser,
summaries of the views of the portfolio managers with respect to the financial
markets, or descriptions of the nature of the Adviser's and its staff's
management techniques; (7) the results of a hypothetical investment in the Fund
over a given number of years, including the amount that the investment would be
at the end of the period; (8) the effects of investing in a tax-deferred
account, such as an individual retirement account or Section 401(k) pension
plan; (9) the net asset value, net assets or number of shareholders of the Fund
as of one or more dates; and (10) a comparison of the Fund's operations to the
operations of other funds or similar investment products, such as a comparison
of the nature and scope of regulation of the products and the products' weighted
average maturity, liquidity, investment policies, and the manner of calculating
and reporting performance.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,188 at the end
of the second year (an increase of $98). The extra $8 that was earned on the $90
interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of the Fund's performance.
The Fund may advertise information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar cost
averaging. In a dollar-cost averaging program, an investor invests a fixed
dollar amount in the Fund at periodic intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not insure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in the Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
<TABLE>
<S> <C> <C> <C>
SYSTEMATIC SHARE SHARES
PERIOD INVESTMENT PRICE PURCHASED
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
TOTAL AVERAGE TOTAL
INVESTED $600 PRICE $15.17 SHARES 41.81
</TABLE>
In connection with its advertisements, the Fund may provide "shareholder's
letters" which serve to provide shareholders or investors with an introduction
into the Fund's, the Trust's or any of the Trust's service provider's policies
or business practices
4. MANAGEMENT
A. TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Trust, their positions with the
Trust, address, date of birth and 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 Board
supervises the Fund's activities, monitors its contractual arrangements with
various service providers and decides upon matters of general policy.
13
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------- ----------------------------------------------------------------------
NAME, POSITION WITH THE TRUST, PRINCIPAL OCCUPATION(S) DURING
DATE OF BIRTH AND ADDRESS PAST 5 YEARS
- -------------------------------------------- ----------------------------------------------------------------------
- -------------------------------------------- ----------------------------------------------------------------------
- -------------------------------------------- ----------------------------------------------------------------------
John Y. Keffer*, Chairman and President President, Forum Financial Group, LLC (a mutual fund services
Born: July 15, 1942 holding company)
Two Portland Square President, Forum Fund Services, LLC (Trust's underwriter)
Portland, Maine 04101 Chairman and President, Core Trust (Delaware) (registered investment
company)
- -------------------------------------------- ----------------------------------------------------------------------
Costas Azariadis, Trustee Professor of Economics, University of California-Los Angeles
Born: February 15, 1943 Trustee, Core Trust (Delaware)
Department of Economics
University of California
Los Angeles, CA 90024
- -------------------------------------------- ----------------------------------------------------------------------
James C. Cheng, Trustee President, Technology Marketing Associates
Born: July 26, 1942 (marketing company for small and medium size businesses in New
27 Temple Street England)
Belmont, MA 02718 Trustee, Core Trust (Delaware)
- -------------------------------------------- ----------------------------------------------------------------------
J. Michael Parish, Trustee Partner, Thelen Reid & Priest LLP (law firm) since 1995
Born: November 9, 1943 Partner, Winthrop Stimson Putnam & Roberts (law firm) from 1989-1995
40 West 57th Street Trustee, Core Trust (Delaware)
New York, NY 10019
- -------------------------------------------- ----------------------------------------------------------------------
David I. Goldstein, Vice President General Counsel, Forum Financial Group, LLC
Born: August 3, 1961 Secretary, Forum Fund Services, LLC (Trust's underwriter)
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Stacey Hong, Treasurer Director, Fund Accounting, Forum Financial Group, LLC
Born: May 10, 1966 Treasurer, Core Trust (Delaware)
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Dawn Taylor, Asst. Treasurer Manager/Senior Tax Specialist, Tax Department, Forum Financial
Born: May 14, 1964 Group, LLC since 1997
Two Portland Square Senior Tax Accountant, Pardy Bingham & Burrell during 1997
Portland, Maine 04101 Senior Tax Specialist, Forum Financial Group, LLC from 1994 to 1997
- -------------------------------------------- ----------------------------------------------------------------------
Leslie K. Klenk, Secretary Assistant Counsel, Forum Financial Group, LLC since 1998
Born: August 24, 1964 Vice President/Associate General Counsel, Smith Barney Inc.
Two Portland Square (brokerage firm) from 1993 through 1998
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Pamela Stutch, Asst. Secretary Fund Administrator, Forum Financial Group, LLC since 1998
Born: June 29, 1967 Law Student, Temple University from 1994-1997
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
</TABLE>
B. COMPENSATION OF TRUSTEES AND OFFICERS
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 $1,000 for each audit committee
meeting attended on a date when a Board meeting is not held. In addition to the
$1,000 for each Board meeting attended, each Trustee is paid $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.
14
<PAGE>
Trustees that are affiliated with the Adviser receive no compensation for their
services or reimbursement for their associated expenses. No officer of the Trust
is compensated by the Trust.
The following table sets forth the fees to paid to each Trustee by the Trust for
the fiscal year ended March 31, 1999.
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------- ---------------- ------------ ----------------- -------------------------------------
Compensation Total Compensation from Trust
Trustee from Trust Benefits Retirement and Core Trust (Delaware)
- ---------------------- ---------------- ------------ ----------------- -------------------------------------
- ---------------------- ---------------- ------------ ----------------- -------------------------------------
John Y. Keffer $0 $0 $0 $0
- ---------------------- ---------------- ------------ ----------------- -------------------------------------
Costas Azariadis $583.80 $0 $0 $583.80
- ---------------------- ---------------- ------------ ----------------- -------------------------------------
James C. Cheng $583.80 $0 $0 $583.80
- ---------------------- ---------------- ------------ ----------------- -------------------------------------
J. Michael Parish $583.80 $0 $0 $583.80
- ---------------------- ---------------- ------------ ----------------- -------------------------------------
</TABLE>
C. INVESTMENT ADVISER
1. SERVICES OF ADVISER
The Adviser serves as investment adviser to the Fund pursuant to an investment
advisory agreement (the "Agreement") with the Trust. Under the Agreement, the
Adviser furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the Fund's investments and effecting
portfolio transactions for the Fund.
2. OWNERSHIP OF ADVISER
The Adviser is 99% owned by Forum Trust, LLC and 1% owned by Forum Holdings
Corp. I, both of which are mutual fund services holding companies controlled by
John Y. Keffer, Chairman and President of the Trust. Forum Investment Advisors,
LLC is registered as an investment adviser with the SEC under the 1940 Act.
3. FEES
The Adviser's fee is calculated as a percentage of the applicable Fund's average
net assets. The fee is accrued daily by the Fund and is paid monthly based on
average net assets for the previous month.
In addition to receiving its advisory fee from the Fund, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets they invested in the Fund. If you have a separately managed account with
the Adviser with assets invested in the Fund, the Adviser will credit an amount
equal to all or a portion of the fees received by the Adviser against any
investment management fee received from the client.
Table 1 in Appendix B shows the dollar amount of the fees payable by the Fund to
the Adviser, the amount of fees waived by the Adviser, and the actual fees
received by the Adviser. The data are for the past three fiscal years.
4. OTHER PROVISIONS OF ADVISER'S AGREEMENT
The Agreement remains in effect for a period of two years from the date of its
effectiveness. Subsequently, the Agreement must be approved at least annually by
the Board or by majority vote of the shareholders, and in either case by a
majority of the Trustees who are not parties to the agreement or interested
persons of any such party.
The Agreement is terminable without penalty by the Trust regarding the Fund on
30 days' written notice when authorized either by vote of the Fund's
shareholders or by a majority vote of the Board, or by the Adviser on 90 days'
written notice to the Trust. The Agreement terminates immediately upon
assignment.
Under the Agreement, the Adviser is not liable for any mistake of judgment or in
any event whatsoever except for breach of fiduciary duty, 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 agreement.
15
<PAGE>
D. DISTRIBUTOR
1. DISTRIBUTOR; SERVICES AND COMPENSATION OF DISTRIBUTOR
Forum Fund Services, LLC (FFS), the distributor (also known as principal
underwriter) of the shares of the Fund, is located at Two Portland Square,
Portland, Maine 04101. FFS is a registered broker-dealer and is a member of the
National Association of Securities Dealers, Inc. Prior to August 1, 1999, Forum
Financial Services, Inc. was the distributor of each Fund pursuant to similar
terms and compensation.
FFS, FAdS, FAcS and the Transfer Agent are each controlled indirectly by Forum
Financial Group, LLC. Forum Financial Group, LLC is controlled by John Y.
Keffer.
Under a distribution agreement with the Trust (the "Distribution Agreement"),
FFS acts as the agent of the Trust in connection with the offering of shares of
the Fund. FFS continually distributes shares of the Fund on a best efforts
basis. FFS has no obligation to sell any specific quantity of Fund shares.
FFS may enter into arrangements with various financial institutions through
which you may purchase or redeem shares. FFS may, at its own expense and from
its own resources, compensate certain persons who provide services in connection
with the sale or expected sale of shares of the Fund.
FFS 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 with a sales charge. 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 the Prospectus in conjunction
with any materials and information provided by their institution. The financial
institution and not its customers will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
Pursuant to the Distribution Agreement, FFS receives, and may reallow to certain
financial institutions, the sales charge paid by the purchasers of the Fund's
shares. Table 2 in Appendix B shows the aggregate sales charges paid to FFSI,
the amount of sales charge reallowed by FFSI, and the amount of sales charge
retained by FFSI. The data are for the past three years (or shorter depending on
a Fund's commencement of operations).
2. OTHER PROVISIONS OF DISTRIBUTOR'S AGREEMENT
The Distribution Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party.
The Distribution Agreement is terminable without penalty by the Trust with
respect to the Fund on 60 days' written notice when authorized either by vote of
the Fund's shareholders or by a majority vote of the Board, or by FFS on 60
days' written notice to the Trust.
Under the Distribution Agreement, FFS is not liable to the Trust or the Trust's
shareholders for any error of judgment or mistake of law, for any loss arising
out of any investment or for any act or omission in the performance of its
duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties under the agreement.
16
<PAGE>
Under the Distribution Agreement, FFS and certain related parties (such as FFS's
officers and persons that control FFS) are indemnified by the Trust against all
claims and expenses in any way related to alleged untrue statements of material
fact contained in the Fund's Registration Statement or any alleged omission of a
material fact required to be stated in the Registration Statement to make
statements contained therein not misleading. The Trust, however, will not
indemnify FSS for any such misstatements or omissions if they were made in
reliance upon information provided in writing by FSS in connection with the
preparation of the Registration Statement.
E. OTHER FUND SERVICE PROVIDERS
1. ADMINISTRATOR
As administrator, pursuant to an administration agreement with the Trust (the
"Administration Agreement"), Forum Administrative Services, LLC (FAdS) is
responsible for the supervision of the overall management of the Trust,
providing the Trust with general office facilities and providing persons
satisfactory to the Board to serve as officers of the Trust.
For its services, FAdS receives a fee from the Fund at an annual rate of 0.20%
of the average daily net assets of the Fund. The fee is accrued daily by the
Fund and is paid monthly based on average net assets for the previous month.
The Administration Agreement must be approved at least annually by the Board or
by majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Administration Agreement is terminable without penalty by the Trust
or by FAdS with respect to the Fund on 60 days' written notice.
Under the Administration Agreement, FAdS is not liable to the Trust or the
Trust's shareholders for any act or omission, 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 agreement. Under the
Administration Agreement, FAdS and certain related parties (such as FAdS's
officers and persons who control FAdS) are indemnified by the Trust against any
and all claims and expenses related to FAdS's actions or omissions that are
consistent with FAdS's contractual standard of care.
Table 3 in Appendix B shows the dollar amount of the fees payable by the Fund to
FAdS, the amount of the fee waived by FAdS, and the actual fees received by
FAdS. The data are for the past three fiscal years.
2. FUND ACCOUNTANT
As fund accountant, pursuant to an accounting agreement with the Trust (the
"Accounting Agreement"), Forum Accounting Services, LLC (FAcS) provides fund
accounting services to the Fund. These services include calculating the NAV per
share of the Fund and preparing the Fund's financial statements and tax returns.
For its services, FAcS receives a fee from the Fund at an annual rate of $36,000
with certain surcharges based upon the number and type of the Fund's portfolio
transactions and positions. The fee is accrued daily by the Fund and is paid
monthly based on the transactions and positions for the previous month.
The Accounting Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Accounting Agreement is terminable without penalty by the Trust or by
FAcS with respect to the Fund on 60 days' written notice.
Under the Accounting Agreement, FAcS is not liable for any action or omission in
the performance of its duties to the Fund, except for willful misfeasance, bad
faith, gross negligence or by reason of reckless disregard of its obligations
and duties under the agreement. Under the Accounting Agreement, FAcS and certain
related parties
17
<PAGE>
(such as FAcS's officers and persons who control FAcS) are indemnified by the
Trust against any and all claims and expenses related to FAcS's actions or
omissions that are consistent with FAcS's contractual standard of care.
Under the Accounting Agreement, in calculating the Fund's NAV per share, FAcS is
deemed not to have committed an error if the NAV per share it calculates is (1)
within 1/10 of 1% of the actual NAV per share (after recalculation). The
Accounting Agreement also provides that FAcS will not be liable to a shareholder
for any loss incurred due to an NAV difference if such difference is less than
or equal 1/2 of 1% or less than or equal to $10.00. In addition, FAcS is not
liable for the errors of others, including the companies that supply securities
prices to FAcS and the Fund.
Table 4 in Appendix B shows the dollar amount of the fees payable by the Fund to
FAcS, the amount of the fee waived by FAcS, and the actual fees received by
FAcS. The data are for the past three fiscal years.
3. TRANSFER AGENT
As transfer agent and distribution paying agent, pursuant to a transfer agent
agreement with the Trust (the "Transfer Agent Agreement"), the Transfer Agent
maintains an account for each shareholder of record of the Fund and is
responsible for processing purchase and redemption requests and paying
distributions to shareholders of record. The Transfer Agent is located at Two
Portland Square, Portland, Maine 04101 and is registered as a transfer agent
with the SEC.
For its services, the Transfer Agent receives 0.25% of the average daily net
assets of the Fund, an annual fee of $12,000 and $18 per shareholder account.
The Transfer Agent Agreement must be approved at least annually by the Board or
by majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Transfer Agent Agreement is terminable without penalty by the Trust
or by the Transfer Agent with respect to the Fund on 60 days' written notice.
Under the Transfer Agent Agreement, the Transfer Agent is not liable for any act
in the performance of its duties to the Fund, except for willful misfeasance,
bad faith or gross negligence in the performance of its duties under the
agreement. Under the Transfer Agent Agreement, the Transfer Agent and certain
related parties (such as the Transfer Agent's officers and persons who control
the Transfer Agent) are indemnified by the Trust against any and all claims and
expenses related to FAdS's actions or omissions that are consistent with FAdS's
contractual standard of care.
Table 5 in Appendix B shows the dollar amount of the fees payable by the Fund to
FSS, the amount of the fee waived by FSS, and the actual fees received by FSS.
The data are for the past three fiscal years.
4. CUSTODIAN
As custodian, pursuant to an agreement with the Trust, Forum Trust, LLC
safeguards and controls the Fund's cash and securities, determines income and
collects interest on Fund investments. The Custodian may employ subcustodians to
provide custody of the Fund's domestic and foreign assets. The Custodian is
located at Two Portland Square, Portland, Maine 04101.
For its services, the Custodian receives an annualized percentage of the average
daily net assets of the Fund. The Fund also pays an annual domestic custody fee
as well as certain other transaction fees. These fees are accrued daily by the
Fund and are paid monthly based on average net assets and transactions for the
previous month.
18
<PAGE>
5. LEGAL COUNSEL
Seward & Kissel LLP, 1200 G Street, N.W., Washington, D.C. 20005, passes upon
legal matters in connection with the issuance of shares of the Trust.
6. INDEPENDENT AUDITORS
Deloitte & Touche LLP, 200 Berkeley Street, 14th Floor, Boston, Massachusetts,
02116-5022, independent auditors, have been selected as auditors for the Fund.
The auditors audit the annual financial statements of the Fund and provide the
Fund with an audit opinion. The auditors also review certain regulatory filings
of the Fund and the Fund's tax returns.
5. PORTFOLIO TRANSACTIONS
A. HOW SECURITIES ARE PURCHASED AND SOLD
Purchases and sales of portfolio securities that are fixed income securities
(for instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom the Fund
purchases or to whom the Fund sells is acting on its own behalf (and not as the
agent of some other party such as its customers). These securities normally are
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for these
securities.
Purchases and sales of portfolio securities that are equity securities (for
instance common stock and preferred stock) are generally effected: (1) if the
security is traded on an exchange, through brokers who charge commissions; and
(2) if the security is traded in the "over-the-counter" markets, in a principal
transaction directly from a market maker. In transactions on stock exchanges,
commissions are negotiated. When transactions are executed in an
over-the-counter market, the Adviser will seek to deal with the primary market
makers; but when necessary in order to obtain best execution, the Adviser will
utilize the services of others.
Purchases of securities from underwriters of the securities include a disclosed
fixed 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 price.
In the case of fixed income and equity securities traded in the over-the-counter
markets, there is generally no stated commission, but the price usually includes
an undisclosed commission or markup.
B. COMMISSIONS PAID
Table 6 in Appendix B shows the aggregate brokerage commissions or shorter
period if the Fund has been in operation for a shorter period with respect to
the Fund. The data presented are for the past three fiscal years.
C. ADVISER RESPONSIBILITY FOR PURCHASES AND SALES
The Adviser places orders for the purchase and sale of securities with brokers
and dealers selected by and in the discretion of the Adviser. The Fund does not
have any obligation to deal with any specific broker or dealer in the execution
of portfolio transactions. 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 the Fund rather
than by any formula.
The Adviser seeks "best execution" for all portfolio transactions. This means
that the Adviser seeks the most favorable price and execution available. The
Adviser's primary consideration in executing transactions for the Fund is prompt
execution of orders in an effective manner and at the most favorable price
available.
19
<PAGE>
1. CHOOSING BROKER-DEALERS
The Fund may not always pay the lowest commission or spread available. Rather,
in determining the amount of commissions (including certain dealer spreads) paid
in connection with securities transactions, the Adviser takes into account
factors such as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the research services described below)
and any risk assumed by the executing broker.
Consistent with applicable rules and the Adviser's duties, the Adviser may: (1)
consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund; and (2) take into
account payments made by brokers effecting transactions for the Fund (these
payments may be made to the Fund or to other persons on behalf of the Fund for
services provided to the Fund for which those other persons would be obligated
to pay.)
2. OBTAINING RESEARCH FROM BROKERS
The Adviser may give consideration to research services furnished by brokers to
the Adviser for its use and may cause the Fund to pay these brokers a higher
amount of commission than may be charged by other brokers. This research is
designed to augment the Adviser's own internal research and investment strategy
capabilities. This research may be used by the Adviser in connection with
services to clients other than the Fund, and not all research services may be
used by the Adviser in connection with the Fund. The Adviser's fees are not
reduced by reason of the Adviser's receipt of research services.
The Adviser has full brokerage discretion. It evaluates the range and quality of
a broker's services in placing trades including securing best price,
confidentiality, clearance and settlement capabilities, promptness of execution
and the financial stability of the broker-dealer. Under certain circumstances,
the value of research provided by a broker-dealer may be a factor in the
selection of a broker. This research would include reports that are common in
the industry. Typically, the research will be used to service all of the
Adviser's accounts although a particular client may not benefit from all the
research received on each occasion. The nature of the services purchased for
clients include industry research reports and periodicals, quotation systems,
software for portfolio management and formal data bases.
Occasionally, the Adviser may execute a transaction through a broker and pay a
slightly higher commission than another broker might charge. The higher
commission is paid because of the Adviser's need for specific research, for
specific expertise a firm may have in a particular type of transaction (due to
factors such as size or difficulty), or for speed/efficiency in execution. Since
most of the Adviser's brokerage commissions for research are for economic
research on specific companies or industries, and since the Adviser is involved
with a limited number of securities, most of the commission dollars spent for
industry and stock research directly benefit the clients.
There are occasions on which portfolio transactions may be executed as part of
concurrent authorizations to purchase or sell the same securities for more than
one account served by the Adviser, some of which accounts may have similar
investment objectives. Although such concurrent authorizations potentially could
be either advantageous or disadvantageous to any one or more particular
accounts, they will be effected only when the Adviser believes that to do so
will be in the best interest of the affected accounts. When such concurrent
authorizations occur, the objective will be to allocate the execution in a
manner equitable to the accounts involved. Clients are typically allocated
securities with prices averaged on a per-share or per-bond basis.
3. COUNTERPARTY RISK
The Adviser monitors the creditworthiness of counterparties to the Fund's
transactions and intends to enter into a transaction only when it believes that
the counterparty presents minimal and appropriate credit risks.
20
<PAGE>
4. TRANSACTIONS THROUGH AFFILIATES
The Adviser may effect brokerage transactions through affiliates of the Adviser
(or affiliates of those persons) pursuant to procedures adopted by the Trust.
5. OTHER ACCOUNTS OF THE ADVISER
Investment decisions for the Fund are made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. Investment decisions are the product of many
factors, including 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. In addition two or more clients may
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 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 a portfolio
security for one client could have an adverse effect on another client that has
a position in that security. In addition, when purchases or sales of the same
security for the Fund and other client accounts managed by the Adviser occurs
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
6. PORTFOLIO TURNOVER
The frequency of portfolio transactions of the Fund (the portfolio turnover
rate) will vary from year to year depending on many factors. From time to time
the Fund may engage in active short-term trading to take advantage of price
movements affecting individual issues, groups of issues or markets. An annual
portfolio turnover rate of 100% would occur if all of the securities in the Fund
were replaced once in a period of one year. Higher portfolio turnover rates may
result in increased brokerage costs to the Fund and a possible increase in
short-term capital gains or losses.
D. SECURITIES OF REGULAR BROKER-DEALERS
From time to time the Fund may acquire and hold securities issued by its
"regular brokers and dealers" or the parents of those brokers and dealers. For
this purpose, regular brokers and dealers are the 10 brokers or dealers that:
(1) received the greatest amount of brokerage commissions during the Fund's last
fiscal year; (2) engaged in the largest amount of principal transactions for
portfolio transactions of the Fund during the Fund's last fiscal year; or (3)
sold the largest amount of the Fund's shares during the Fund's last fiscal year.
Table 7 in Appendix B lists the regular brokers and dealers of each fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of the Funds' most recent fiscal year.
6. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A. GENERAL INFORMATION
You may effect purchases or redemptions or request any shareholder privilege in
person at the Transfer Agent's offices located at Two Portland Square, Portland,
Maine 04101.
The Fund accepts orders for the purchase or redemption of shares on any weekday
except days when the New York Stock Exchange is closed.
21
<PAGE>
B. ADDITIONAL PURCHASE INFORMATION
The distributor sells shares of the Fund on a continuous basis. Set forth below
is an example of the method of computing the offering price of the Fund's
shares. The example assumes a purchase of shares of beneficial interest
aggregating less than $100,000 subject to the schedule of sales charges set
forth in the Prospectus at a price based on the net asset value per share of the
Fund on March 31, 1999.
Net Asset Value Per Share $11.60
- --------------------------------------------- -----------------
Sales Charge, 4.00% of offering price
(4.17% of net asset value per share) $0.48
- --------------------------------------------- -----------------
Offering to Public $12.08
The Fund reserves the right to refuse any purchase request.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, the Fund may accept portfolio securities that meet the investment
objective and policies of the Fund as payment for Fund shares. The Fund will
only accept securities that: (1) are not restricted as to transfer by law and
are not illiquid; and (2) have a value which is readily ascertainable (and not
established only by valuation procedures).
1. IRAS
All contributions into an IRA through the automatic investing service are
treated as IRA contributions made during the year the investment is received.
2. UGMAS/UTMAS
If the trustee's name is not in the account registration of a gift or transfer
to minor ("UGMA/UTMA") account, the investor must provide a copy of the trust
document.
3. PURCHASES THROUGH FINANCIAL INSTITUTIONS
You may purchase and redeem shares through certain broker-dealers, banks and
other financial institutions. Financial institutions may charge their customers
a fee for their services and are responsible for promptly transmitting purchase,
redemption and other requests to the Fund.
If you purchase shares through a financial institution, you will be subject to
the institution's procedures, which may include charges, limitations, investment
minimums, cutoff times and restrictions in addition to, or different from, those
applicable when you invest in the Fund directly. When you purchase the Fund's
shares through a financial institution, you may or may not be the shareholder of
record and, subject to your institution's procedures, you may have Fund shares
transferred into your name. There is typically a three-day settlement period for
purchases and redemptions through broker-dealers.
Certain financial institutions may also enter purchase orders with payment to
follow.
You may not be eligible for certain shareholder services when you purchase
shares through a financial institution. Contact your institution for further
information. If you hold shares through a financial institution, the Fund may
confirm purchases and redemptions to the financial institution, which will
provide you with confirmations and periodic statements. The Fund is not
responsible for the failure of any financial institution to carry out its
obligations.
22
<PAGE>
Investors purchasing shares of the Fund through a financial institution should
read any materials and information provided by the financial institution to
acquaint themselves with its procedures and any fees that the institution may
charge.
C. ADDITIONAL REDEMPTION INFORMATION
The Fund may redeem shares involuntarily to reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to
transactions effected for the benefit of a shareholder which is applicable to
the Fund's shares as provided in the Prospectus.
1. SUSPENSION OF RIGHT OF REDEMPTION
The right of redemption may not be suspended, except for any period during
which: (1) the New York Stock Exchange is closed (other than customary weekend
and holiday closings) or during which the Securities and Exchange Commission
determines that trading thereon is restricted; (2) an emergency (as determined
by the SEC) exists as a result of which disposal by the Fund of its securities
is not reasonably practicable or as a result of which it is not reasonably
practicable for the Fund fairly to determine the value of its net assets; or (3)
the SEC may by order permit for the protection of the shareholders of the Fund.
2. REDEMPTION-IN-KIND
Redemption proceeds normally are paid in cash. Payments may be made wholly or
partly in portfolio securities, however, if the Board determines conditions
exist which would make payment in cash detrimental to the best interests of the
Fund. If redemption proceeds are paid wholly or partly in portfolio securities,
brokerage costs may be incurred by the shareholder in converting the securities
to cash. The Trust has filed an election with the SEC pursuant to which the Fund
may only effect a redemption in portfolio securities if the particular
shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
D. NAV DETERMINATION
In determining the Fund's NAV per share, securities for which market quotations
are readily available are valued at current market value using the last reported
sales price. If no sale price is reported, the average of the last bid and ask
price is used. If no average price is available, the last bid price is used. If
market quotations are not readily available, then securities are valued at fair
value as determined by the Board (or its delegate).
E. DISTRIBUTIONS
Distributions of net investment income will be reinvested at the Fund's NAV per
share as of the last day of the period with respect to which the distribution is
paid. Distributions of capital gain will be reinvested at the NAV per share of
the Fund on the payment date for the distribution. Cash payments may be made
more than seven days following the date on which distributions would otherwise
be reinvested.
7. TAXATION
The tax information set forth in the Prospectus and the information in this
section relates solely to U.S. federal income tax law and assumes that the Fund
qualifies as a regulated investment company (as discussed below). Such
information is only a summary of certain key federal income tax considerations
affecting the Fund and its shareholders that are not described in the
prospectus. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or the implications to shareholders. The
discussions here and in the prospectus are not intended as substitutes for
careful tax planning.
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This "Taxation" section is based on the Code and applicable regulations in
effect on the date hereof. Future legislative or administrative changes or court
decisions may significantly change the tax rules applicable to the Fund and
their shareholders. Any of these changes or court decisions may have a
retroactive effect.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX PROVISIONS APPLICABLE TO THEM.
A. QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund intends for each tax year to qualify as a "regulated investment
company" under the Code. This qualification does not involve governmental
supervision of management or investment practices or policies of the Fund.
The tax year end of the Fund is March 31 (the same as the Fund's fiscal year
end).
1. MEANING OF QUALIFICATION
As a regulated investment company, the Fund will not be subject to federal
income tax on the portion of its net investment income (that is, taxable
interest, dividends and other taxable ordinary income, net of expenses) and
capital gain net income (that is, the excess of long-term capital gains over
long-term capital losses) that it distributes to shareholders. In order to
qualify as a regulated investment company the Fund must satisfy the following
requirements:
o The Fund must distribute at least 90% of its investment company taxable
income (that is, net investment income and capital gain net income) for
the tax year. (Certain distributions made by the Fund after the close
of its tax year are considered distributions attributable to the
previous tax year for purposes of satisfying this requirement.)
o The Fund must derive at least 90% of its gross income from certain
types of income derived with respect to its business of investing.
o The Fund must satisfy the following asset diversification test at the
close of each quarter of the Fund's tax year: (1) at least 50% of the
value of the Fund's assets must consist of cash and cash items, U.S.
government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in
securities of the issuer and as to which the Fund does not hold more
than 10% of the outstanding voting securities of the issuer); and (2)
no more than 25% of the value of the Fund's total assets may be
invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which
are engaged in the same or similar trades or businesses.
2. FAILURE TO QUALIFY
If for any tax year the Fund does not qualify as a regulated investment company,
all of its taxable income (including its net capital gain) will be subject to
tax at regular corporate rates without any deduction for dividends to
shareholders, and the dividends will be taxable to the shareholders as ordinary
income to the extent of the Fund's current and accumulated earnings and profits.
A portion of these distributions generally may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Failure to qualify as a regulated investment company would thus have a negative
impact on the Fund's income and performance. It is possible that the Fund will
not qualify as a regulated investment company in any given tax year.
24
<PAGE>
B. FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its net investment income
for each tax year. These distributions are taxable to you as ordinary income.
These distributions may qualify for the 70% dividends-received deduction for
corporate shareholders.
The Fund anticipates distributing substantially all of its net capital gain for
each tax year. These distributions generally are made only once a year, usually
in November or December, but the Fund may make additional distributions of net
capital gain at any time during the year. These distributions are taxable to you
as long-term capital gain, regardless of how long you have held shares.
The Fund may have capital loss carryovers (unutilized capital losses from prior
years). These capital loss carryovers (which can be used for up to eight years)
may be used to offset any current capital gain (whether short- or long-term).
All capital loss carryovers are listed in the Fund's financial statements. Any
such losses may not be carried back.
Distributions by the Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital. Return of capital
distributions reduces your tax basis in the shares and are treated as gain from
the sale of the shares to the extent your basis would be reduced below zero.
All distributions by the Fund will be treated in the manner described above
regardless of whether the distribution is paid in cash or reinvested in
additional shares of the Fund (or of another Fund). If you receive a
distribution in the form of additional shares, it will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date.
You may purchase shares whose net asset value at the time reflects undistributed
net investment income or recognized capital gain, or unrealized appreciation in
the value of the assets of the Fund. Distributions of these amounts are taxable
to you in the manner described above, although the distribution economically
constitutes a return of capital to you.
If you purchase shares of the Fund just prior to the ex-dividend date of a
distribution, you will be taxed on the entire amount of the distribution
received, even though the net asset value per share on the date of the purchase
reflected the amount of the distribution.
If you hold shares for six months or less and redeem shares at a loss after
receiving a capital gain distribution, the loss will be treated as a long-term
capital loss to the extent of the distribution.
Ordinarily, you are required to take distributions by the Fund into account in
the year in which they are made. A distribution declared in October, November or
December of any year and payable to you on a specified date in those months,
however, is deemed to be received by you (and made by the Fund) on December 31
of that calendar year if the distribution is actually paid in January of the
following year.
You will be advised annually as to the U.S. federal income tax consequences of
distributions made (or deemed made) to them during the year.
C. CERTAIN TAX RULES APPLICABLE TO THE FUND'S TRANSACTIONS
For federal income tax purposes, when put and call options purchased by the Fund
expire unexercised, the premiums paid by the Fund give rise to short- or
long-term capital losses at the time of expiration (depending on the length of
the respective exercise periods for the options). When put and call options
written by the Fund expire unexercised, the premiums received by the Fund give
rise to short-term capital gains at the time of expiration. When the Fund
exercises a call, the purchase price of the underlying security is increased by
the amount of the premium paid by the Fund. When the Fund exercises a put, the
proceeds from the sale of the underlying security are decreased by the premium
paid. When a put or call written by the Fund is exercised, the purchase price
(selling
25
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price in the case of a call) of the underlying security is decreased (increased
in the case of a call) for tax purposes by the premium received.
Certain listed options, regulated futures contracts and forward currency
contracts are considered "Section 1256 contracts" for federal income tax
purposes. Section 1256 contracts held by the Fund at the end of each tax year
are "marked to market" and treated for federal income tax purposes as though
sold for fair market value on the last business day of the tax year. Gains or
losses realized by the Fund on Section 1256 contracts generally is considered
60% long-term and 40% short-term capital gains or losses. The Fund can elect to
exempt its Section 1256 contracts which are part of a "mixed straddle" (as
described below) from the application of Section 1256.
Any option, futures contract, or other position entered into or held by the Fund
in conjunction with any other position held by the Fund may constitute a
"straddle" for federal income tax purposes. A straddle of which at least one,
but not all, the positions are Section 1256 contracts, may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of the Fund's gains and losses with respect to straddle
positions by requiring, among other things, that: (1) the loss realized on
disposition of one position of a straddle may not be recognized to the extent
that the Fund has unrealized gains with respect to the other position in such
straddle; (2) the Fund's holding period in straddle positions be suspended while
the straddle exists (possibly resulting in gain being treated as short-term
capital gain rather than long-term capital gain); (3) the losses recognized with
respect to certain straddle positions which are part of a mixed straddle and
which are non-Section 1256 positions be treated as 60% long-term and 40%
short-term capital loss; (4) losses recognized with respect to certain straddle
positions which would otherwise constitute short-term capital losses be treated
as long-term capital losses; and (5) the deduction of interest and carrying
charges attributable to certain straddle positions may be deferred. Various
elections are available to the Fund which may mitigate the effects of the
straddle rules, particularly with respect to mixed straddles. In general, the
straddle rules described above do not apply to any straddles held by the Fund
all of the offsetting positions of which consist of Section 1256 contracts.
D. FEDERAL EXCISE TAX
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to: (1) 98% of
ordinary its taxable income for the calendar year; and (2) 98% of its capital
gain net income for the one-year period ended on October 31 of the calendar
year. If the Fund changes its tax year end to November 30 or December 31, it may
elect to use that date instead of the October 31 date in making this
calculation. The balance of the Fund's income must be distributed during the
next calendar year. The Fund will be treated as having distributed any amount on
which it is subject to income tax for any tax year ending in a calendar year.
For purposes of calculating the excise tax, the Fund: (1) reduces its capital
gain net income (but not below its net capital gain) by the amount of any net
ordinary loss for the calendar year; and (2) excludes foreign currency gains and
losses incurred after October 31 of any year (or November 30 or December 31 if
it has made the election described above) in determining the amount of ordinary
taxable income for the current calendar year. The Fund will include foreign
currency gains and losses incurred after October 31 in determining ordinary
taxable income for the succeeding calendar year.
The Fund intends to make sufficient distributions of its ordinary taxable income
and capital gain net income prior to the end of each calendar year to avoid
liability for the excise tax. Investors should note, however, that the Fund may
in certain circumstances be required to liquidate portfolio investments to make
sufficient distributions to avoid excise tax liability.
E. SALE OR REDEMPTION OF SHARES
In general, a shareholder will recognize gain or loss on the sale or redemption
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale or redemption and the shareholder's adjusted tax basis in the
shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the Fund within 30 days before or after
the sale or redemption (a so called "wash sale"). In general, any gain or loss
26
<PAGE>
arising from the sale or redemption of shares of the Fund will be considered
capital gain or loss and will be long-term capital gain or loss if the shares
were held for longer than one year. Any capital loss arising from the sale or
redemption of shares held for six months or less, however, is treated as a
long-term capital loss to the extent of the amount of capital gain distributions
received on such shares. For this purpose, the special holding period rules of
Code Section 246(c) (3) and (4) generally will apply in determining the holding
period of shares. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
F. WITHHOLDING TAX
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of distributions, and the proceeds of redemptions of shares, paid
to any shareholder: (1) who has failed to provide correct tax payer
identification number; (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly; or (3)
who has failed to certify to the Fund that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient."
G. FOREIGN SHAREHOLDERS
Taxation of a shareholder who under the Code is a nonresident alien individual,
foreign trust or estate, foreign corporation, or foreign partnership ("foreign
shareholder"), depends on whether the income from the Fund is "effectively
connected" with a U.S. trade or business carried on by the foreign shareholder.
If the income from the Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income distributions paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) upon the gross amount of the distribution.
The foreign shareholder generally would be exempt from U.S. federal income tax
on gain realized on the sale of shares of the Fund, capital gain distributions
from the Fund and amounts retained by the Fund that are designated as
undistributed capital gain.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income
distributions, capital gain distributions, and any gain realized upon the sale
of shares of the Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or U.S. corporations.
In the case of a noncorporate foreign shareholder, the Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding (or taxable at a reduced treaty rate), unless
the shareholder furnishes the Fund with proper notification of its foreign
status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein.
The tax rules of other countries with respect to distributions from the Fund can
differ from the rules for U.S. federal income taxation described above. These
foreign rules are not discussed herein. Foreign shareholders are urged to
consult their own tax advisers as to the consequences of foreign tax rules with
respect to an investment in the Fund, distributions from the Fund and the
applicability of foreign taxes and related matters.
H. STATE AND LOCAL TAXES
The tax rules of the various states of the U.S. and their local jurisdictions
with respect to distributions from the Fund can differ from the rules for U.S.
federal income taxation described above. These state and local rules are not
discussed herein. Shareholders are urged to consult their tax advisers as to the
consequences of state and local tax rules with respect to an investment in the
Fund, distributions from the Fund and the applicability of state and local taxes
and related matters.
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8. OTHER MATTERS
A. THE TRUST AND ITS SHAREHOLDERS
1. GENERAL INFORMATION
Forum Funds 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.
The Trust is registered as an open-end, management investment company under the
1940 Act. The Trust offers shares of beneficial interest in its series. As of
the date hereof, the Trust consisted of the following shares of beneficial
interest:
Investors Bond Fund Payson Value Fund
TaxSaver Bond Fund Payson Balanced Fund
Investors High Grade Bond Fund Austin Global Equity Fund
Maine Municipal Bond Fund Polaris Global Value Fund
New Hampshire Bond Fund Investors Equity Fund
Daily Assets Government Fund(1) Equity Index Fund
Daily Assets Treasury Obligations Fund(1) Investors Growth Fund
Daily Assets Cash Fund(1) BIA Small-Cap Growth Fund
Daily Assets Government Obligations Fund(1) BIA Growth Equity Fund
Daily Assets Municipal Fund(1)
(1)The Trust offers shares of beneficial interest in an institutional,
institutional service, and investor share class of these series.
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 series and may divide series into classes of
shares; the costs of doing so will be borne by the Trust.
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The Trust and the Fund will continue indefinitely until terminated.
2. SERIES AND CLASSES OF THE TRUST
Each series or class of the Trust may have a different expense ratio and each
class' performance will be affected by its expenses. For more information on any
other class of shares of the Fund, investors may contact the Transfer Agent.
3. SHAREHOLDER VOTING AND OTHER RIGHTS
Each share of each series 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, shareholder service and administration expenses) are borne
solely by those shares. Each class votes separately with respect to the
provisions of any Rule 12b-1 plan which pertains to the class and other matters
for which separate class voting is appropriate under applicable law. Generally,
shares will be voted separately by individual series except if: (1) the 1940 Act
requires shares to be voted in the aggregate and not by individual series; and
(2) when the Trustees determine that the matter affects more than one series and
all affected series must vote. The Trustees may also determine that a matter
only affects certain classes of the Trust and thus only those such classes are
entitled to vote on the matter. 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. 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.
A shareholder in a series is entitled to the shareholder's pro rata share of all
distributions arising from that series' assets and, upon redeeming shares, will
receive the portion of the series' net assets represented by the redeemed
shares.
Shareholders representing 10% or more of the Trust's (or a series') outstanding
shares may, as set forth in the Trust Instrument, call meetings of the Trust (or
series) for any purpose related to the Trust (or series), including, in the case
of a meeting of the Trust, the purpose of voting on removal of one or more
Trustees.
4. CERTAIN REORGANIZATION TRANSACTIONS
The Trust or any series may be terminated upon the sale of its assets to, or
merger with, another open-end, management investment company or series thereof,
or upon liquidation and distribution of its assets. Generally such terminations
must be approved by the vote of the holders of a majority of the outstanding
shares of the Trust or the Fund. The Trustees may, without prior shareholder
approval, change the form of organization of the Trust by merger, consolidation
or incorporation. Under the Trust Instrument, the Trustees may, without
shareholder vote, cause the Trust to merge or consolidate into one or more
trusts, partnerships or corporations or cause the Trust to be incorporated under
Delaware law, so long as the surviving entity is an open-end, management
investment company that will succeed to or assume the Trust's registration
statement.
B. FUND OWNERSHIP
As of July 1, 1999, the Trustees and officers of the Trust in the aggregate
owned less than 1% of the outstanding Shares of the Fund.
Also as of that date, certain shareholders of record owned 5% or more of the
Fund. These shareholders and any shareholder known by the Fund to own
beneficially 5% or more of the Fund are listed in Table 8 in Appendix B.
From time to time, certain shareholders may own a large percentage of the shares
of the Fund. Accordingly, those shareholders may be able to greatly affect (if
not determine) the outcome of a shareholder vote. As of July 1, 1999, the
following persons beneficially owned 25% or more of the shares of a Fund (or of
the Trust) and may be deemed to control the Fund (or the Trust). For each person
listed that is a company, the jurisdiction under the laws of which the company
is organized (if applicable) and the company's parents are listed.
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CONTROLLING PERSON INFORMATION
SHAREHOLDER PERCENTAGE OF
SHARES OWNED
FirsTrust Co
National City Bank Trust Dept
227 Main Street
Evansville, Indiana 47708 85.66%
C. LIMITATIONS ON SHAREHOLDERS' AND TRUSTEES' LIABILITY
Delaware law provides that Fund shareholders are entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. In the past, the Trust believes that the securities
regulators of some states, however, have indicated that they and the courts in
their state may decline to apply Delaware law on this point. The Forum Funds'
Trust Instrument (the document that governs the operation of the Trust contains
an express disclaimer of shareholder liability for the debts, liabilities,
obligations and expenses of the Trust. The Trust Instrument provides for
indemnification out of each series' property of any shareholder or former
shareholder held personally liable for the obligations of the series. The Trust
Instrument also provides that each series shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the series and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which Delaware law does not apply, no contractual limitation of
liability was in effect and the portfolio is unable to meet its obligations.
FAdS believes that, in view of the above, there is no risk of personal liability
to shareholders.
The Trust Instrument provides that the Trustees shall not be liable to any
person other than the Trust and its shareholders. In addition, the Trust
Instrument provides that the Trustees shall not be liable for any conduct
whatsoever, provided that a Trustee is not protected against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
D. REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby. The registration statement, including
the exhibits filed therewith, may be examined at the office of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents are not necessarily complete, and, in each instance,
are qualified by, reference to the copy of such contract or other documents
filed as exhibits to the registration statement.
E. FINANCIAL STATEMENTS
The financial statements of the Fund for the year ended March 31, 1999, which
are included in the Annual Report to Shareholders of the Fund, are incorporated
herein by reference. These financial statements only include the schedules of
investments, statements of assets and liabilities, statements of operations,
statements of changes in net assets, financial highlights, notes and independent
auditors' reports.
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APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
A. CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
1. MOODY'S INVESTORS SERVICE
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." 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.
AA 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 risk
appear somewhat larger than the Aaa securities.
A 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.
BAA Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments 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.
BA 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.
B 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.
CAA 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. Ca 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.
C 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
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
A-1
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2. STANDARD AND POOR'S CORPORATION
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
NOTE Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
NOTE Plus (+) or minus (-). 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.
A-2
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The "r" symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
currencies, or commodities; obligations exposed to severe prepayment
risk-such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse
floaters.
3. DUFF & PHELPS CREDIT RATING CO.
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+
AA High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+
A, A- Protection factors are average but adequate. However, risk factors are
more variable in periods of greater economic stress.
BBB+
BBB
BBB- Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
BB+
BB
BB- Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according
to industry conditions. Overall quality may move up or down frequently
within this category.
B+
B, B- Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
4. FITCH IBCA, INC.
INVESTMENT GRADE
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A-3
<PAGE>
A High credit quality. `A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC
CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates
that default of some kind appears probable. `C' ratings signal imminent
default.
DDD
DD, D Default. Securities are not meeting current obligations and are
extremely speculative. `DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, `DD' indicates expected recovery of 50%
- 90% of such outstandings, and `D' the lowest recovery potential, i.e.
below 50%.
B. PREFERRED STOCK
1. MOODY'S INVESTORS SERVICE
AAA An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated "aa" is considered a high- grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
A An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in
the "aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA An issue which is rated "baa" is considered to be 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.
BA An issue which is 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
A-4
<PAGE>
periods. Uncertainty of position characterizes preferred stocks in this
class.
B 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.
CAA 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.
CA 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 payments.
C This is the lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor prospects of
ever attaining any real investment standing.
NOTE Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: 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
issue ranks in the lower end of its generic rating category.
2. STANDARD & POOR'S
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA 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.
A 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.
BBB 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.
BB
B, CCC Preferred stock rated BB, B, and CCC is 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. While such issues will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating CC is reserved for a preferred stock issue that is in
arrears on dividends or sinking fund payments, but that is currently
paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in
default on debt instruments.
A-5
<PAGE>
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
NOTE Plus (+) or minus (-). To provide more detailed indications of
preferred stock quality, 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.
C. SHORT TERM RATINGS
1. MOODY'S INVESTORS SERVICE
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) 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.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above 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.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
NOT
PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.
2. STANDARD AND POOR'S
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-6
<PAGE>
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
3. FITCH IBCA, INC.
F1 Obligations assigned this rating have the highest capacity for timely
repayment under Fitch IBCA's national rating scale for that country,
relative to other obligations in the same country. This rating is
automatically assigned to all obligations issued or guaranteed by the
sovereign state. Where issues possess a particularly strong credit
feature, a "+" is added to the assigned rating.
F2 Obligations supported by a strong capacity for timely repayment
relative to other obligors in the same country. However, the relative
degree of risk is slightly higher than for issues classified as `A1'
and capacity for timely repayment may be susceptible to adverse changes
in business, economic, or financial conditions.
F3 Obligations supported by an adequate capacity for timely repayment
relative to other obligors in the same country. Such capacity is more
susceptible to adverse changes in business, economic, or financial
conditions than for obligations in higher categories.
B Obligations for which the capacity for timely repayment is uncertain
relative to other obligors in the same country. The capacity for timely
repayment is susceptible to adverse changes in business, economic, or
financial conditions.
C Obligations for which there is a high risk of default to other obligors
in the same country or which are in default.
A-7
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
The following table shows the dollar amount of fees payable to the Adviser with
respect to the Fund, the amount of fee that was waived by the Adviser, if any,
and the actual fee received by the Adviser.
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE PAYABLE ADVISORY FEE ADVISORY FEE RETAINED
INVESTORS GROWTH FUND WAIVED
- --------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $207,130 $0 $207,130
Period Ended March 31, 1998 $59,250 $0 $59,250
TABLE 2 - SALES CHARGES
AGGREGATE SALES CHARGE
FISCAL YEAR ENDED MARCH 31, AMOUNT RETAINED AMOUNT REALLOWED
- ---------------------------------------------------------------------------------------------------------------------------
1999 $0 $0 $0
1998 $0 $0 $0
TABLE 3 - ADMINISTRATION FEES
The following table shows the dollar amount of fees payable to FAdS with respect
to the Fund, the amount of fee that was waived by FAdS, if any, and the actual
fee received by FAdS.
ADMINISTRATION FEE ADMINISTRATION FEE WAIVED ADMINISTRATION FEE
PAYABLE RETAINED
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $63,732 $63,732 $0
Period Ended March 31, 1998 $18,231 $18,231 $0
TABLE 4 - ACCOUNTING FEES
The following table shows the dollar amount of fees paid to FAcS.
ACCOUNTING FEE AMOUNT RETAINED AMOUNT REALLOWED
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $37,000 $37,000 $0
Period Ended March 31, 1998 $10,935 $10,935 $0
</TABLE>
B-1
<PAGE>
TABLE 5 - TRANSFER AGENCY FEES
The following table shows the dollar amount of fees payable to FSS with respect
to each Fund, the amount of fee that was waived by FSS, if any, and the actual
fee received by FSS.
<TABLE>
<S> <C> <C> <C>
TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
PAYABLE WAIVED RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $91,741 $44,032 $47,709
Period Ended March 31, 1998 $26,445 $22,744 $ 3,701
</TABLE>
TABLE 6 - COMMISSIONS
The following table shows the aggregate brokerage commissions with respect to
the Fund that incurred brokerage costs. The data are for the past three fiscal
years or shorter period if the Fund has been in operation for a shorter period.
Note that the Fund was only in operation for less than three months for the
period ended March 31, 1998.
AGGREGATE COMMISSION
INVESTORS GROWTH FUND PAID
- ------------------------------------------------------------------------
Year Ended March 31, 1999 $37,518
Period Ended March 31, 1998 $9,612
TABLE 7 - SECURITIES OF REGULAR BROKERS OR DEALERS
The following table lists the regular brokers and dealers of each fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of the Fund's most recent fiscal year.
REGULAR BROKER DEALER VALUE HELD
- --------------------------------------------------------------------------
Merrill Lynch & Co., Inc. $884,375
BankAmerica Corp. $645,230
Wells Fargo & Co. $631,124
Dreyfus Cash Management $467,027
TABLE 8 - 5% SHAREHOLDERS
The following table lists (1) the persons who owned of record 5% or more of the
outstanding shares of a class of shares of the Fund and (2) any person known by
the Fund to own beneficially 5% or more of a class of shares of the Fund, as of
July 1, 1999.
NAME AND ADDRESS % OF FUND
- -----------------------------------------------------------------------
FirsTrust Co
National City Bank Trust Dept
227 Main Street
Evansville, Indiana 47708 13.89%
B-2
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - TOTAL RETURNS (WITHOUT SALES CHARGE)
The average annual total return of the Fund for the period ended March 31, 1999,
was as follows.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALENDAR SINCE
ONE MONTH THREE YEAR TO ONE YEAR THREE FIVE YEARS TEN YEARS INCEPTION
INVESTORS MONTHS DATE YEARS (ANNUALIZED)
GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------
1.96% 1.25% 1.25% 6.25% N/A N/A N/A 15.51%
TABLE 2 - TOTAL RETURNS (WITH SALES CHARGE)
The average annual total return of the Fund for the period ended March 31, 1999,
was as follows.
CALENDAR SINCE
ONE MONTH THREE YEAR TO ONE YEAR THREE FIVE YEARS TEN YEARS INCEPTION
INVESTORS MONTHS DATE YEARS (ANNUALIZED)
GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------
(2.12)% (2.80)% (2.80)% 2.00% N/A N/A N/A 11.94%
</TABLE>
C-1
<PAGE>
APPENDIX D - ADDITIONAL ADVERTISING MATERIALS
TEXT OF FORUM BROCHURE
In connection with its advertisements, a Fund may provide a description of the
Fund's investment adviser and its affiliates, which are service providers to the
Fund. Text, which is currently in use, is set forth below.
"FORUM FINANCIAL GROUP OF COMPANIES
Forum Financial Group of Companies represents 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 181
mutual funds for 17 different fund managers, with approximately $70 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 390 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.
D-1
<PAGE>
Fund sponsors understand that even the most efficiently and creatively designed
fund can disappoint shareholders if it is inadequately serviced. That is the
reason why fund sponsors have relied on Forum to meet all of a fund's complex
compliance, regulatory, and filing needs.
Forum's full service commitment includes providing state-of-the-art accounting
support (Forum has 7 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.
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 $1.25 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 $1.95 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
D-2
<PAGE>
cushioning the investment against market volatility. These funds offer regular
income, ready access to your money, and flexibility to buy or sell at any time.
In the less conservative but still not aggressive category are funds in the
Forum Family that seek to provide steady income and, in certain cases, tax-free
earnings. Such investments provide important diversification to an investment
portfolio.
Growth funds in the Forum Family more aggressively pursue a high return at the
risk of market volatility. These funds include domestic and international stock
mutual funds."
D-3
<PAGE>
PEOPLES HERITAGE NEWS RELEASE
Peoples Heritage Financial Group, Inc. (NASDAQ:PHBK) announced today that it has
formed an alliance with a major mutual fund provider and an investment advisory
firm to expand its mutual fund offerings. The alliance with Forum Financial
Group and H.M. Payson & Company will result in fifteen funds, including the
unique Maine Municipal Bond Fund and New Hampshire Bond Fund, being offered
through the branches of Peoples' affiliate banks in Maine, New Hampshire and
northern Massachusetts and the Company's trust and investment subsidiaries
"There is no secret to where financial services are moving, under one roof,"
said William J. Ryan, Chairman, President and Chief Executive Officer of Peoples
Heritage. "One only has to watch the virtually daily announcements of
consolidations in the financial sector to understand that customers are
demanding and receiving 'one-stop' financial services.
"We think we are adding the additional competitive advantage of funds that are
managed and administered close to home."
Eighteen Forum funds will be offered including two Payson funds. The tax-free
Maine and New Hampshire State bond funds are the only two such funds available
and usually invest 80% of total assets in municipal securities. Other funds
being provided by the alliance include money market, fixed income and equity
funds.
Forum Financial, based in Portland, Maine since 1987, administers 124funds with
more than $29 billion in assets. Forum manages mutual funds for independent
investment advisors such as Payson and for banks. Forum Investment Advisors, LLC
an affiliate, is the largest Maine-based investment adviser with approximately
$1.95 billion in fund assets under management.
"We are providing a great product set to the customers served by Peoples' nearly
200 branches in northern New England," said John Y. Keffer, Forum Financial
president, "The key today is to link a wide variety of investment options with
convergent, easy access for customers. I believe this alliance does just that."
H.M. Payson & Co., founded in 1854, is one of the nation's oldest investment
firms with nearly $1.25 billion in assets under management and $412 million in
non-managed custodial accounts. The Payson Value Fund and Payson Balanced Fund
are among the 18 offerings.
"I believe we have all the ingredients of a tremendous alliance," said John
Walker, Payson President and Managing Director. "We have the region's premier
community banking company, a community-based investment advisor, and a local
mutual fund company that operates nationally and specializes in working with
banks. We are poised to provide solid investment performance and service."
Peoples Heritage Financial Group is a $10 billion multi-state bank and financial
services holding company headquartered in Portland, Maine. Its Maine banking
affiliate, Peoples Heritage Bank, has the state's leading deposit market share.
Its New Hampshire banking affiliate, Bank of New Hampshire, has the state's
leading deposit market share. Family Bank, the Company's Massachusetts banking
subsidiary, has the state's tenth largest deposit market share and the leading
market share in many of the northern Massachusetts communities it serves.
Peoples affiliate banks also operate subsidiaries in leasing, trust and
investment services and insurance.
D-4
<PAGE>
FORUM FINANCIAL GROUP:
Headquarters: Two Portland Square, Portland, Maine 04101
President: John Y. Keffer
Offices: Portland, Seattle, Warsaw, Bermuda
*Established in 1986 to administer mutual funds for independent investment
advisors and banks *Among the nation's largest third-party fund administrators
*Uses proprietary in-house systems and custom programming capabilities
*Administration and Distribution Services: Regulatory, compliance,
expense accounting, budgeting for all funds
*Fund Accounting Services: Portfolio valuation, accounting, dividend
declaration, and tax advice
*Shareholder Services: Preparation of statements, distribution
support, inquiries and processing of trades
*Client Assets under Administration and Distribution: $70.4 billion
*Client Assets Processed by Fund Accounting: $53 billion
*Client Funds under Administration and Distribution: 181mutual funds with 89
share classes
*International Ventures:
Joint venture with Bank Handlowy in Warsaw, Poland, using Forum's
proprietary transfer agency and distribution systems Off-shore
investment fund administration, using Bermuda as Forum's center of
operations
*Forum Employees: United States -215, Poland - 180, Bermuda - 4
FORUM CONTACTS:
Mark Kaplan, Managing Director and Portfolio Manager, Forum Investment Advisors,
LLC,
(207) 879-1900 X 6123
Tony Santaniello, Director of Marketing, (207) 879-1900 X 6175
<PAGE>
H.M. PAYSON & CO.:
Headquarters: One Portland Square, Portland, Maine
President and Managing Director: John Walker
Quality investment services and conservative wealth management since 1854
*Assets under Management: $1.25 Billion
*Non-managed Custody Assets: $412 Million
*Client Base: 85% individuals; 15% institutional
*Owned by 11 shareholders; 10 managing directors
*Payson Balanced Fund and Payson Value Fund (administrative and shareholder
services provided by Forum Financial Group)
*Employees: 45
H.M. PAYSON & CO. CONTACT:
Joel Harris, Marketing Coordinator, (207) 772-3761
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1999
PAYSON VALUE FUND
PAYSON BALANCED FUND
INVESTMENT ADVISER:
H.M. Payson & Co.
P.O. Box 31
One Portland Square
Portland, Maine 04112
ACCOUNT INFORMATION AND SHAREHOLDER SERVICES:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
(207) 879-0001
(800) 805-8258
This Statement of Additional Information (the "SAI") supplements the Prospectus
dated August 1, 1999, as may be amended from time to time, offering shares of
Payson Value Fund and Payson Balanced Fund (the "Funds"), two separate series of
Forum Funds, a registered, open-end management investment company (the "Trust").
This SAI is not a prospectus and should only be read in conjunction with the
Prospectus. You may obtain the Prospectus without charge by contacting Forum
Shareholder Services at the address or telephone number listed above.
Financial Statements for each Fund for the year ended March 31, 1999, included
in the Annual Report to shareholders, are incorporated into this SAI by
reference. Copies of the Annual Report may be obtained, without charge, upon
request by contacting Forum Shareholder Services, LLC at the address or
telephone number listed above.
<PAGE>
TABLE OF CONTENTS
Glossary...................................................................1
1. Investment Policies And Risks..........................................2
2. Investment Limitations................................................13
3. Performance Data And Advertising......................................16
4. Management............................................................20
5. Portfolio Transactions................................................25
6. Additional Purchase And Redemption Information........................28
7. Taxation..............................................................31
8. Other Matters.........................................................35
Appendix A - Description Of Securities Ratings...........................A-1
Appendix B - Miscellaneous Tables........................................B-1
Appendix C - Performance Data............................................C-1
Appendix D - Additional Advertising Materials............................D-1
<PAGE>
GLOSSARY
As used in this SAI, the following terms have the meanings listed.
"Adviser" means H.M. Payson & Co.
"Board" means the Board of Trustees of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Custodian" means the custodian of each Fund's assets.
"FAdS" means Forum Administrative Services, LLC, the administrator of
each Fund.
"Fitch" means Fitch IBCA, Inc.
"FAcS" means Forum Accounting Services, LLC, the fund accountant of
each Fund.
"FFS" means Forum Fund Services, LLC, the distributor of each Fund's
shares.
"FFSI" means Forum Financial Services, LLC, the distributor of each
Fund's shares prior to August 1, 1999.
"FSS" means Forum Shareholder Services, LLC, the transfer agent of each
Fund.
"Fund" means each of Payson Value Fund or the Payson Balanced Fund.
"Moody's" means Moody's Investors Service.
"NRSRO" means a nationally recognized statistical rating organization.
"NAV" means net asset value per share.
"SEC" means the U.S. Securities and Exchange Commission.
"S&P" means Standard & Poor's, A Division of the McGraw Hill Companies.
"Transfer Agent" means Forum Shareholder Services, LLC, the transfer
agent of each Fund.
"Trust" means Forum Funds.
"U.S. Government Securities" means obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
1
<PAGE>
1. INVESTMENT POLICIES AND RISKS
Each Fund is a diversified series of the Trust. This section discusses in
greater detail than the Funds' Prospectus certain investments that the Funds may
make. A Fund will make only those investments described below that are in
accordance with its investment objectives and policies.
A. SECURITY RATINGS INFORMATION
Payson Balanced Fund's investments in debt securities is subject to credit risk
relating to the financial condition of the issuers of the securities that the
Fund holds. To limit credit risk, the Fund may only invest in debt securities
that are considered to be investment grade. Investment grade means rated in the
top four long-term rating categories by an NRSRO, or unrated and determined by
the Adviser to be of comparable quality.
The lowest ratings that are investment grade for corporate bonds, including
convertible bonds, are "Baa" in the case of Moody's and "BBB" in the case of S&P
and Fitch; for preferred stock are "Baa" in the case of Moody's and "BBB" in the
case of S&P. Unrated securities may not be as actively traded as rated
securities. A Fund may retain securities whose rating has been lowered below the
lowest permissible rating category (or that are unrated and determined by the
Adviser to be of comparable quality to securities whose rating has been lowered
below the lowest permissible rating category) if the Adviser determines that
retaining such security is in the best interests of the Fund. Because a
downgrade often results in a reduction in the market price of the security, sale
of a downgraded security may result in a loss.
Moody's, S&P and other 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 SAI. The Funds
may use these ratings to determine whether to purchase, sell or hold a security.
Ratings are general and are not absolute standards of quality. 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 Adviser will determine whether the Fund should
continue to hold the obligation. To the extent that the ratings given by a NRSRO
may change as a result of changes in such organizations or their rating systems,
the Adviser will attempt to substitute comparable ratings. Credit ratings
attempt to evaluate the safety of principal and interest payments and do not
evaluate the risks of fluctuations in market value. Also, rating agencies may
fail to make timely changes in credit ratings. An issuer's current financial
condition may be better or worse than a rating indicates.
B. EQUITY SECURITIES
1. GENERAL
COMMON AND PREFERRED STOCK. Each Fund may invest in common and preferred stock.
Common stock represents an equity (ownership) interest in a company, and usually
possesses voting rights and earns dividends. Dividends on common stock are not
fixed but are declared at the discretion of the issuer. Common stock generally
represents the riskiest investment in a company. In addition, common stock
generally has the greatest appreciation and depreciation potential because
increases and decreases in earnings are usually reflected in a company's stock
price.
Preferred stock is a class of stock having a preference over common stock as to
the payment of dividends and the recovery of investment should a company be
liquidated, although preferred stock is usually junior to the debt securities of
the issuer. Preferred stock typically does not possess voting rights and its
market value may change based on changes in interest rates.
CONVERTIBLE SECURITIES. Each Fund may invest in convertible securities.
Convertible securities include debt securities, preferred stock or other
securities that may be converted into or exchanged for a given amount of common
stock of the same or a different issuer during a specified period and at a
specified price in the future. A convertible security entitles the holder to
receive interest on debt or the dividend on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Convertible
securities rank senior to common
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stock in a company's capital structure but are usually subordinated to
comparable nonconvertible securities. 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.
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 is called for redemption, the Fund will be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
WARRANTS. Each Fund may invest in warrants. Warrants are securities, typically
issued with preferred stock or bonds that give the holder the right to purchase
a given number of shares of common stock at a specified price and time. The
price usually represents a premium over the applicable market value of the
common stock at the time of the warrant's issuance. Warrants have no voting
rights with respect to the common stock, receive no dividends and have no rights
with respect to the assets of the issuer.
DEPOSITARY RECEIPTS. Each Fund may invest in depository receipts. A depositary
receipt is a receipt for shares of a foreign-based company that entitles the
holder to distributions on the underlying security. Depositary receipts include
sponsored and unsponsored American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and other similar global instruments. ADRs
typically are issued by a U.S. bank or trust company, evidence ownership of
underlying securities issued by a foreign company, and are designed for use in
U.S. securities markets. EDRs (sometimes called Continental Depositary Receipts)
are receipts issued by a European financial institution evidencing an
arrangement similar to that of ADRs, and are designed for use in European
securities markets. The Fund invests in depositary receipts in order to obtain
exposure to foreign securities markets.
2. RISKS
COMMON AND PREFERRED STOCK. The fundamental risk of investing in common and
preferred stock is the risk that the value of the stock might decrease. Stock
values fluctuate in response to the activities of an individual company or in
response to general market and/or economic conditions. Historically, common
stocks have provided greater long-term returns and have entailed greater
short-term risks than preferred stocks, fixed-income and money market
investments. The market value of all securities, including common and preferred
stocks, is based upon the market's perception of value and not necessarily the
book value of an issuer or other objective measure of a company's worth. If you
invest in the Fund, you should be willing to accept the risks of the stock
market and should consider an investment in the Fund only as a part of your
overall investment portfolio.
CONVERTIBLE SECURITIES. Investment in convertible securities generally entails
less risk than an investment in the issuer's common stock. Convertible
securities are typically issued by smaller capitalized companies whose stock
price may be volatile. Therefore, the price of a convertible security may
reflect variations in the price of the underlying common stock in a way that
nonconvertible debt does not. The extent to which such risk is reduced, however,
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
WARRANTS. Investments in warrants involve certain risks, including the possible
lack of a liquid market for the resale of the warrants, potential price
fluctuations due to adverse market conditions or other factors and failure of
the price of the common stock to rise. If the warrant is not exercised within
the specified time period, it becomes worthless.
DEPOSITARY RECEIPTS. The Funds may invest up to 20% of their assets in American
Depository Receipts ("ADRs"). Unsponsored depositary receipts may be created
without the participation of the foreign issuer. Holders of these receipts
generally bear all the costs of the depositary receipt facility, whereas foreign
issuers typically bear certain costs in a sponsored depositary receipt. The bank
or trust company depositary of an unsponsored depositary receipt may be under no
obligation to distribute shareholder communications received from the foreign
issuer or to pass
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through voting rights. Accordingly, available information concerning the issuer
may not be current and the prices of unsponsored depositary receipts may be more
volatile than the prices of sponsored depositary receipts.
C. DEBT SECURITIES
1. GENERAL
Payson Balanced Fund may invest in debt securities including corporate debt
obligations, U.S. Government Securities, mortgage-related securities and
variable and floating rate securities.
CORPORATE DEBT OBLIGATIONS. Corporate debt obligations include corporate bonds,
debentures, notes, commercial paper and other similar corporate debt
instruments. Companies use these instruments to borrow money from investors. The
issuer pays the investor a fixed or variable rate of interest and must repay the
amount borrowed at maturity. Commercial paper (short-term unsecured promissory
notes) is issued by companies to finance their current obligations and normally
has a maturity of less than 9 months. In addition, Payson Balanced Fund may
invest in corporate debt securities registered and sold in the United States by
foreign issuers (Yankee bonds) and those sold outside the United States by
foreign or U.S. issuers (Eurobonds). The Fund intends to restrict its purchases
of these securities to issues denominated and payable in United States dollars.
Payson Balanced Fund may only invest in commercial paper that is rated in one of
the two highest short-term rating categories by an NRSRO or, if unrated, are
judged by the adviser to be of comparable quality.
FINANCIAL INSTITUTION OBLIGATIONS. Obligations of financial institutions
include, among other things, negociable certificates of deposit and bankers'
acceptances. The Fund may invest in negociable certificates of deposit and
bankers' acceptances issued by commerical banks doing business in the United
States that havem at the time of investment, total assets in excess of one
billion dollars and that are insured by the Federal Deposit Insurance
Corporation. Certificates of deposit represent an institution's obligation to
repay funds deposited with it that earn a specified interest rate over a given
period. Bankers' acceptances are negotiable obligations of a bank to pay a draft
which has been drawn by a customer and are usually backed by goods in
international trade. Certificates of deposit which are payable at the stated
maturity date and bear a fixed rate of interest, generally may be withdrawn on
demand by the Fund but may be subject to early withdrawal penalties which could
reduce the Fund's performance.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities include securities issued
by the U.S. Treasury and by U.S. Government agencies and instrumentalities. U.S.
Government Securities may be supported by the full faith and credit of the
United States (such as mortgage-related securities and certificates of the
Government National Mortgage Association and securities of the Small Business
Administration); by the right of the issuer to borrow from the U.S. Treasury
(such as Federal Home Loan Bank securities); by the discretionary authority of
the U.S. Treasury to lend to the issuer (such as Fannie Mae (formerly the
Federal National Mortgage Association) securities); or solely by the
creditworthiness of the issuer (such as Federal Home Loan Mortgage Corporation
securities).
Holders of U.S. Government Securities not backed by the full faith and credit of
the United States must look principally to the agency or instrumentality issuing
the obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment. No assurance can be given that the U.S. Government would provide
support if it were not obligated to do so by law. Neither the U.S. Government
nor any of its agencies or instrumentalities guarantees the market value of the
securities they issue.
MORTGAGE-RELATED SECURITIES. Payson Balanced Fund may invest in mortgage-related
securities that are U.S. Government Securities of are rated in one of the two
highest rating categories by an NRSRO or, if unrated, are judged by the Adviser
to be of comparable quality. Mortgage related securities represent interests in
a pool of mortgage loans originated by lenders such as commercial banks, savings
associations and mortgage bankers and brokers. Mortgage-related securities may
be issued by governmental or government-related entities or by non-governmental
entities such as special purpose trusts created by commercial lenders.
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Pools of mortgages consist of whole mortgage loans or participations in mortgage
loans. The majority of these loans are made to purchasers of 1-4 family homes.
The terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, the Funds may purchase pools of adjustable-rate mortgages,
growing equity mortgages, graduated payment mortgages and other types. Mortgage
poolers apply qualification standards to lending institutions which originate
mortgages for the pools as well as credit standards and underwriting criteria
for individual mortgages included in the pools. In addition, many mortgages
included in pools are insured through private mortgage insurance companies.
Mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or on specified call dates. Most mortgage-related
securities, however, are pass-through securities, which means that investors
receive payments consisting of a pro-rata share of both principal and interest
(less servicing and other fees), as well as unscheduled prepayments, as loans in
the underlying mortgage pool are paid off by the borrowers. Additional
prepayments to holders of these securities are caused by prepayments resulting
from the sale or foreclosure of the underlying property or refinancing of the
underlying loans. As prepayment rates of individual pools of mortgage loans vary
widely, it is not possible to predict accurately the average life of a
particular mortgage-related security. Although mortgage-related securities are
issued with stated maturities of up to forty years, unscheduled or early
payments of principal and interest on the mortgages may shorten considerably the
securities' effective maturities.
GOVERNMENT AND AGENCY MORTGAGE-RELATED SECURITIES. The principal issuers or
guarantors of mortgage-related securities are the Government National Mortgage
Association ("GNMA"), Fannie Mae ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). GNMA, a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development ("HUD"), creates pass-through
securities from pools of government guaranteed (Federal Housing Authority or
Veterans Administration) mortgages. The full faith and credit of the U.S.
Government back the principal and interest on GNMA pass-through securities.
FNMA, which is a U.S. Government-sponsored corporation owned entirely by private
stockholders that is subject to regulation by the Secretary of HUD, and FHLMC, a
corporate instrumentality of the U.S. Government, issue pass-through securities
from pools of conventional and federally insured and/or guaranteed residential
mortgages. FNMA guarantees full and timely payment of all interest and
principal, and FHMLC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. The full faith and
credit of the U.S. Government do not back mortgage-related securities from FNMA
and FHLMC.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Mortgage-related securities
offered by private issuers include pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds, which are
considered to be debt obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations that are collateralized by mortgage-related securities issued by
GNMA, FNMA or FHLMC or by pools of conventional mortgages of multi-family or of
commercial mortgage loans.
Privately-issued mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than securities issued by
U.S. Government issuers because there are no direct or indirect governmental
guarantees of payment. Many non-governmental issuers or servicers of
mortgage-related securities guarantee or provide insurance for timely payment of
interest and principal on the securities. The market for privately-issued
mortgage-related securities is smaller and less liquid than the market for
mortgage-related securities issued by U.S. government issuers.
STRIPPED MORTGAGE-RELATED SECURITIES. Stripped mortgage-related securities are
multi-class mortgage-related securities that are created by separating the
securities into their principal and interest components and selling each piece
separately. Stripped mortgage-related securities are usually structured with two
classes that receive different proportions of the interest and principal
distributions in a pool of mortgage assets.
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ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMs") are pass-through securities representing interests in pools of mortgage
loans with adjustable interest rates that are reset at periodic intervals,
usually by reference to some interest rate index or market interest rate, and
that may be subject to certain limits. Although the rate adjustment feature may
reduce sharp changes in the value of adjustable rate securities, these
securities can change in value based on changes in market interest rates or
changes in the issuer's creditworthiness. Changes in the interest rates on ARMs
may lag behind changes in prevailing market interest rates. This may result in a
slightly lower net value until the interest rate resets to market rates. Thus, a
Fund could suffer some principal loss if the Fund sold the securities before the
interest rates on the underlying mortgages were adjusted to reflect current
market rates. Some adjustable rate securities (or the underlying mortgages) are
subject to caps or floors, that limit the maximum change in interest rates
during a specified period or over the life of the security.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are multiple-class debt obligations that are fully collateralized by
mortgage-related pass-through securities or by pools of mortgages ("Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets are passed
through to the holders of the CMOs as they are received, although certain
classes (often referred to as "tranches") of CMOs have priority over other
classes with respect to the receipt of mortgage prepayments.
Multi-class mortgage pass-through securities are interests in trusts that hold
Mortgage Assets and that have multiple classes similar to those of CMOs.
Payments of principal of and interest on the underlying Mortgage Assets (and in
the case of CMOs, any reinvestment income thereon) provide funds to pay debt
service on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities. Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. Planned amortization class mortgage-related
securities ("PAC Bonds") are a form of parallel pay CMO. PAC Bonds are designed
to provide relatively predictable payments of principal provided that, among
other things, the actual prepayment experience on the underlying mortgage loans
falls within a contemplated range. CMOs may have complicated structures and
generally involve more risks than simpler forms of mortgage-related securities.
VARIABLE AND FLOATING RATE SECURITIES. Debt securities have variable or floating
rates of interest and, under certain limited circumstances, may have varying
principal amounts. These securities pay interest at rates that are adjusted
periodically according to a specified formula, usually with reference to one or
more interest rate indices or market interest rates (the "underlying index").
The interest paid on these securities is a function primarily of the underlying
index upon which the interest rate adjustments are based. These adjustments
minimize changes in the market value of the obligation. Similar to fixed rate
debt instruments, variable and floating rate instruments are subject to changes
in value based on changes in market interest rates or changes in the issuer's
creditworthiness. The rate of interest on securities may be tied to U.S.
Government Securities or indices on those securities as well as any other rate
of interest or index. Certain variable rate securities pay interest at a rate
that varies inversely to prevailing short-term interest rates (sometimes
referred to as "inverse floaters"). Certain inverse floaters may have an
interest rate reset mechanism that multiplies the effects of changes in the
underlying index. This mechanism may increase the volatility of the security's
market value while increasing the security's yield.
Variable and floating rate demand notes of corporations are redeemable upon a
specified period of notice. These obligations include master demand notes that
permit investment of fluctuating amounts at varying interest rates under direct
arrangements with the issuer of the instrument. The issuer of these obligations
often has the right, after a given period, to prepay the outstanding principal
amount of the obligations upon a specified number of days' notice.
Certain securities may have an initial principal amount that varies over time
based on an interest rate index, and, accordingly, a Fund might be entitled to
less than the initial principal amount of the security upon the security's
maturity. The Funds intend to purchase these securities only when the Adviser
believes the interest income from the instrument justifies any principal risks
associated with the instrument. The Adviser may attempt to limit any potential
loss of principal by purchasing similar instruments that are intended to provide
an offsetting increase
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in principal. There can be no assurance that the Adviser will be able to limit
the effects of principal fluctuations and, accordingly, a Fund may incur losses
on those securities even if held to maturity without issuer default.
There may not be an active secondary market for any particular floating or
variable rate instruments, which could make it difficult for a Fund to dispose
of the instrument during periods that the Fund is not entitled to exercise any
demand rights it may have. A Fund could, for this or other reasons, suffer a
loss with respect to those instruments. The Adviser monitors the liquidity of
each Fund's investment in variable and floating rate instruments, but there can
be no guarantee that an active secondary market will exist.
2. RISKS
GENERAL. The market value of the interest-bearing fixed income securities held
by the Funds will be affected by changes in interest rates. There is normally an
inverse relationship between the market value of securities sensitive to
prevailing interest rates and actual changes in interest rates. The longer the
remaining maturity (and duration) of a security, the more sensitive the security
is to changes in interest rates. All fixed income securities, including U.S.
Government Securities, can change in value when there is a change in interest
rates. Changes in the ability of an issuer to make payments of interest and
principal and in the markets' perception of an issuer's creditworthiness will
also affect the market value of that issuer's debt securities. As a result, an
investment in a Fund is subject to risk even if all fixed income securities in
the Fund's investment portfolio are paid in full at maturity. In addition,
certain fixed income securities may be subject to extension risk, which refers
to the change in total return on a security resulting from an extension or
abbreviation of the security's maturity.
Yields on fixed income securities, including municipal securities, are dependent
on a variety of factors, including the general conditions of the fixed income
securities markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Fixed income securities with longer
maturities tend to produce higher yields and are generally subject to greater
price movements than obligations with shorter maturities. A portion of the
municipal securities held by the Funds may be supported by credit and liquidity
enhancements, such as letters of credit (which are not covered by federal
deposit insurance) or puts or demand features of third party financial
institutions, generally domestic and foreign banks.
The issuers of fixed income securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors that may restrict the ability of the issuer to pay, when due, the
principal of and interest on its debt securities. The possibility exists
therefore, that, as a result of bankruptcy, litigation or other conditions, the
ability of an issuer to pay, when due, the principal of and interest on its debt
securities may become impaired.
CREDIT RISK. The Funds' investments in fixed income securities are subject to
credit risk relating to the financial condition of the issuers of the securities
that each Fund holds. To limit credit risk, each Fund will generally buy debt
securities that are rated in the top four long-term rating categories by an
NRSRO or in the top two short-term rating categories by an NRSRO. Moody's,
Standard & Poor's and other 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 securities by
several NRSROs is included in Appendix A. The Adviser may use these ratings to
determine whether to purchase, sell or hold a security. Ratings are not,
however, absolute standards of quality. Credit ratings attempt to evaluate the
safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Consequently, similar securities with the same
rating may have different market prices. In addition, rating agencies may fail
to make timely changes in credit ratings and the issuer's current financial
condition may be better or worse than a rating indicates.
Each Fund may retain a security that ceases to be rated or whose rating has been
lowered below the Fund's lowest permissible rating category if the Adviser
determines that retaining the security is in the best interests of the Fund.
Because a downgrade often results in a reduction in the market price of the
security, sale of a downgraded security may result in a loss.
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Each Fund may purchase unrated securities if the Adviser determines that the
security is of comparable quality to a rated security that the Fund may
purchase. Unrated securities may not be as actively traded as rated securities.
MORTGAGE-RELATED SECURITIES. The value of mortgage-related securities may be
significantly affected by changes in interest rates, the markets' perception of
issuers, the structure of the securities and the creditworthiness of the parties
involved. The ability of the Funds to successfully utilize mortgage-related
securities depends in part upon the ability of the Advisers to forecast interest
rates and other economic factors correctly. Some mortgage-related securities
have structures that make their reaction to interest rate changes and other
factors difficult to predict.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related
securities. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location and age of the mortgages and other social and demographic conditions.
In periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool. The volume of prepayments of principal on
the mortgages underlying a particular mortgage-related security will influence
the yield of that security, affecting the Fund's yield. Because prepayments of
principal generally occur when interest rates are declining, it is likely that
the Funds, to the extent they retain the same percentage of debt securities, may
have to reinvest the proceeds of prepayments at lower interest rates then those
of their previous investments. If this occurs, a Fund's yield will
correspondingly decline. Thus, mortgage-related securities may have less
potential for capital appreciation in periods of falling interest rates (when
prepayment of principal is more likely) than other fixed income securities of
comparable duration, although they may have a comparable risk of decline in
market value in periods of rising interest rates. A decrease in the rate of
prepayments may extend the effective maturities of mortgage-related securities,
reducing their sensitivity to changes in market interest rates. To the extent
that the Funds purchase mortgage-related securities at a premium, unscheduled
prepayments, which are made at par, result in a loss equal to any unamortized
premium.
To lessen the effect of the failures by obligors on Mortgage Assets to make
payments, CMOs and other mortgage-related securities may contain elements of
credit enhancement, consisting of either: (1) liquidity protection; or (2)
protection against losses resulting after default by an obligor on the
underlying assets and allocation of all amounts recoverable directly from the
obligor and through liquidation of the collateral. This protection may be
provided through guarantees, insurance policies or letters of credit obtained by
the issuer or sponsor from third parties, through various means of structuring
the transaction or through a combination of these. The Funds will not pay any
additional fees for credit enhancements for mortgage-related securities,
although the credit enhancement may increase the costs of the mortgage-related
securities.
D. OPTIONS AND FUTURES
1. GENERAL
Each Fund may 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 by
purchasing and writing (selling) covered options on securities in which it
invests and on any securities index based in whole or in part on securities in
which the Fund may invest. The Funds may also buy and sell stock and bond index
futures as well as futures contracts on Treasury bills, Treasury bonds and other
financial instruments and may write covered call options and purchase and sell
out and call options on those futures contracts. The Fund may only invest in
options traded on an exchange or in an over-the-counter market.
2. OPTIONS AND FUTURES STRATEGIES
OPTIONS ON SECURITIES. A call option is a contract under which the purchaser of
the call option, in return for a premium paid, has the right to buy the security
(or index) underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price. A put option gives
its
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purchaser, in return for a premium, the right to sell the underlying security at
a specified price during the term of the option. The writer of the put, who
receives the premium, has the obligation to buy, upon exercise of the option,
the underlying security (or a cash amount equal to the value of the index) at
the exercise price. The amount of a premium received or paid for an option is
based upon certain factors, including the market price of the underlying
security, the relationship of the exercise price to the market price, the
historical price volatility of the underlying security, the option period and
interest rates.
OPTIONS ON INDICES. An index assigns relative values to the securities in the
index, and the index fluctuates with changes in the market values of the
securities included in the index. Index options operate in the same way as the
more traditional options on securities except that index options are settled
exclusively in cash and do not involve delivery of securities. Thus, upon
exercise of index options, the purchaser will realize and the writer will pay an
amount based on the differences between the exercise price and the closing price
of the index.
OPTIONS ON FUTURES. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell a security, at a specified exercise
price at any time during the period of the option. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by transfer to the holder of an accumulated balance representing the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future.
FUTURES CONTRACTS AND INDEX FUTURES CONTRACTS. A futures contract is a bilateral
agreement where one party agrees to accept, and the other party agrees to make,
delivery of cash, an underlying debt security or a currency, as called for in
the contract, at a specified date and at an agreed upon price. An index futures
contract involves the delivery of an amount of cash equal to a specified dollar
amount times the difference between the index value at the close of trading of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the securities comprising the index is made. Generally,
these futures contracts are closed out prior to the expiration date of the
contracts.
3. LIMITATIONS ON OPTIONS AND FUTURES TRANSACTIONS
A Fund will not hedge more than 30% of its total assets by selling futures
contracts, buying put options and writing call options. In addition, a Fund will
not buy futures contracts or write put options whose underlying value exceeds
10% of the Fund's total assets. A Fund will also not purchase call options if
the underlying value of all such options would exceed 5% of the Fund's total
assets. A Fund will not enter into futures contracts and options, if immediately
thereafter, more than 5% of the Fund's total assets would be invested in these
options or committed to margin on futures contracts.
Each 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.
4. RISKS OF OPTIONS AND FUTURES TRANSACTIONS
There are certain investment risks associated with options and futures
transactions. 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 correlations between movements in the
prices of options and movements in the price of the securities (or indices)
hedged or used for cover which may cause a given hedge not to achieve its
objective;
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(3) the fact that the skills and techniques needed to trade these instruments
are different from those needed to select the securities in which a Fund
invests; and (4) lack of assurance that a liquid secondary market will exist for
any particular instrument at any particular time, which, among other things, may
hinder a Fund's ability to limit exposures by closing its positions.
Other risks include the inability of a Fund, as the writer of covered call
options, to benefit from any appreciation of the underlying securities above the
exercise price, and the possible loss of the entire premium paid for options
purchased by the Fund. In addition, the futures exchanges may limit the amount
of fluctuation permitted in certain futures contract prices on related options
during a single trading day. A Fund may be forced, therefore, to liquidate or
close out a futures contract position at a disadvantageous price. There is no
assurance that a counterparty in an over-the-counter option transaction will be
able to perform its obligations. A Fund may use various futures contracts that
are relatively new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market in those
contracts will develop or continue to exist. A Fund's activities in the futures
and options markets may result in higher portfolio turnover rates and additional
brokerage costs, which could reduce a Fund's yield.
E. ILLIQUID AND RESTRICTED SECURITIES
1. GENERAL
A Fund may not acquire securities or invest in repurchase agreements if, as a
result, more than 15% of the Fund's net assets (taken at current value) would be
invested in illiquid securities.
The term "illiquid securities" 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. Illiquid securities include: (1)
repurchase agreements not entitling the holder to payment of principal within
seven days (2) purchased over-the-counter options; (3) securities which are not
readily marketable; and (4) except as otherwise determined by the Adviser,
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act ("restricted securities").
2. RISKS
Limitations on resale may have an adverse effect on the marketability of a
security and the Fund might also have to register a restricted security in order
to dispose of it, resulting in expense and delay. A Fund might not be able to
dispose of restricted or illiquid securities promptly or at reasonable prices
and might thereby experience difficulty satisfying redemptions. There can be no
assurance that a liquid market will exist for any security at any particular
time. Any security, including securities determined by the Adviser to be liquid,
can become illiquid.
3. DETERMINATION OF LIQUIDITY
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid and has delegated the function of making
determinations of liquidity to the Adviser, pursuant to guidelines approved by
the Board. The Adviser determines and monitors the liquidity of the portfolio
securities and reports periodically on its decisions to the Board. The Adviser
takes into account a number of factors in reaching liquidity decisions,
including but not limited to: (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer.
An institutional market has developed for certain restricted securities.
Accordingly, contractual or legal restrictions on the resale of a security may
not be indicative of the liquidity of the security. If such securities are
eligible for purchase by institutional buyers in accordance with Rule 144A under
the 1933 Act or other exemptions, the Adviser may determine that the securities
are not illiquid.
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F. LEVERAGE TRANSACTIONS
1. GENERAL
Each Fund may use leverage to increase potential returns. Leverage involves
special risks and may involve speculative investment techniques. Leverage exists
when cash made available to a Fund through an investment technique is used to
make additional Fund investments. Lending portfolio securities and purchasing
securities on a when-issued, delayed delivery or forward commitment basis are
transactions involving leverage. The Funds use these investment techniques only
when the Adviser believes that the leveraging and the returns available to the
Funds from investing the cash will provide investors a potentially higher
return.
SECURITIES LENDING. As a fundamental policy, each Fund may lend portfolio
securities or participate in repurchase agreements in an amount up to 10% of its
total assets to brokers, dealers and other financial institutions. Repurchase
agreements are transactions in which a Fund purchases a security and
simultaneously agrees to resell that security to the seller at an agreed upon
price on an agreed upon future date, normally, one to seven days later. If a
Fund enters into a repurchase agreement, it will retain possession of the
purchased securities and any underlying collateral. Securities loans and
repurchase agreements must be continuously collateralized and the collateral
must have market value at least equal to the value of the Fund's loaned
securities, plus accrued interest or, in the case of repurchase agreements,
equal to the repurchase price of the securities, plus accrued interest. In a
portfolio securities lending transaction, a 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 as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. The Fund may share the interest it receives on the
collateral securities with the borrower. The terms of a Fund's loans permit the
Fund to reacquire loaned securities on five business days' notice or in time to
vote on any important matter. Loans are subject to termination at the option of
a Fund or the borrower at any time, and the borrowed securities must be returned
when the loan is terminated.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Funds may purchase
securities offered on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When these transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be negotiated. During
the period between a commitment and settlement, no payment is made for the
securities purchased by the purchaser and, thus, no interest accrues to the
purchaser from the transaction. At the time a Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, the Fund will
record the transaction as a purchase and thereafter reflect the value each day
of such securities in determining its net asset value. A purchase of securities
on a "when-issued" or "forward commitment basis" will not be made if, as a
result, more than 15% of a Fund's total assets would be committed to such
transactions.
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2. RISKS
Leverage creates the risk of magnified capital losses. Losses incurred by a Fund
may be magnified by borrowings and other liabilities that exceed the equity base
of the Fund. Leverage may involve the creation of a liability that requires a
Fund to pay interest (for instance, reverse repurchase agreements) or the
creation of a liability that does not entail any interest costs (for instance,
forward commitment costs).
The risks of leverage include a higher volatility of the net asset value of the
Fund's securities and the relatively greater effect on the net asset value of
the securities caused by favorable or adverse market movements or changes in the
cost of cash obtained by leveraging and the yield from invested cash. So long as
a Fund is able to realize a net return on its investment portfolio that is
higher than interest expense incurred, if any, leverage will result in higher
current net investment income for the Fund than if the Fund were not leveraged.
Changes in interest rates and related economic factors could cause the
relationship between the cost of leveraging and the yield to change so that
rates involved in the leveraging arrangement may substantially increase relative
to the yield on the obligations in which the proceeds of the leveraging have
been invested. To the extent that the interest expense involved in leveraging
approaches the net return on a Fund's investment portfolio, the benefit of
leveraging will be reduced, and, if the interest expense on borrowings were to
exceed the net return to investors, the Fund's use of leverage would result in a
lower rate of return than if the Fund were not leveraged. In an extreme case, if
a Fund's current investment income were not sufficient to meet the interest
expense of leveraging, it could be necessary for the Fund to liquidate certain
of its investments at an inappropriate time.
SEGREGATED ACCOUNTS. In order to attempt to reduce the risks involved in various
transactions involving leverage, each Fund's custodian will set aside and
maintain, in a segregated account, cash and liquid securities. The account's
value, which is marked to market daily, will be at least equal to a Fund's
commitments under these transactions.
G. FOREIGN SECURITIES
Each Fund may invest up to 20% of their total assets in foreign securities.
Investments in the securities of foreign issuers may involve risks in addition
to those normally associated with investments in the securities of U.S. issuers.
All foreign investments are subject to risks of: (1) foreign political and
economic instability; (2) adverse movements in foreign exchange rates; (3) the
imposition or tightening of exchange controls or other limitations on
repatriation of foreign capital; and (4) changes in foreign governmental
attitudes towards private investment, including potential nationalization,
increased taxation or confiscation of your assets.
Dividends payable on foreign securities may be subject to foreign withholding
taxes, thereby reducing the income available for distribution to you. Commission
rates payable on foreign transactions are generally higher than in the United
States. Foreign accounting, auditing and financial reporting standards differ
from those in the United States, and therefore, less information may be
available about foreign companies than is available about issuers of comparable
U.S. companies. Foreign securities also may trade less frequently and with lower
volume and may exhibit greater price volatility than United States securities.
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Changes in foreign exchange rates will affect the U.S. dollar value of all
foreign currency-denominated securities held by a Fund. Exchange rates are
influenced generally by the forces of supply and demand in the foreign currency
markets and by numerous other political and economic events occurring outside
the United States, many of which may be difficult, if not impossible, to
predict.
Income from foreign securities will be received and realized in foreign
currencies, and a Fund is required to compute and distribute income in U.S.
dollars. Accordingly, a decline in the value of a particular foreign currency
against the U.S. dollar after a Fund's income has been earned and computed in
U.S. dollars may require the Fund to liquidate portfolio securities to acquire
sufficient U.S. dollars to make a distribution. Similarly, if the exchange rate
declines between the time a Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the Fund may be required to liquidate additional foreign
securities to purchase the U.S. dollars required to meet such expenses.
H. CORE AND GATEWAY(R)
Each Fund may seek to achieve its investment objective by converting to a Core
and Gateway(R) structure. A Fund operating under a Core and Gateway(R) structure
holds, as its only investment, shares of another investment company having
substantially the same investment objective and policies. The Board will not
authorize conversion to a Core and Gateway(R) structure if it would materially
increase costs to a Fund's shareholders. The Board will not convert a Fund to a
Core and Gateway(R) structure without notice to the shareholders.
I. TEMPORARY DEFENSIVE POSITION
The Fund may assume a temporary defensive position and may invest without limit
in money market instruments that are of prime quality. Prime quality money
market instruments are those instruments that are rated in one of the two
short-term highest rating categories by an NRSRO or, if not rated, determined by
the Adviser to be of comparable quality.
Money market instruments usually have maturities of one year or less and fixed
rates of return. The money market instruments in which the Fund may invest
include U.S. Government Securities, commercial paper, time deposits, bankers
acceptances and certificates of deposit issued by domestic banks, corporate
notes and short-term bonds and money market mutual funds. The Fund may only
invest in money market mutual funds to the extent permitted by the 1940 Act.
The money market instruments in which the Fund may invest may have variable or
floating rates of interest. These obligations include master demand notes that
permit investment of fluctuating amounts at varying rates of interest pursuant
to direct arrangement with the issuer of the instrument. The issuer of these
obligations often has the right, after a given period, to prepay the outstanding
principal amount of the obligations upon a specified number of days' notice.
These obligations generally are not traded, nor generally is there an
established secondary market for these obligations. To the extent a demand note
does not have a 7-day or shorter demand feature and there is no readily
available market for the obligation, it is treated as an illiquid security.
Under normal circumstances, Payson Balanced Fund may also invest in money market
instruments that are rated in one of the two highest rating categories by an
NRSRO or, if unrated, are judged by the adviser to be of comparable quality.
2. INVESTMENT LIMITATIONS
For purposes of all investment policies of the Funds: (1) the term 1940 Act
includes the rules thereunder, SEC interpretations and any exemptive order upon
which the Fund may rely; and (2) the term Code includes the rules thereunder,
IRS interpretations and any private letter ruling or similar authority upon
which the Fund may rely.
Except as required by the 1940 Act or the Code, 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 a Fund's assets or purchases and redemptions of shares will not be considered
a violation of the limitation.
A fundamental policy of a Fund and the Fund's investment objective, cannot be
changed without the affirmative vote of the lesser of: (1) 50% of the
outstanding shares of the Fund; or (2) 67% of the shares of the Fund present or
represented at a shareholders meeting at which the holders of more than 50% of
the outstanding shares of the Fund are present or represented. A nonfundamental
policy of a Fund may be changed by the Board without shareholder approval.
A. FUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations, which are
fundamental policies of the Fund. Neither Fund may:
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1. BORROWING
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. CONCENTRATION
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. DIVERSIFICATION
With respect to 75% of its assets, purchase securities, other than U.S.
Government Securities, of any one issuer, if: (1) 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 (2) 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. UNDERWRITING ACTIVITIES
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. MAKING LOANS
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. PURCHASES AND SALES OF REAL ESTATE
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. PURCHASES AND SALES OF COMMODITIES
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. ISSUANCE OF SENIOR SECURITIES
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. OIL, GAS & MINERAL EXPLORATION
Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
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B. NONFUNDAMENTAL LIMITATIONS
Each Fund has adopted the following nonfundamental investment limitations that
may be changed by the Board without shareholder approval. Neither Fund may:
1. PLEDGING
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.
2. INVESTMENT IN OTHER INVESTMENT COMPANIES
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.
3. MARGIN AND SHORT SALES
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.
4. BORROWING
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.
5. ILLIQUID SECURITIES
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.
6. REAL PROPERTY
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.)
7. WARRANTS
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.
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3. PERFORMANCE DATA AND ADVERTISING
A. PERFORMANCE DATA
A Fund may quote performance in various ways. All performance information
supplied in advertising, sales literature, shareholder reports or other
materials is historical and is not intended to indicate future returns.
A Fund may compare any of its performance information with:
o Data published by independent evaluators such as Morningstar, Inc.,
Lipper, Inc., IBC Financial Data, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment
companies ("Fund Tracking Companies").
o The performance of other mutual funds.
o The performance of recognized stock, bond and other indices, including
but not limited to the Standard & Poor's 500(R) Index, the Russell
2000(R) Index, the Russell MidcapTM Index, the Russell 1000(R) Value
Index, the Russell 2500(R) Index, the Morgan Stanley - Europe,
Australia and Far East Index, the Dow Jones Industrial Average, the
Salomon Brothers Bond Index, the Shearson Lehman Bond Index, U.S.
Treasury bonds, bills or notes and changes in the Consumer Price Index
as published by the U.S. Department of Commerce.
Performance information may be presented numerically or in a table, graph, or
similar illustration.
Indices are not used in the management of a Fund but rather are standards by
which the Fund's Adviser and shareholders may compare the performance of the
Fund to an unmanaged composite of securities with similar, but not identical,
characteristics as the Fund.
A Fund may refer to: (1) general market performances over past time periods such
as those published by Ibbotson Associates (for instance, its "Stocks, Bonds,
Bills and Inflation Yearbook"); (2) mutual fund performance rankings and other
data published by Fund Tracking Companies; and (3) material and comparative
mutual fund data and ratings reported in independent periodicals, such as
newspapers and financial magazines.
A Fund's performance will fluctuate in response to market conditions and other
factors.
B. PERFORMANCE CALCULATIONS
A Fund's performance may be quoted in terms of yield or total return. Table 1 in
Appendix C includes performance information for the Funds.
1. SEC YIELD
Standardized SEC yields for a Fund used in advertising are computed by dividing
the Fund's interest income (in accordance with specific standardized rules) for
a given 30 day or one month period, net of expenses, by the average number of
shares entitled to receive income 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 accordance with
specific standardized rules) in order to arrive at an annual percentage rate.
Capital gains and losses 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
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<PAGE>
in yield calculations, the yield quoted for a Fund may differ from the rate of
distribution of income from the Fund 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 fluctuates
from day to day and that the 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. Financial intermediaries may charge their customers that
invest in a Fund fees in connection with that investment. This will have the
effect of reducing the Fund's after-fee yield to those shareholders.
The yields of a Fund are not fixed or guaranteed, and an investment in a Fund is
not insured or guaranteed. Accordingly, yield information should not 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 that are insured or guaranteed.
Yield quotations are based on amounts invested in a Fund net of any applicable
sales charges that may be paid by an investor. A computation of yield that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
The Funds charge no sales charges.
Yield is calculated according to the following formula:
a - b
Yield = 2[(------ + 1)6 - 1]
cd
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
2. TOTAL RETURN CALCULATIONS
A Fund's total return shows its overall change in value, including changes in
share price and assuming all of the Fund's distributions are reinvested.
Total return figures may be based on amounts invested in a Fund net of sales
charges that may be paid by an investor. A computation of total return that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is calculated using a
formula prescribed by the SEC. To calculate standard average annual total
returns a Fund: (1) determines the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period; and (2) calculates the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. For
example, a cumulative return of 100% over ten years would produce an average
annual total return of 7.18%. While average annual returns are a convenient
means of comparing investment alternatives, investors should realize that
performance is not constant over time but changes from year to year, and that
average annual returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.
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Average annual total return is calculated 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
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 th
applicable period
Because average annual returns tend to smooth out variations in the Fund's
returns, shareholders should recognize that they are not the same as actual
year-by-year results.
OTHER MEASURES OF TOTAL RETURN. Standardized total return quotes may be
accompanied by non-standardized total return figures calculated by alternative
methods.
A Fund may quote unaveraged or cumulative total returns that reflect a
Fund's performance over a stated period of time.
Total returns may be stated in their components of income and capital
(including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to
total return.
Any total return may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over any time period. Total returns may be quoted with or without
taking into consideration a Fund's front-end sales charge or contingent deferred
sales charge (if applicable).
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
C. OTHER MATTERS
A Fund may also include various information in its advertising, sales
literature, shareholder reports or other materials including, but not limited
to: (1) portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer or by maturity; (2) statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
by an investor to meet specific financial goals, such as funding retirement,
paying for children's education and financially supporting aging parents; (3)
information (including charts and illustrations) showing the effects of
compounding interest (compounding is the process of earning interest on
principal plus interest that was earned earlier; interest can be compounded at
different intervals, such as annually, quarterly or daily); (4) information
relating to inflation and its effects on the dollar; (for example, after ten
years the purchasing power of $25,000 would shrink to $16,621, $14,968, $13,465
and $12,100, respectively, if the annual rates of inflation were 4%, 5%, 6% and
7%, respectively); (5) information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar-cost
averaging; (6) biographical descriptions of the Fund's portfolio managers and
the portfolio management staff of the Fund's investment adviser, summaries of
the views of the portfolio managers with respect to the financial markets, or
descriptions of the nature of the Adviser's and its staff's management
techniques; (7) the results of a hypothetical investment in the Fund over a
given number of years, including the amount that the investment would be at the
end of the period; (8) the effects of investing in a tax-deferred account, such
as an individual retirement account or Section 401(k) pension plan; (9) the net
asset value, net assets or number of
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<PAGE>
shareholders of the Fund as of one or more dates; and (10) a comparison of the
Fund's operations to the operations of other funds or similar investment
products, such as a comparison of the nature and scope of regulation of the
products and the products' weighted average maturity, liquidity, investment
policies, and the manner of calculating and reporting performance.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,188 at the end
of the second year (an increase of $98). The extra $8 that was earned on the $90
interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of a Fund's performance.
A Fund may advertise information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar cost
averaging. In a dollar-cost averaging program, an investor invests a fixed
dollar amount in a Fund at periodic intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not insure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in a Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
<TABLE>
<S> <C>! <C> <C>
SYSTEMATIC SHARE SHARES
PERIOD INVESTMENT PRICE PURCHASED
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
TOTAL AVERAGE TOTAL
INVESTED $600 PRICE $15.17 SHARES 41.81
</TABLE>
In connection with its advertisements, a Fund may provide "shareholder's
letters" which serve to provide shareholders or investors with an introduction
into the Fund's, the Trust's or any of the Trust's service provider's policies
or business practices
19
<PAGE>
4. MANAGEMENT
A. TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Trust, their positions with the
Trust, address, date of birth and 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 (*).
<TABLE>
<S> <C>
- -------------------------------------------- ----------------------------------------------------------------------
NAME, POSITION WITH THE TRUST, PRINCIPAL OCCUPATION(S) DURING
DATE OF BIRTH AND ADDRESS PAST 5 YEARS
- -------------------------------------------- ----------------------------------------------------------------------
John Y. Keffer*, Chairman and President President, Forum Financial Group, LLC (a mutual fund services
Born: July 15, 1942 holding company)
Two Portland Square President, Forum Fund Services, LLC. (Trust's underwriter)
Portland, Maine 04101 Chairman and President*, Core Trust (Delaware) (registered
investment company)
- -------------------------------------------- ----------------------------------------------------------------------
Costas Azariadas, Trustee Professor of Economics, University of California-Los Angeles
Born: February 15, 1943 Trustee, Core Trust (Delaware)
Department of Economics
University of California
Los Angeles, CA 90024
- -------------------------------------------- ----------------------------------------------------------------------
James C. Cheng, Trustee President, Technology Marketing Associates
Born: July 26, 1942 (marketing company for small and medium size businesses in New
27 Temple Street England)
Belmont, MA 02718 Trustee, Core Trust (Delaware)
- -------------------------------------------- ----------------------------------------------------------------------
J. Michael Parish, Trustee Partner-Thelen Reid & Priest LLP (law firm) since 1995
Born: November 9, 1943 Partner-Winthrop Stimson Putnam & Roberts (law firm) from 1989-1995
40 West 57th Street Trustee, Core Trust (Delaware)
New York, NY 10019
- -------------------------------------------- ----------------------------------------------------------------------
David I. Goldstein, Vice President General Counsel, Forum Financial Group
Born: August 3, 1961 Secretary, Forum Fund Services, Inc. (Trust's underwriter)
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Stacey Hong, Treasurer Director, Fund Accounting, Forum Financial Group, LLC
Born: May 10, 1966 Treasurer, Core Trust (Delaware)
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Dawn Taylor, Asst. Treasurer Manager/Senior Tax Specialist, Tax Department, Forum Financial
Born: May 14, 1964 Group, LLC since 1997
Two Portland Square Senior Tax Accountant, Pardy Bingham &Burrell during 1997
Portland, Maine 04101 Senior Tax Specialist, Forum Financial Group, LLC from 1994 to 1997
- -------------------------------------------- ----------------------------------------------------------------------
Leslie K. Klenk, Secretary Assistant Counsel, Forum Financial Group, LLC since 1998
Born: August 24, 1964 Vice President/Associate General Counsel, Smith Barney Inc.
Two Portland Square (brokerage firm) from 1993 through 1998
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Pamela Stutch, Asst. Secretary Fund Administrator, Forum Financial Group, LLC since 1998
Born: June 29, 1967 Law Student, Temple University from 1994-1997
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
</TABLE>
20
<PAGE>
B. COMPENSATION OF TRUSTEES AND OFFICERS
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 $1,000 for each audit committee
meeting attended on a date when a Board meeting is not held. In addition to the
$1,000 for each Board meeting attended, each Trustee is paid $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.
Trustees that are affiliated with the Adviser receive no compensation for their
services or reimbursement for their associated expenses. No officer of the Trust
is compensated by the Trust.
The following table sets forth the fees paid to each Trustee by the Trust for
the fiscal year ended March 31, 1999.
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
Compensation Total Compensation from Trust
Trustee from Trust Benefits Retirement and Fund Complex
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
John Y. Keffer $0 $0 $0 $0
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
Costas Azariadis $742.51 $0 $0 $742.51
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
James C. Cheng $742.51 $0 $0 $742.51
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
J. Michael Parish $742.51 $0 $0 $742.51
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
</TABLE>
C. INVESTMENT ADVISER
1. SERVICES OF ADVISER
The Adviser serves as investment adviser to each Fund pursuant to an investment
advisory agreement (the "Agreement") with the Trust. Under the Agreement, the
Adviser furnishes at its own expense all services, facilities and personnel
necessary in connection with managing a Fund's investments and effecting
portfolio transactions for a Fund.
2. OWNERSHIP OF ADVISER
The Adviser is a privately-owned company incorporated under the laws of the
State of Maine in 1987.
3. FEES
The Adviser's fee is calculated as a percentage of the applicable Fund's average
net assets. The fee is accrued daily by the Funds and is paid monthly based on
average net assets for the previous month.
In addition to receiving its advisory fee from each Fund, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets they invested in a Fund. If you have a separately managed account with
the Adviser with assets invested in a Fund, the Adviser will credit an amount
equal to all or a portion of the fees received by the Adviser against any
investment management fee received from the client.
Table 1 in Appendix B shows the dollar amount of the fees payable by each Fund
to the Adviser, the amount of fees waived by the Adviser, and the actual fees
received by the Adviser. The data are for the past three fiscal years.
21
<PAGE>
4. OTHER PROVISIONS OF ADVISER'S AGREEMENT
The Agreement remains in effect for a period of two years from the date of its
effectiveness. Subsequently, the Agreement must be approved at least annually by
the Board or by majority vote of the shareholders, and in either case by a
majority of the Trustees who are not parties to the agreement or interested
persons of any such party.
The Agreement is terminable without penalty by the Trust regarding a Fund on 60
days' written notice when authorized either by vote of the Fund's shareholders
or by a majority vote of the Board, or by the Adviser on not more than 60 days'
(but not less than 30 days') written notice to the Trust. The Agreement
terminates immediately upon assignment.
Under the Agreement, the Adviser is not liable for any mistake of judgment, or
in any event whatsoever, except for willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of its duties or by reason
of reckless disregard of its obligations and duties under the agreement.
D. DISTRIBUTOR
1. DISTRIBUTOR; SERVICES AND COMPENSATION OF DISTRIBUTOR
FFS, the distributor (also known as principal underwriter) of the shares of each
Fund, is located at Two Portland Square, Portland, Maine 04101. FFS is a
registered broker-dealer and is a member of the National Association of
Securities Dealers, Inc. Prior to August 1, 1999, Forum Financial Services, Inc.
("FFSI") was the distributor of each Fund pursuant to similar terms and
compensation.
FFS, FAdS, FAcS and the Transfer Agent are each controlled indirectly by Forum
Financial Group, LLC. John Y. Keffer controls Forum Financial Group, LLC.
Under a distribution agreement with the Trust (the "Distribution Agreement"),
FFS acts as the agent of the Trust in connection with the offering of shares of
the Funds. FFS continually distributes shares of the Funds on a best efforts
basis. FFS has no obligation to sell any specific quantity of Fund shares.
FFS may enter into arrangements with various financial institutions through
which you may purchase or redeem shares. FFS may, at its own expense and from
its own resources, compensate certain persons who provide services in connection
with the sale or expected sale of shares of the Funds.
FFS may enter into agreements with selected broker-dealers, banks or other
financial institutions for distribution of shares of the Funds. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Funds are sold with a sales charge. These
financial institutions may otherwise act as processing agents, and will be
responsible for promptly transmitting purchase, redemption and other requests to
the Funds.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through which 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 a Fund in this manner should acquaint themselves
with their institution's procedures and should read the Prospectus in
conjunction with any materials and information provided by their institution.
The financial institution and not its customers will be the shareholder of
record, although customers may have the right to vote shares depending upon
their arrangement with the institution.
Pursuant to the Distribution Agreement, FFS 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 FFS with respect to each Fund are
outlined in table 2 in Appendix B.
22
<PAGE>
Table 5 in Appendix B shows the aggregate sales charges paid to FFSI, the amount
of sales charge reallowed by FFSI, and the amount of sales charge retained by
FFSI. The data are for the past three years (or shorter depending on a Fund's
commencement of operations).
2. OTHER PROVISIONS OF DISTRIBUTOR'S AGREEMENT
The Distribution Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party.
The Distribution 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 majority vote of the Board, or by FFS on 60
days' written notice to the Trust.
Under the Distribution Agreement, FFS is not liable to the Trust or the Trust's
shareholders for any error of judgment or mistake of law, for any loss arising
out of any investment or for any act or omission in the performance of its
duties to a Fund, except for willful misfeasance, bad faith or gross negligence
in the performance of its duties or by reason of reckless disregard of its
obligations and duties under the agreement.
Under the Distribution Agreement, FFS and certain related parties (such as FFS's
officers and persons that control FFS) are indemnified by the Trust against all
claims and expenses in any way related to alleged untrue statements of material
fact contained in a Fund's Registration Statement or any alleged omission of a
material fact required to be stated in the Registration Statement to make
statements contained therein not misleading. The Trust, however, will not
indemnify FSS for any such misstatements or omissions if they were made in
reliance upon information provided in writing by FSS in connection with the
preparation of the Registration Statement.
E. OTHER FUND SERVICE PROVIDERS
1. ADMINISTRATOR
As administrator, pursuant to an administration agreement with the Trust (the
"Admin Agreement"), FAdS is responsible for the supervision of the overall
management of the Trust, providing the Trust with general office facilities and
providing persons satisfactory to the Board to serve as officers of the Trust.
For its services, FAdS receives a fee from a Fund at an annual rate of 0.20% of
the average daily net assets of each Fund. The fee is accrued daily by the Funds
and is paid monthly based on average net assets for the previous month.
The Admin Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. FAdS's agreement is terminable without penalty by the Trust or by FAdS
with respect to a Fund on 60 days' written notice.
Under the Admin Agreement, FAdS is not liable to the Trust or the Trust's
shareholders for any act or omission, 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 agreement. Under the Admin
Agreement, FAdS and certain related parties (such as FAdS's officers and persons
who control FAdS) are indemnified by the Trust against any and all claims and
expenses related to FAdS's actions or omissions that are consistent with FAdS's
contractual standard of care.
Table 3 in Appendix B shows the dollar amount of the fees payable by the Funds
to FAdS, the amount of the fee waived by FAdS, and the actual fees received by
FAdS. The data are for the past three fiscal years.
23
<PAGE>
2. FUND ACCOUNTANT
As fund accountant, pursuant to an accounting agreement with the Trust (the
"Accounting Agreement"), FAcS provides fund accounting services to each Fund.
These services include calculating the NAV per share of each Fund (and class)
and preparing the Funds' financial statements and tax returns.
For its services, FAcS receives a fee from each Fund at an annual rate of
$36,000 and certain surcharges based upon the number and type of a Fund's
portfolio transactions and positions. The fee is accrued daily by the Funds and
is paid monthly based on the transactions and positions for the previous month.
The Accounting Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Accounting Agreement is terminable without penalty by the Trust or by
FAcS with respect to a Fund on 60 days' written notice.
Under the Accounting Agreement, FAcS is not liable for any action or omission in
the performance of its duties to a Fund, except for willful misfeasance, bad
faith, gross negligence or by reason of reckless disregard of its obligations
and duties under the agreement. Under the Accounting Agreement, FAcS and certain
related parties (such as FAcS's officers and persons who control FAcS) are
indemnified by the Trust against any and all claims and expenses related to
FAcS's actions or omissions that are consistent with FAcS's contractual standard
of care.
Under the Accounting Agreement, in calculating a Fund's NAV per share, FAcS is
deemed not to have committed an error if the NAV per share it calculates is
within 1/10 of 1% of the actual NAV per share (after recalculation). The
agreement also provides that FAcS will not be liable to a shareholder for any
loss incurred due to an NAV difference if such difference is less than or equal
1/2 of 1% or less than or equal to $10.00. In addition, FAcS is not liable for
the errors of others, including the companies that supply securities prices to
FAcS and the Funds.
Table 4 in Appendix B shows the dollar amount of the fees payable by the Funds
to FAcS, the amount of the fee waived by FAcS, and the actual fees received by
FAcS. The data are for the past three fiscal years.
3. TRANSFER AGENT
As transfer agent and distribution paying agent, pursuant to a transfer agent
agreement with the Trust (the "Transfer Agent Agreement"), the Transfer Agent
maintains an account for each shareholder of record of a Fund and is responsible
for processing purchase and redemption requests and paying distributions to
shareholders of record. The Transfer Agent is located at Two Portland Square,
Portland, Maine 04101 and is registered as a transfer agent with the SEC.
For its services, the Transfer Agent receives with respect to each Fund 0.25% of
the average daily net assets of the Fund, an annual fee of $12,000 plus $18 per
shareholder account.
The Transfer Agent Agreement must be approved at least annually by the Board or
by majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Transfer Agent Agreement is terminable without penalty by the Trust
or by the Transfer Agent with respect to a Fund on 60 days' written notice.
Under the Transfer Agent Agreement, the Transfer Agent is not liable for any act
in the performance of its duties to a Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties under the agreement.
Under the Transfer Agent Agreement, the Transfer Agent and certain related
parties (such as the Transfer Agent's officers and persons who control the
Transfer Agent) are indemnified by the Trust against any and all claims and
expenses related to FAdS's actions or omissions that are consistent with FAdS's
contractual standard of care.
24
<PAGE>
Table 5 in Appendix B shows the dollar amount of the fees payable by the Funds
to FSS, the amount of the fee waived by FSS, and the actual fees received by
FSS. The data are for the past three fiscal years.
4. CUSTODIAN
As custodian, pursuant to an agreement with the Trust, Forum Trust, LLC
safeguards and controls the Funds' cash and securities, determines income and
collects interest on Fund investments. The Custodian may employ subcustodians to
provide custody of a Fund's domestic and foreign assets. The Custodian is
located at Two Portland Square, Portland, Maine 04101.
For its services, the Custodian receives an annualized percentage of the average
daily net assets of a Fund. Each Fund also pays an annual domestic custody fee
as well as certain other transaction fees. These fees are accrued daily by the
Funds and are paid monthly based on average net assets and transactions for the
previous month.
5. LEGAL COUNSEL
Seward & Kissel LLP, 1200 G Street, N.W., Washington, D.C. 20005 passes upon
legal matters in connection with the issuance of shares of the Trust.
6. INDEPENDENT AUDITORS
Deloitte & Touche LLP, 200 Berkeley Street, 14th Floor, Boston, Massachusetts,
02116-5022 , independent auditors, have been selected as auditors for each Fund.
The auditors audit the annual financial statements of the Funds and provide the
Funds with an audit opinion. The auditors also review certain regulatory filings
of the Funds and the Funds' tax returns.
5. PORTFOLIO TRANSACTIONS
A. HOW SECURITIES ARE PURCHASED AND SOLD
Purchases and sales of portfolio securities that are fixed income securities
(for instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom the Fund
purchases or to whom the Fund sells is acting on its own behalf (and not as the
agent of some other party such as its customers). These securities normally are
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for these
securities.
Purchases and sales of portfolio securities that are equity securities (for
instance common stock and preferred stock) are generally effected; (1) if the
security is traded on an exchange, through brokers who charge commissions; and
(2) if the security is traded in the "over-the-counter" markets, in a principal
transaction directly from a market maker. In transactions on stock exchanges,
commissions are negotiated. When transactions are executed in an
over-the-counter market, the Adviser will seek to deal with the primary market
makers; but when necessary in order to obtain best execution, the Adviser will
utilize the services of others.
Purchases of securities from underwriters of the securities include a disclosed
fixed 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 price.
In the case of fixed income and equity securities traded in the over-the-counter
markets, there is generally no stated commission, but the price usually includes
an undisclosed commission or markup.
25
<PAGE>
B. COMMISSIONS PAID
Table 6 in Appendix B shows the aggregate brokerage commissions with respect to
each Fund. The data presented are for the past three fiscal years. For the
fiscal years ended March 31, 1997, $600 in commissions was paid to H.M. Payson &
Co. as broker for the Funds. For the fiscal year ended March 31, 1998, no
commissions were paid by the Funds to an affiliate of the Funds or to its
adviser as broker for the Funds. For the Fiscal year ended March 31, 1999,
Payson Balanced Fund paid H.M. Payson & Co., as broker for the Fund, $719.
C. ADVISER RESPONSIBILITY FOR PURCHASES AND SALES
The Adviser places orders for the purchase and sale of securities with brokers
and dealers selected by and in the discretion of the Adviser. No Fund has any
obligation to deal with any specific broker or dealer in the execution of
portfolio transactions. 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 each Fund rather than by
any formula.
The Adviser seeks "best execution" for all portfolio transactions. This means
that the Adviser seeks the most favorable price and execution available. The
Adviser's primary consideration in executing transactions for a Fund is prompt
execution of orders in an effective manner and at the most favorable price
available.
1. CHOOSING BROKER-DEALERS
The Funds may not always pay the lowest commission or spread available. Rather,
in determining the amount of commissions (including certain dealer spreads) paid
in connection with securities transactions, the Adviser takes into account
factors such as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the research services described below)
and any risk assumed by the executing broker.
Consistent with applicable rules and the Adviser's duties, the Adviser may: (1)
consider sales of shares of the Funds as a factor in the selection of
broker-dealers to execute portfolio transactions for a Fund; and (2) take into
account payments made by brokers effecting transactions for a Fund (these
payments may be made to the Fund or to other persons on behalf of the Fund for
services provided to the Fund for which those other persons would be obligated
to pay.)
2. OBTAINING RESEARCH FROM BROKERS
The Adviser may give consideration to research services furnished by brokers 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. This research is
designed to augment the Adviser's own internal research and investment strategy
capabilities. This research may be used by the Adviser in connection with
services to clients other than the Funds, and not all research services may be
used by the Adviser in connection with the Funds. The Adviser's fees are not
reduced by reason of the Adviser's receipt of research services.
The Adviser has full brokerage discretion. It evaluates the range and quality of
a broker's services in placing trades including securing best price,
confidentiality, clearance and settlement capabilities, promptness of execution
and the financial stability of the broker-dealer. Under certain circumstances,
the value of research provided by a broker-dealer may be a factor in the
selection of a broker. This research would include reports that are common in
the industry. Typically, the research will be used to service all of the
Adviser's accounts although a particular client may not benefit from all the
research received on each occasion. The nature of the services purchased for
clients include industry research reports and periodicals, quotation systems,
software for portfolio management and formal databases.
Occasionally, the Adviser may utilize a broker and pay a slightly higher
commission than another broker might charge. The higher commission is paid
because of the Adviser's need for specific research, for specific expertise a
26
<PAGE>
firm may have in a particular type of transaction (due to factors such as size
or difficulty), or for speed/efficiency in execution. Since most of the
Adviser's brokerage commissions for research are for economic research on
specific companies or industries, and since the Adviser is involved with a
limited number of securities, most of the commission dollars spent for industry
and stock research directly benefit the clients.
There are occasions on which portfolio transactions may be executed as part of
concurrent authorizations to purchase or sell the same securities for more than
one account served by the Adviser, some of which accounts may have similar
investment objectives. Although such concurrent authorizations potentially could
be either advantageous or disadvantageous to any one or more particular
accounts, they will be effected only when the Adviser believes that to do so
will be in the best interest of the affected accounts. When such concurrent
authorizations occur, the objective will be to allocate the execution in a
manner equitable to the accounts involved. Clients are typically allocated
securities with prices averaged on a per-share or per-bond basis.
3. COUNTERPARTY RISK
The Adviser monitors the creditworthiness of counterparties to each Fund's
transactions and intends to enter into a transaction only when it believes that
the counterparty presents minimal and appropriate credit risks.
4. TRANSACTIONS THROUGH AFFILIATES
The Adviser may effect brokerage transactions through affiliates of the Adviser
(or affiliates of those persons) pursuant to procedures adopted by the Trust.
5. OTHER ACCOUNTS OF THE ADVISER
Investment decisions for the Funds are made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. Investment decisions are the product of many
factors, including 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. In addition, two or more clients may
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 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 a portfolio
security for one client could have an adverse effect on another client that has
a position in that security. In addition, when purchases or sales of the same
security for a Fund and other client accounts managed by the Adviser occurs
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
6. PORTFOLIO TURNOVER
The frequency of portfolio transactions of a Fund (the portfolio turnover rate)
will vary from year to year depending on many factors. From time to time a Fund
may engage in active short-term trading to take advantage of price movements
affecting individual issues, groups of issues or markets. An annual portfolio
turnover rate of 100% would occur if all of the securities in a Fund were
replaced once in a period of one year. Higher portfolio turnover rates may
result in increased brokerage costs to a Fund and a possible increase in
short-term capital gains or losses.
D. SECURITIES OF REGULAR BROKER-DEALERS
From time to time a Fund may acquire and hold securities issued by its "regular
brokers and dealers" or the parents of those brokers and dealers. For this
purpose, regular brokers and dealers are the 10 brokers or dealers that: (1)
received the greatest amount of brokerage commissions during the Fund's last
fiscal year; (2) engaged in the largest amount of principal transactions for
portfolio transactions of the Fund during the Fund's last fiscal year; or (3)
sold
27
<PAGE>
the largest amount of the Fund's shares during the Fund's last fiscal year.
Table 7 in Appendix B lists the regular brokers and dealers of each fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of the Funds' most recent fiscal year.
6. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A. GENERAL INFORMATION
You may effect purchases or redemptions or request any shareholder privilege in
person at the Transfer Agent's offices located at Two Portland Square, Portland,
Maine 04101.
The Funds accept orders for the purchase or redemption of shares on any weekday
except days when the New York Stock Exchange is closed.
B. ADDITIONAL PURCHASE INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor at net
asset value per share plus any applicable sales charge.
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 March 31, 1999.
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------- ------------------------ ---------------------------
Payson Value Fund Payson Balanced Fund
- --------------------------------------------------------------- ------------------------ ---------------------------
Net Asset Value Per Share $19.30 $12.48
- --------------------------------------------------------------- ------------------------ ---------------------------
Shares Charge, 4.00% of offering price
(4.17% of net asset value per share) $0.80 $0.52
- --------------------------------------------------------------- ------------------------ ---------------------------
Offering to Public $20.10 $13.00
- --------------------------------------------------------------- ------------------------ ---------------------------
</TABLE>
The Funds reserve the right to refuse any purchase request.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, a Fund may accept portfolio securities that meet the investment
objective and policies of a Fund as payment for Fund shares. A Fund will only
accept securities that: (1) are not restricted as to transfer by law and are not
illiquid; and (2) have a value that is readily ascertainable (and not
established only by valuation procedures).
1. IRAS
All contributions into an IRA through the automatic investing service are
treated as IRA contributions made during the year the investment is received.
2. UGMAS/UTMAS
If the trustee's name is not in the account registration of a gift or transfer
to minor ("UGMA/UTMA") account, the investor must provide a copy of the trust
document.
28
<PAGE>
3. PURCHASES THROUGH FINANCIAL INSTITUTIONS
You may purchase and redeem shares through certain broker-dealers, banks and
other financial institutions. Financial institutions may charge their customers
a fee for their services and are responsible for promptly transmitting purchase,
redemption and other requests to the Funds.
If you purchase shares through a financial institution, you will be subject to
the institution's procedures, which may include charges, limitations, investment
minimums, cutoff times and restrictions in addition to, or different from, those
applicable when you invest in a Fund directly. When you purchase a Fund's shares
through a financial institution, you may or may not be the shareholder of record
and, subject to your institution's procedures, you may have Fund shares
transferred into your name. There is typically a three-day settlement period for
purchases and redemptions through broker-dealers. Certain financial institutions
may also enter purchase orders with payment to follow.
You may not be eligible for certain shareholder services when you purchase
shares through a financial institution. Contact your institution for further
information. If you hold shares through a financial institution, the Funds may
confirm purchases and redemptions to the financial institution, which will
provide you with confirmations and periodic statements. The Funds are not
responsible for the failure of any financial institution to carry out its
obligations.
Investors purchasing shares of the Funds through a financial institution should
read any materials and information provided by the financial institution to
acquaint themselves with its procedures and any fees that the institution may
charge.
C. ADDITIONAL REDEMPTION INFORMATION
A Fund may redeem shares involuntarily to reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to
transactions effected for the benefit of a shareholder which is applicable to a
Fund's shares as provided in the Prospectus.
1. SUSPENSION OF RIGHT OF REDEMPTION
The right of redemption may not be suspended, except for any period during
which: (1) the New York Stock Exchange, Inc. is closed (other than customary
weekend and holiday closings) or during which the Securities and Exchange
Commission determines that trading thereon is restricted; (2) an emergency (as
determined by the SEC) exists as a result of which disposal by a Fund of its
securities is not reasonably practicable or as a result of which it is not
reasonably practicable for a Fund fairly to determine the value of its net
assets; or (3) the SEC may by order permit for the protection of the
shareholders of a Fund.
2. REDEMPTION-IN-KIND
Redemption proceeds normally are paid in cash. Payments may be made wholly or
partly in portfolio securities, however, if the Board determines conditions
exist which would make payment in cash detrimental to the best interests of a
Fund. If redemption proceeds are paid wholly or partly in portfolio securities,
brokerage costs may be incurred by the shareholder in converting the securities
to cash. The Trust has filed an election with the SEC pursuant to which a Fund
may only effect a redemption in portfolio securities if the particular
shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
D. NAV DETERMINATION
In determining a Fund's NAV per share, securities for which market quotations
are readily available are valued at current market value using the last reported
sales price. If no sale price is reported, the average of the last bid and ask
price is used. If no average price is available, the last bid price is used. If
market quotations are not readily available, then securities are valued at fair
value as determined by the Board (or its delegate).
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E. DISTRIBUTIONS
Distributions of net investment income will be reinvested at a Fund's NAV per
share as of the last day of the period with respect to which the distribution is
paid. Distributions of capital gain will be reinvested at the NAV per share of a
Fund on the payment date for the distribution. Cash payments may be made more
than seven days following the date on which distributions would otherwise be
reinvested.
F. SALES CHARGES
1. REDUCED SALES CHARGES
You may qualify for a reduced sales charge on Fund purchases under rights of
accumulation or a letter of intent. If you qualify for RIGHTS OF ACCUMULATION
("ROA"), the sales charge you pay is based on the total of your current purchase
and the net asset value (at the end of the previous fund business day) of shares
that you already hold. To qualify for ROA on a purchase, you must inform the
transfer agent and supply sufficient information to verify that each purchase
qualifies for the privilege or discount. You may also enter into a written
Letter of Intent ("LOI"), which expresses your intent to invest $100,000 or more
in a Fund within a period of 13 months. Each purchase under a LOI will be made
at the public offering price applicable at the time of the purchase to a single
transaction of the dollar amount indicated in the LOI. If you do not purchase
the minimum investment referenced in the LOI, you must pay the Fund an amount
equal to the difference between the dollar value of the sales charges paid under
the LOI and the dollar value of the sales charges due on the aggregrate
purchases of the Fund as if such purchases were executed in a single
transaction.
2. ELIMINATION OF SALES CHARGES
No sales charge is assessed on the reinvestment of Fund distributions. No sales
charge is assessed on purchases made for investment purposes or on redemptions
by:
o any bank, trust company, savings association or similar institution with
whom the distributor has entered into a share purchase agreement acting on
behalf of the institution's fiduciary customer accounts or any account
maintained by its trust department (including a pension, profit sharing or
other employee benefit trust created pursuant to a qualified retirement
plan)
o any registered investment adviser with whom the distributor has entered
into a share purchase agreement and which is acting on behalf of its
fiduciary customer accounts
o any broker-dealer with whom the distributor has entered into a Fee-Based
Wrap Account Agreement or similar agreement and which is acting on behalf
of its fee-based program clients
o Trustees and officers of the Trust; directors, officers and full-time
employees of the Advisor, the distributor, any of their affiliates or any
organization with which the distributor has entered into a Selected Dealer
or similar agreement; the spouse, sibling, direct ancestor or direct
descendent (collectively, "relatives") of any such person; any trust or
individual retirement account or self-employed retirement plan for the
benefit of any such person or relative; or the estate of any such person or
relative
o any person who has, within the preceding 90 days, redeemed Fund shares (but
only on purchases in amounts not exceeding the redeemed amounts) and
completes a reinstatement form upon investment
o persons who exchange into a Fund from a mutual fund other than a fund of
the Trust that participates in the Trust's exchange program
o employee benefit plans qualified under Section 401 of the Internal Revenue
Code of 1986, as amended.
The Fund requires appropriate documentation of an investor's eligibility to
purchase or redeem Fund shares without a sales charge. Any shares so purchased
may not be resold except to the Fund.
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7. TAXATION
The tax information set forth in the Prospectus and the information in this
section relates solely to U.S. federal income tax law and assumes that each Fund
qualifies as a regulated investment company (as discussed below). Such
information is only a summary of certain key federal income tax considerations
affecting each Fund and its shareholders that are not described in the
prospectus. No attempt has been made to present a complete explanation of the
federal tax treatment of the Funds or the implications to shareholders. The
discussions here and in the prospectus are not intended as substitutes for
careful tax planning.
This "Taxation" section is based on the Code and applicable regulations in
effect on the date hereof. Future legislative or administrative changes or court
decisions may significantly change the tax rules applicable to the Funds and
their shareholders. Any of these changes or court decisions may have a
retroactive effect.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX PROVISIONS APPLICABLE TO THEM.
A. QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund intends for each tax year to qualify as a "regulated investment
company" under the Code. This qualification does not involve governmental
supervision of management or investment practices or policies of a Fund.
The tax year end of each Fund is March 31 (the same as the Fund's fiscal year
end).
1. MEANING OF QUALIFICATION
As a regulated investment company, a Fund will not be subject to federal income
tax on the portion of its net investment income (that is, taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (that is, the excess of long-term capital gains over long-term
capital losses) that it distributes to shareholders. In order to qualify as a
regulated investment company a Fund must satisfy the following requirements:
o The Fund must distribute at least 90% of its investment company taxable
income (that is, net investment income and capital gain net income) for
the tax year. (Certain distributions made by a Fund after the close of
its tax year are considered distributions attributable to the previous
tax year for purposes of satisfying this requirement.)
o The Fund must derive at least 90% of its gross income from certain
types of income derived with respect to its business of investing.
o The Fund must satisfy the following asset diversification test at the
close of each quarter of the Fund's tax year: (1) at least 50% of the
value of the Fund's assets must consist of cash and cash items, U.S.
government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in
securities of the issuer and as to which the Fund does not hold more
than 10% of the outstanding voting securities of the issuer); and (2)
no more than 25% of the value of the Fund's total assets may be
invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which
are engaged in the same or similar trades or businesses.
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2. FAILURE TO QUALIFY
If for any tax year a Fund does not qualify as a regulated investment company,
all of its taxable income (including its net capital gain) will be subject to
tax at regular corporate rates without any deduction for dividends to
shareholders, and the dividends will be taxable to the shareholders as ordinary
income to the extent of a Fund's current and accumulated earnings and profits. A
portion of these distributions generally may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Failure to qualify as a regulated investment company would thus have a negative
impact on a Fund's income and performance. It is possible that a Fund will not
qualify as a regulated investment company in any given tax year.
B. FUND DISTRIBUTIONS
Each Fund anticipates distributing substantially all of its net investment
income for each tax year. These distributions are taxable to you as ordinary
income. These distributions may qualify for the 70% dividends-received deduction
for corporate shareholders.
Each Fund anticipates distributing substantially all of its net capital gain for
each tax year. These distributions generally are made only once a year, usually
in November or December, but the Funds may make additional distributions of net
capital gain at any time during the year. These distributions are taxable to you
as long-term capital gain, regardless of how long you have held shares.
Each Fund may have capital loss carryovers (unutilized capital losses from prior
years). These capital loss carryovers (which can be used for up to eight years)
may be used to offset any current capital gain (whether short- or long-term).
All capital loss carryovers are listed in the Funds' financial statements. Any
such losses may not be carried back.
Distributions by a Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital. Return of capital
distributions reduces your tax basis in the shares and are treated as gain from
the sale of the shares to the extent your basis would be reduced below zero.
All distributions by a Fund will be treated in the manner described above
regardless of whether the distribution is paid in cash or reinvested in
additional shares of the Fund (or of another Fund). If you receive a
distribution in the form of additional shares, it will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date.
You may purchase shares whose net asset value at the time reflects undistributed
net investment income or recognized capital gain, or unrealized appreciation in
the value of the assets of a Fund. Distributions of these amounts are taxable to
you in the manner described above, although the distribution economically
constitutes a return of capital to you.
If you purchase shares of a Fund just prior to the ex-dividend date of a
distribution, you will be taxed on the entire amount of the distribution
received, even though the net asset value per share on the date of the purchase
reflected the amount of the distribution.
If you hold shares for six months or less and redeem shares at a loss after
receiving a capital gain distribution, the loss will be treated as a long-term
capital loss to the extent of the distribution.
Ordinarily, you are required to take distributions by a Fund into account in the
year in which they are made. A distribution declared in October, November or
December of any year and payable to you on a specified date in those months,
however, is deemed to be received by you (and made by the Fund) on December 31
of that calendar year if the distribution is actually paid in January of the
following year.
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You will be advised annually as to the U.S. federal income tax consequences of
distributions made (or deemed made) to them during the year.
C. CERTAIN TAX RULES APPLICABLE TO THE FUNDS' TRANSACTIONS
For federal income tax purposes, when put and call options purchased by a Fund
expire unexercised, the premiums paid by a Fund give rise to short- or long-term
capital losses at the time of expiration (depending on the length of the
respective exercise periods for the options). When put and call options written
by a Fund expire unexercised, the premiums received by the Fund give rise to
short-term capital gains at the time of expiration. When a Fund exercises a
call, the purchase price of the underlying security is increased by the amount
of the premium paid by a Fund. When a Fund exercises a put, the proceeds from
the sale of the underlying security are decreased by the premium paid. When a
put or call written by a Fund is exercised, the purchase price (selling price in
the case of a call) of the underlying security is decreased (increased in the
case of a call) for tax purposes by the premium received.
Certain listed options, regulated futures contracts and forward currency
contracts are considered "Section 1256 contracts" for federal income tax
purposes. Section 1256 contracts held by a Fund at the end of each tax year are
"marked to market" and treated for federal income tax purposes as though sold
for fair market value on the last business day of the tax year. Gains or losses
realized by a Fund on Section 1256 contracts generally are considered 60%
long-term and 40% short-term capital gains or losses. Each Fund can elect to
exempt its Section 1256 contracts that are part of a "mixed straddle" (as
described below) from the application of Section 1256.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by the Fund may constitute a
"straddle" for federal income tax purposes. A straddle of which at least one,
but not all, the positions are Section 1256 contracts, may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that: (1) the loss realized on
disposition of one position of a straddle may not be recognized to the extent
that the Fund has unrealized gains with respect to the other position in such
straddle; (2) the Fund's holding period in straddle positions be suspended while
the straddle exists (possibly resulting in gain being treated as short-term
capital gain rather than long-term capital gain); (3) the losses recognized with
respect to certain straddle positions which are part of a mixed straddle and
which are non-Section 1256 positions be treated as 60% long-term and 40%
short-term capital loss; (4) losses recognized with respect to certain straddle
positions which would otherwise constitute short-term capital losses be treated
as long-term capital losses; and (5) the deduction of interest and carrying
charges attributable to certain straddle positions may be deferred. Various
elections are available to a Fund, which may mitigate the effects of the
straddle rules, particularly with respect to mixed straddles. In general, the
straddle rules described above do not apply to any straddles held by a Fund, all
of which consist of the offsetting positions of Section 1256 contracts.
D. FEDERAL EXCISE TAX
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to: (1) 98% of
ordinary its taxable income for the calendar year; and (2) 98% of its capital
gain net income for the one-year period ended on October 31 of the calendar
year. If the Fund changes its tax year end to November 30 or December 31, it may
elect to use that date instead of the October 31 date in making this
calculation. The balance of the Fund's income must be distributed during the
next calendar year. A Fund will be treated as having distributed any amount on
which it is subject to income tax for any tax year ending in a calendar year.
For purposes of calculating the excise tax, each Fund: (1) reduces its capital
gain net income (but not below its net capital gain) by the amount of any net
ordinary loss for the calendar year and (2) excludes foreign currency gains and
losses incurred after October 31 of any year (or November 30 or December 31 if
it has made the election described above) in determining the amount of ordinary
taxable income for the current calendar year. The Fund will include foreign
currency gains and losses incurred after October 31 in determining ordinary
taxable income for the succeeding calendar year.
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Each Fund intends to make sufficient distributions of its ordinary taxable
income and capital gain net income prior to the end of each calendar year to
avoid liability for the excise tax. Investors should note, however, that a Fund
might in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.
E. SALE OR REDEMPTION OF SHARES
In general, a shareholder will recognize gain or loss on the sale or redemption
of shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption (a so called "wash sale"). In general, any gain or loss arising from
the sale or redemption of shares of a Fund will be considered capital gain or
loss and will be long-term capital gain or loss if the shares were held for
longer than one year. Any capital loss arising from the sale or redemption of
shares held for six months or less, however, is treated as a long-term capital
loss to the extent of the amount of capital gain distributions received on such
shares. For this purpose, the special holding period rules of Code Section
246(c) (3) and (4) generally will apply in determining the holding period of
shares. Capital losses in any year are deductible only to the extent of capital
gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
F. WITHHOLDING TAX
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of distributions, and the proceeds of redemptions of shares, paid
to any shareholder: (1) who has failed to provide correct tax payer
identification number; (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly; or (3)
who has failed to certify to a Fund that it is not subject to backup withholding
or that it is a corporation or other "exempt recipient."
G. FOREIGN SHAREHOLDERS
Taxation of a shareholder who under the Code is a nonresident alien individual,
foreign trust or estate, foreign corporation, or foreign partnership ("foreign
shareholder"), depends on whether the income from a Fund is "effectively
connected" with a U.S. trade or business carried on by the foreign shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income distributions paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) upon the gross amount of the distribution.
The foreign shareholder generally would be exempt from U.S. federal income tax
on gain realized on the sale of shares of a Fund, capital gain distributions
from a Fund and amounts retained by a Fund that are designated as undistributed
capital gain.
If the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then ordinary income distributions, capital
gain distributions, and any gain realized upon the sale of shares of a Fund will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
or U.S. corporations.
In the case of a noncorporate foreign shareholder, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding (or taxable at a reduced treaty rate), unless
the shareholder furnishes the Fund with proper notification of its foreign
status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty might be different from those described herein.
The tax rules of other countries with respect to distributions from a Fund can
differ from the rules for U.S. federal income taxation described above. These
foreign rules are not discussed herein. Foreign shareholders are urged to
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consult their own tax advisers as to the consequences of foreign tax rules with
respect to an investment in a Fund, distributions from a Fund and the
applicability of foreign taxes and related matters.
H. STATE AND LOCAL TAXES
The tax rules of the various states of the U.S. and their local jurisdictions
with respect to distributions from a Fund can differ from the rules for U.S.
federal income taxation described above. These state and local rules are not
discussed herein. Shareholders are urged to consult their tax advisers as to the
consequences of state and local tax rules with respect to an investment in a
Fund, distributions from a Fund and the applicability of state and local taxes
and related matters.
8. OTHER MATTERS
A. THE TRUST AND ITS SHAREHOLDERS
1. GENERAL INFORMATION
Forum Funds 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.
The Trust is registered as an open-end, management investment company under the
1940 Act. The Trust offers shares of beneficial interest in its series. As of
the date hereof, the Trust consisted of the following shares of beneficial
interest:
Investors Bond Fund Payson Balanced Fund
TaxSaver Bond Fund Payson Value Fund
Investors High Grade Bond Fund Austin Global Equity Fund
Maine Municipal Bond Fund Polaris Global Value Fund
New Hampshire Bond Fund Investors Equity Fund
Daily Assets Government Fund(1) Equity Index Fund
Daily Assets Treasury Obligations Fund(1) Investors Growth Fund
Daily Assets Cash Fund(1) BIA Small-Cap Growth Fund
Daily Assets Government Obligations Fund(1) BIA Growth Equity Fund
Daily Assets Municipal Fund(1)
(1) The Trust offers shares of beneficial interest in an institutional,
institutional service, and investor share class of these series.
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 series and may divide series into classes of
shares; the costs of doing so will be borne by the Trust.
The Trust and each Fund will continue indefinitely until terminated.
2. SERIES AND CLASSES OF THE TRUST
Each series or class of the Trust may have a different expense ratio and its
expenses will affect each class' performance. For more information on any other
class of shares of the Fund, investors may contact the Transfer Agent.
3. SHAREHOLDER VOTING AND OTHER RIGHTS
Each share of each series 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
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of the shares of each class (and certain other expenses such as transfer agency,
shareholder service and administration expenses) are borne solely by those
shares. Each class votes separately with respect to the provisions of any Rule
12b-1 plan which pertains to the class and other matters for which separate
class voting is appropriate under applicable law. Generally, shares will be
voted separately by individual series except if (1) the 1940 Act requires shares
to be voted in the aggregate and not by individual series and (2) when the
Trustees determine that the matter affects more than one series and all affected
series must vote. The Trustees may also determine that a matter only affects
certain classes of the Trust and thus only those classes are entitled to vote on
the matter.
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. 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.
A shareholder in a series is entitled to the shareholder's pro rata share of all
distributions arising from that series' assets and, upon redeeming shares, will
receive the portion of the series' net assets represented by the redeemed
shares.
Shareholders representing 10% or more of the Trust's (or a series') outstanding
shares may, as set forth in the Trust Instrument, call meetings of the Trust (or
series) for any purpose related to the Trust (or series), including, in the case
of a meeting of the Trust, the purpose of voting on removal of one or more
Trustees.
4. CERTAIN REORGANIZATION TRANSACTIONS
The Trust or any series may be terminated upon the sale of its assets to, or
merger with, another open-end, management investment company or series thereof,
or upon liquidation and distribution of its assets. Generally such terminations
must be approved by the vote of the holders of a majority of the outstanding
shares of the Trust or a Fund. The Trustees may, without prior shareholder
approval, change the form of organization of the Trust by merger, consolidation
or incorporation. Under the Trust Instrument, the Trustees may, without
shareholder vote, cause the Trust to merge or consolidate into one or more
trusts, partnerships or corporations or cause the Trust to be incorporated under
Delaware law, so long as the surviving entity is an open-end, management
investment company that will succeed to or assume the Trust's registration
statement.
B. FUND OWNERSHIP
As of July 1, 1999, the percentage of shares owned by all officers and trustees
of the Trust as a group was as follows. To the extent officers and trustees own
less than 1% of the shares of each class of shares of a Fund (or of the Trust),
the table reflects "N/A" for not applicable.
PERCENTAGE OF SHARES
FUND (OR TRUST) OWNED
- ------------------------------------------------------------------------------
The Trust N/A
Payson Value Fund N/A
Payson Balanced Fund N/A
Also as of that date, certain shareholders of record owned 5% or more of a class
of shares of a Fund. Shareholders known by a Fund to own beneficially 5% or more
of a class of shares of the Fund are listed in Table 8 in Appendix B.
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 of July 1, 1999, no person
beneficially owned 25% or more of the shares of a Fund (or of the Trust).
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C. LIMITATIONS ON SHAREHOLDERS' AND TRUSTEES' LIABILITY
Delaware law provides that Fund shareholders are entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. In the past, the Trust believes that the securities
regulators of some states, however, have indicated that they and the courts in
their state may decline to apply Delaware law on this point. The Forum Funds'
Trust Instrument (the document that governs the operation of the Trust) contains
an express disclaimer of shareholder liability for the debts, liabilities,
obligations and expenses of the Trust. The Trust Instrument provides for
indemnification out of each series' property of any shareholder or former
shareholder held personally liable for the obligations of the series. The Trust
Instrument also provides that each series shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the series and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which Delaware law does not apply, no contractual limitation of
liability was in effect, and the portfolio is unable to meet its obligations.
FAdS believes that, in view of the above, there is no risk of personal liability
to shareholders.
The Trust Instrument provides that the Trustees shall not be liable to any
person other than the Trust and its shareholders. In addition, the Trust
Instrument provides that the Trustees shall not be liable for any conduct
whatsoever, provided that a Trustee is not protected against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
D. REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby. The registration statement, including
the exhibits filed therewith, may be examined at the office of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents are not necessarily complete, and, in each instance,
are qualified by, reference to the copy of such contract or other documents
filed as exhibits to the registration statement.
FINANCIAL STATEMENTS
The financial statements of Payson Value Fund and of Payson Balanced
Fund for the year ended March 31, 1999, which are included in the Annual Report
to Shareholders of each Fund, are incorporated herein by reference. These
financial statements only include the schedules of investments, statements of
assets and liabilities, statements of operations, statements of changes in net
assets, financial highlights, notes and independent auditors' reports.
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APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
A. CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
1. MOODY'S INVESTORS SERVICE
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." 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.
AA 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 risk
appear somewhat larger than the Aaa securities.
A 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.
BAA Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments 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.
BA 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.
B 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.
CAA 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. Ca 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.
C 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
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
A-1
<PAGE>
2. STANDARD AND POOR'S CORPORATION
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
NOTE Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
NOTE Plus (+) or minus (-). 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.
A-2
<PAGE>
The "r" symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
currencies, or commodities; obligations exposed to severe prepayment
risk-such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse
floaters.
3. DUFF & PHELPS CREDIT RATING CO.
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+
AA High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+
A, A- Protection factors are average but adequate. However, risk factors are
more variable in periods of greater economic stress.
BBB+
BBB
BBB- Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
BB+
BB
BB- Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according
to industry conditions. Overall quality may move up or down frequently
within this category.
B+
B, B- Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
4. FITCH IBCA, INC.
INVESTMENT GRADE
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A-3
<PAGE>
A High credit quality. `A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC
CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates
that default of some kind appears probable. `C' ratings signal imminent
default.
DDD
DD, D Default. Securities are not meeting current obligations and are
extremely speculative. `DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For
U.S. corporates, for example, `DD' indicates expected recovery
of 50%-90% of such outstandings, and `D' the lowest recovery potential,
i.e. below 50%.
B. PREFERRED STOCK
1. MOODY'S INVESTORS SERVICE
AAA An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated "aa" is considered a high- grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
A An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in
the "aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA An issue which is rated "baa" is considered to be 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.
BA An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
A-4
<PAGE>
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
B 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.
CAA 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.
CA 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 payments.
C This is the lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor prospects of
ever attaining any real investment standing.
NOTE Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: 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
issue ranks in the lower end of its generic rating category.
2. STANDARD & POOR'S
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA 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.
A 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.
BBB 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.
BB
B, CCC Preferred stock rated BB, B, and CCC is 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. While such issues will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating CC is reserved for a preferred stock issue that is in
arrears on dividends or sinking fund payments, but that is currently
paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in
default on debt instruments.
A-5
<PAGE>
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
NOTE Plus (+) or minus (-). To provide more detailed indications of
preferred stock quality, 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.
C. SHORT TERM RATINGS
1. MOODY'S INVESTORS SERVICE
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) 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.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above 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.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
NOT
PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.
2. STANDARD AND POOR'S
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-6
<PAGE>
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
3. FITCH IBCA, INC.
F1 Obligations assigned this rating have the highest capacity for timely
repayment under Fitch IBCA's national rating scale for that country,
relative to other obligations in the same country. This rating is
automatically assigned to all obligations issued or guaranteed by the
sovereign state. Where issues possess a particularly strong credit
feature, a "+" is added to the assigned rating.
F2 Obligations supported by a strong capacity for timely repayment
relative to other obligors in the same country. However, the relative
degree of risk is slightly higher than for issues classified as `A1'
and capacity for timely repayment may be susceptible to adverse changes
in business, economic, or financial conditions.
F3 Obligations supported by an adequate capacity for timely repayment
relative to other obligors in the same country. Such capacity is more
susceptible to adverse changes in business, economic, or financial
conditions than for obligations in higher categories.
B Obligations for which the capacity for timely repayment is uncertain
relative to other obligors in the same country. The capacity for timely
repayment is susceptible to adverse changes in business, economic, or
financial conditions.
C Obligations for which there is a high risk of default to other obligors
in the same country or which are in default.
A-7
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
The following table shows the dollar amount of fees payable to the Adviser with
respect to each Fund, the amount of fee that was waived by the Adviser, if any,
and the actual fee received by the Adviser.
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE PAYABLE ADVISORY FEE WAIVED ADVISORY FEE RETAINED
PAYSON VALUE FUND
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $148,850 $46,719 $102,131
Year Ended March 31, 1998 $131,769 $0 $131,769
Year Ended March 31, 1997 $92,360 $0 $92,360
ADVISORY FEE PAYABLE ADVISORY FEE WAIVED ADVISORY FEE RETAINED
PAYSON BALANCED FUND
- -----------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $140,477 $50,090 $90,387
Year Ended March 31, 1998 $131,512 $0 $131.512
Year Ended March 31, 1997 $107,243 $0 $107,243
</TABLE>
TABLE 2 - SALES CHARGES
PAYSON VALUE FUND
<TABLE>
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31 AGGREGATE SALES CHARGE AMOUNT RETAINED AMOUNT REALLOWED
- -------------------------------------------------------------------------------------------------------------------------
1999 $394 $394 $0
1998 $3,715 $462 $3,253
PAYSON BALANCED FUND
FISCAL YEAR ENDED MARCH 31
AGGREGATE SALES CHARGE
AMOUNT RETAINED AMOUNT REALLOWED
- -------------------------------------------------------------------------------------------------------------------------
1999 $0 $0 $0
1998 $186 $186 $0
</TABLE>
B-1
<PAGE>
TABLE 3 - ADMINISTRATION FEES
The following table shows the dollar amount of fees payable to FAdS with respect
to each Fund, the amount of fee that was waived by FAdS, if any, and the actual
fee received by FAdS.
<TABLE>
<S> <C> <C> <C>
ADMINISTRATION FEE ADMINISTRATION FEE WAIVED ADMINISTRATION FEE
PAYSON VALUE FUND PAYABLE RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $37,213 $9,758 $27,455
Year Ended March 31, 1998 $32,942 $28,750 $4,192
Year Ended March 31, 1997 $23,090 $23,090 $0
ADMINISTRATION FEE ADMINISTRATION FEE ADMINISTRATION FEE
PAYSON BALANCED FUND PAYABLE WAIVED RETAINED
- --------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $46,826 $29,359 $17,467
Year Ended March 31, 1998 $43,837 $38,278 $5,559
Year Ended March 31, 1997 $35,748 $35,748 $0
</TABLE>
TABLE 4 - ACCOUNTING FEES
The following table shows the dollar amount of fees payable to FAcS with respect
to each Fund, the amount of fee that was waived by FAcS, if any, and the actual
fee received by FAcS.
<TABLE>
<S> <C> <C> <C>
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE
PAYSON VALUE FUND RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $36,000 $0 $36,000
Year Ended March 31, 1998 $36,000 $0 $36,000
Year Ended March 31, 1997 $36,000 $0 $36,000
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE
PAYSON BALANCED FUND RETAINED
- --------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $38,000 $0 $38,000
Year Ended March 31, 1998 $37,000 $0 $37,000
Year Ended March 31, 1997 $37,000 $0 $37,000
</TABLE>
B-2
<PAGE>
TABLE 5 - TRANSFER AGENCY FEES
The following table shows the dollar amount of shareholder service fees payable
to the Transfer Agent with respect to shares of each Fund.
<TABLE>
<S> <C> <C> <C>
TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
PAYSON VALUE FUND PAYABLE WAIVED RETAINED
- ----------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $65,203 $0 $65,203
Year Ended March 31, 1998 $58,869 $39,896 $18,973
Year Ended March 31, 1997 $45,916 $27,131 $18,785
TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
PAYSON BALANCED FUND PAYABLE WAIVED RETAINED
- -----------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $77,383 $0 $77,383
Year Ended March 31, 1998 $73,628 $53,159 $20,469
Year Ended March 31, 1997 $63,723 $42,011 $21,712
</TABLE>
TABLE 6 - COMMISSIONS
The following table shows the aggregate brokerage commissions with respect to
each Fund that incurred brokerage costs. The data are for the past three fiscal
years or shorter period if the Fund has been in operation for a shorter period.
YEAR ENDED PAYSON VALUE PAYSON BALANCED
MARCH 31, FUND FUND
- -----------------------------------------------------------------
1999 $34,078 $60,534
1998 $29,682 $41,370
1997 $17,303 $37,474
B-3
<PAGE>
TABLE 7 - SECURITIES OF REGULAR BROKERS OR DEALERS
The following table lists the regular brokers and dealers of each fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of the Funds' most recent fiscal year.
<TABLE>
<S> <C> <C>
VALUE HELD BY PAYSON VALUE VALUE HELD BY PAYSON
REGULAR BROKER OR DEALER FUND BALANCED FUND
- -----------------------------------------------------------------------------------------------------------------------
Wells Fargo & Co. $467,000 $0
Dreyfus Cash Management $447,000 $1,182,000
BankBoston Corp. $433,000 $0
Merrill Lynch & Co., Inc. $531,000 $570,000
AG Edwards & Sons, Inc. $294,000 $0
Chase Manhattan Corp. $0 $524,000
Chase Manhattan Corp. $0 $198,000
Bear Stearns Cos., Inc. $0 $152,000
Morgan Stanley Group, Inc. $0 $200,000
</TABLE>
TABLE 8 - 5% SHAREHOLDERS
The following table lists the persons who owned of record 5% or more of the
outstanding shares of a Fund as of July 1, 1999.
<TABLE>
<S> <C> <C> <C>
% OF FUND
FUND/CLASS OF SHARES NAME AND ADDRESS SHARES
- --------------------------------------------------------------------------------------------------------------------
PAYSON VALUE FUND Payse & Co.
C/O H M Payson & Co.
PO Box 31
Portland, ME 04112 201,136.399 21.08
Ala & Co.
C/O H M Payson & Co.
PO Box 31
Portland, ME 04112 166,024.279 17.40
PAYSON BALANCED FUND Payse & Co.
C/O H M Payson & Co.
PO Box 31
Portland, ME 04112 241,777.096 13.36
Ala & Co.
C/O H M Payson & Co.
PO Box 31
Portland, ME 04112 223,633.692 12.35
Allagash & Co.
C/O Bank of New Hampshire
PO Box 477
Concord, NH 03302 180,754.137 9.99
</TABLE>
B-4
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - TOTAL RETURNS (WITHOUT SALES CHARGES)
The average annual total return of each Fund for the period ended March 31,
1999, was as follows.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
CALENDAR SINCE INCEPTION
ONE MONTH THREE MONTHS YEAR TO ONE YEAR THREE YEARS FIVE YEARS TEN YEARS (ANNUALIZED)
DATE
- ----------------------------------------------------------------------------------------------------------------------------------
PAYSON VALUE FUND
4.10% 0.95% 0.95% (4.57)% 16.14% 16.35% N/A 15.65%
PAYSON BALANCED FUND
2.32% (4.09)% (4.09)% (8.20)% 9.66% 11.21% N/A 11.05%
TABLE 2 - TOTAL RETURNS (WITH SALES CHARGES)
The average annual total return of each Fund for the period ended March 31,
1999, was as follows.
CALENDAR SINCE INCEPTION
ONE MONTH THREE MONTHS YEAR TO ONE YEAR THREE YEARS FIVE YEARS TEN YEARS (ANNUALIZED)
DATE
- ----------------------------------------------------------------------------------------------------------------------------------
PAYSON VALUE FUND
(0.06)% (3.09)% (3.09)% (8.39)% 14.57% 15.41% N/A 14.95%
PAYSON BALANCED FUND
(1.78)% (7.92)% (7.92)% (11.88)% 8.17% 10.31% N/A 10.43%
</TABLE>
C-1
<PAGE>
APPENDIX D - ADDITIONAL ADVERTISING MATERIALS
TEXT OF FORUM BROCHURE
In connection with its advertisements, a Fund may provide a description of the
Fund's investment adviser and its affiliates, which are service providers to the
Fund. Text, which is currently in use, is set forth below.
"FORUM FINANCIAL GROUP OF COMPANIES
Forum Financial Group of Companies represent more than a decade of diversified
experience with every aspect of mutual funds. The Forum Family of Funds has
benefited from the informed, sharply focused perspective on mutual funds that
experience makes possible.
The Forum Family of Funds has been created and managed by affiliated companies
of Portland-based Forum Financial Group, among the nation's largest mutual fund
administrators providing clients with a full line of services for every type of
mutual fund.
The Forum Family of Funds is designed to give investment representatives and
investors a broad choice of carefully structured and diversified portfolios,
portfolios that can satisfy a wide variety of immediate as well as long-term
investment goals.
Forum Financial Group has developed its "brand name" family of mutual funds and
has made them available to the investment public and to institutions on both the
national and regional levels.
For more than a decade Forum has had direct experience with mutual funds from a
different perspective, a perspective made possible by Forum's position as a
leading designer and full-service administrator and manager of mutual funds of
all types.
Today Forum Financial Group administers and provides services for over 181
mutual funds for 17 different fund managers, with more than $70 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 390 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.
D-1
<PAGE>
Fund sponsors understand that even the most efficiently and creatively designed
fund can disappoint shareholders if it is inadequately serviced. That is the
reason why fund sponsors have relied on Forum to meet all of a fund's complex
compliance, regulatory, and filing needs.
Forum's full service commitment includes providing state-of-the-art accounting
support (Forum has 7 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.
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 $1.25 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 $1.95 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.
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In the less conservative but still not aggressive category are funds in the
Forum Family that seek to provide steady income and, in certain cases, tax-free
earnings. Such investments provide important diversification to an investment
portfolio.
Growth funds in the Forum Family more aggressively pursue a high return at the
risk of market volatility. These funds include domestic and international stock
mutual funds."
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TEXT OF PEOPLES HERITAGE NEWS RELEASE
Peoples Heritage Financial Group, Inc. (NASDAQ:PHBK) announced today that it has
formed an alliance with a major mutual fund provider and an investment advisory
firm to expand its mutual fund offerings. The alliance with Forum Financial
Group and H.M. Payson & Company will result in 18 funds, including the unique
Maine Municipal Bond Fund and New Hampshire Bond Fund, being offered through the
branches of Peoples' affiliate banks in Maine, New Hampshire and northern
Massachusetts and the Company's trust and investment subsidiaries
"There is no secret to where financial services are moving, under one roof,"
said William J. Ryan, Chairman, President and Chief Executive Officer of Peoples
Heritage. "One only has to watch the virtually daily announcements of
consolidations in the financial sector to understand that customers are
demanding and receiving 'one-stop' financial services.
"We think we are adding the additional competitive advantage of funds that are
managed and administered close to home."
Fifteen Forum funds will be offered including two Payson funds. The tax-free
Maine and New Hampshire State bond funds are the only two such funds available
and usually invest 80% of total assets in municipal securities. Other funds
being provided by the alliance include money market, fixed income and equity
funds.
Forum Financial, based in Portland, Maine since 1987, administers 124 funds with
more than $29 billion in assets. Forum manages mutual funds for independent
investment advisers such as Payson and for banks. Forum Investment Advisors, LLC
an affiliate, is the largest Maine-based investment adviser with approximately
$1.7 billion in fund assets under management.
"We are providing a great product set to the customers served by Peoples' nearly
200 branches in northern New England," said John Y. Keffer, Forum Financial
president, "The key today is to link a wide variety of investment options with
convergent, easy access for customers. I believe this alliance does just that."
H.M. Payson & Co., founded in 1854, is one of the nation's oldest investment
firms with nearly $1.25 billion in assets under management and $412 million in
non-managed custodial accounts. The Payson Value Fund and Payson Balanced Fund
are among the 18 offerings.
"I believe we have all the ingredients of a tremendous alliance," said John
Walker, Payson President and Managing Director. "We have the region's premier
community banking company, a community-based investment adviser, and a local
mutual fund company that operates nationally and specializes in working with
banks. We are poised to provide solid investment performance and service."
Peoples Heritage Financial Group is a $10 billion multi-state bank and financial
services holding company headquartered in Portland, Maine. Its Maine banking
affiliate, Peoples Heritage Bank, has the state's leading deposit market share.
Its New Hampshire banking affiliate, Bank of New Hampshire, has the state's
leading deposit market share. Family Bank, the Company's Massachusetts banking
subsidiary, has the state's tenth largest deposit market share and the leading
market share in many of the northern Massachusetts communities it serves.
Peoples affiliate banks also operate subsidiaries in leasing, trust and
investment services and insurance.
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FORUM FINANCIAL GROUP:
Headquarters: Two Portland Square, Portland, Maine 04101
President: John Y. Keffer
Offices: Portland, Seattle, Warsaw, Bermuda
*Established in 1986 to administer mutual funds for independent investment
advisers and banks *Among the nation's largest third-party fund administrators
*Uses proprietary in-house systems and custom programming capabilities
*Administration and Distribution Services: Regulatory, compliance,
expense accounting, budgeting for all funds
*Fund Accounting Services: Portfolio valuation, accounting, dividend
declaration, and tax advice
*Shareholder Services: Preparation of statements, distribution support
inquiries and processing of trades
*Client Assets under Administration and Distribution: $70.4 billion
*Client Assets Processed by Fund Accounting: $53 billion
*Client Funds under Administration and Distribution: 181 mutual funds with 89
share classes
*International Ventures:
Joint venture with Bank Handlowy in Warsaw, Poland, using Forum's
proprietary transfer agency and distribution systems Off-shore
investment fund administration, using Bermuda as Forum's center of
operations
*Forum Employees: United States -215, Poland - 180, Bermuda - 4
FORUM CONTACTS:
Mark Kaplan, Managing Director and Portfolio Manager, Forum Investment Advisers,
LLC,
(207) 879-1900 X 6123
Tony Santaniello, Director of Marketing, (207) 879-1900 X 6175
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H.M. PAYSON & CO.:
Headquarters: One Portland Square, Portland, Maine
President and Managing Director: John Walker
Quality investment services and conservative wealth management since 1854
*Assets under Management: $1.25 Billion
*Non-managed Custody Assets: $412 Million
*Client Base: 85% individuals; 15% institutional
*Owned by 11 shareholders; 10 managing directors
*Payson Balanced Fund and Payson Value Fund (administrative and shareholder
services provided by Forum Financial Group)
*Employees: 45
H.M. PAYSON & CO. CONTACT:
Joel Harris, Marketing Coordinator, (207) 772-3761
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STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1999
AUSTIN GLOBAL EQUITY FUND
INVESTMENT ADVISER:
Austin Investment Management, Inc.
375 Park Avenue
New York, New York 10152
ACCOUNT INFORMATION AND SHAREHOLDER SERVICES:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
(800) 805-8258
(207) 879-0001
This Statement of Additional Information (the "SAI") supplements the Prospectus
dated August 1, 1999, as may be amended from time to time, offering shares of
Austin Global Equity Fund (the "Fund"), a separate series of Forum Funds, a
registered, open-end management investment company (the "Trust"). This SAI is
not a prospectus and should only be read in conjunction with the Prospectus. You
may obtain the Prospectus without charge by contacting Forum Shareholder
Services at the address or telephone number listed above.
Financial Statements for the Fund for the year ended March 31, 1999, included in
the Annual Report to shareholders, are incorporated into this SAI by reference.
Copies of the Annual Report may be obtained, without charge, upon request by
contacting Forum Shareholder Services, LLC at the address or telephone number
listed above.
<PAGE>
TABLE OF CONTENTS
Glossary..................................................................1
1. Investment Policies And Risks.........................................2
2. Investment Limitations................................................9
3. Performance Data And Advertising.....................................11
4. Management...........................................................15
5. Portfolio Transactions...............................................20
6. Additional Purchase And Redemption Information.......................23
7. Taxation.............................................................25
8. Other Matters........................................................29
Appendix A - Description Of Securities Ratings..........................A-1
Appendix B - Miscellaneous Tables.......................................B-1
Appendix C - Performance Data...........................................C-1
<PAGE>
GLOSSARY
As used in this SAI, the following terms have the meanings listed.
"Adviser" means Austin Investment Management, Inc.
"Board" means the Board of Trustees of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Custodian" means the custodian of the Fund's assets.
"FAdS" means Forum Administrative Services, LLC, the administrator of
the Fund.
"Fitch" means Fitch IBCA, Inc.
"FAcS" means Forum Accounting Services, LLC, the fund accountant of
each Fund.
"FFS" means Forum Fund Services, LLC, the distributor of the Fund's
shares.
"FFSI" means Forum Financial Services, Inc., the distributor of the
Fund's shares prior to August 1, 1999. "FSS" means Forum Shareholder
Services, LLC, the transfer agent of the Fund.
"FSS" means Forum Shareholder Services, LLC, the Fund's transfer agent.
"Fund" means Austin Global Equity Fund.
"Moody's" means Moody's Investors Service.
"NRSRO" means a nationally recognized statistical rating organization.
"NAV" means net asset value per share.
"SEC" means the U.S. Securities and Exchange Commission.
"S&P" means Standard & Poor's, A Division of the McGraw Hill Companies.
"Transfer Agent" means Forum Shareholder Services, LLC, the transfer
agent of the Fund.
"Trust" means Forum Funds.
"U.S. Government Securities" means obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
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1. INVESTMENT POLICIES AND RISKS
The Fund is a diversified series of the Trust. This section discusses in greater
detail than the Fund's Prospectus certain investments that the Fund may make.
A. SECURITY RATINGS INFORMATION
The Fund's investments in convertible securities are subject to credit risk
relating to the financial condition of the issuers of the securities that the
Fund holds. To limit credit risk, the Fund may only invest in: (1) convertible
debt securities that are rated B or higher by Moody's or S&P at the time of
purchase; and (2) preferred stock rated b or higher by Moody's or B or higher by
S&P at the time of purchase. The Fund will limit its investment in convertible
securities rated below BBB by S&P or bbb by Moody's to 10% of its total assets.
The Fund may purchase unrated convertible securities if, at the time of
purchase, the Adviser believes that they are of comparable quality to rated
securities that the Fund may purchase.
Moody's characterizes securities in the lowest permissible rating category as
generally lacking characteristics of a desirable investment and by S&P as being
predominantly speculative. A Fund may retain securities whose rating has been
lowered below the lowest permissible rating category (or that are unrated and
determined by the Adviser to be of comparable quality to securities whose rating
has been lowered below the lowest permissible rating category) if the Adviser
determines that retaining such security is in the best interests of the Fund.
Because a downgrade often results in a reduction in the market price of the
security, sale of a downgraded security may result in a loss.
Moody's, S&P and other 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 convertible
securities by several NRSROs is included in Appendix A to this SAI. The Fund may
use these ratings to determine whether to purchase, sell or hold a security.
Ratings are general and are not absolute standards of quality. 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 Adviser will determine whether the Fund should
continue to hold the obligation. To the extent that the ratings given by a NRSRO
may change as a result of changes in such organizations or their rating systems,
the Adviser will attempt to substitute comparable ratings. Credit ratings
attempt to evaluate the safety of principal and interest payments and do not
evaluate the risks of fluctuations in market value. Also, rating agencies may
fail to make timely changes in credit ratings. An issuer's current financial
condition may be better or worse than a rating indicates.
B. EQUITY SECURITIES
1. COMMON AND PREFERRED STOCK
GENERAL. Common stock represents an equity (ownership) interest in a company,
and usually possesses voting rights and earns dividends. Dividends on common
stock are not fixed but are declared at the discretion of the issuer. Common
stock generally represents the riskiest investment in a company. In addition,
common stock generally has the greatest appreciation and depreciation potential
because increases and decreases in earnings are usually reflected in a company's
stock price.
Preferred stock is a class of stock having a preference over common stock as to
the payment of dividends and the recovery of investment should a company be
liquidated, although preferred stock is usually junior to the debt securities of
the issuer. Preferred stock typically does not possess voting rights and its
market value may change based on changes in interest rates.
RISKS. The fundamental risk of investing in common and preferred stock is the
risk that the value of the stock might decrease. Stock values fluctuate in
response to the activities of an individual company or in response to general
market and/or economic conditions. Historically, common stocks have provided
greater long-term returns and have entailed
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greater short-term risks than preferred stocks, fixed-income and money market
investments. The market value of all securities, including common and preferred
stocks, is based upon the market's perception of value and not necessarily the
book value of an issuer or other objective measure of a company's worth. If you
invest in the Fund, you should be willing to accept the risks of the stock
market and should consider an investment in the Fund only as a part of your
overall investment portfolio.
2. CONVERTIBLE SECURITIES
GENERAL. Convertible securities include debt securities, preferred stock or
other securities that may be converted into or exchanged for a given amount of
common stock of the same or a different issuer during a specified period and at
a specified price in the future. A convertible security entitles the holder to
receive interest on debt or the dividend on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Convertible
securities rank senior to common stock in a company's capital structure but are
usually subordinated to comparable nonconvertible securities. 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.
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 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.
RISKS. Investment in convertible securities generally entails less risk than an
investment in the issuer's common stock. Convertible securities are typically
issued by smaller capitalized companies whose stock price may be volatile.
Therefore, the price of a convertible security may reflect variations in the
price of the underlying common stock in a way that nonconvertible debt does not.
The extent to which such risk is reduced, however, depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
3. DEPOSITARY RECEIPTS
GENERAL. The Fund may invest in sponsored and unsponsored American Depositary
Receipts ("ADRs"). ADRs typically are issued by a U.S. bank or trust company,
evidence ownership of underlying securities issued by a foreign company, and are
designed for use in U.S. securities markets. The Fund invests in depositary
receipts in order to obtain exposure to foreign securities markets.
RISKS. Unsponsored depositary receipts may be created without the participation
of the foreign issuer. Holders of these receipts generally bear all the costs of
the depositary receipt facility, whereas foreign issuers typically bear certain
costs in a sponsored depositary receipt. The bank or trust company depositary of
an unsponsored depositary receipt may be under no obligation to distribute
shareholder communications received from the foreign issuer or to pass through
voting rights. Accordingly, available information concerning the issuer may not
be current and the prices of unsponsored depositary receipts may be more
volatile than the prices of sponsored depositary receipts.
C. FOREIGN SECURITIES FORWARD CONTRACT
1. GENERAL
The Fund may conduct foreign currency exchange transactions either on a spot
(cash) basis at the spot rate prevailing in the foreign exchange market or by
entering into a forward foreign currency contract. A forward foreign currency
contract ("forward contract") involves an obligation to purchase or sell a
specific amount of a specific currency at a future date, which may be any fixed
number of days (usually less than one year) from the date of the contract agreed
upon by the parties, at a price set at the time of the contract. Forward
contracts are considered to be "derivatives" -- financial instruments whose
performance is derived, at least in part, from the performance of another asset
(such as a security, currency or an index of securities). The Fund enters into
forward contracts in
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order to "lock in" the exchange rate between the currency it will deliver and
the currency it will receive for the duration of the contract. In addition, the
Fund may enter into forward contracts to hedge against risks arising from
securities the Fund owns or anticipates purchasing, or the U.S. dollar value of
interest and dividends paid on those securities. The Fund does not intend to
enter into forward contracts on a regular or continuing basis. The Fund will not
have more than 25% of its total assets committed to forward contracts, or
maintain a net exposure to forward contracts that would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Portfolio's
investment securities or other assets denominated in that currency.
If the Fund makes delivery of the foreign currency at or before the settlement
of a forward contract, it may be required to obtain the currency through the
conversion of assets of the Fund into the currency. The Fund may close out a
forward contract obligating it to purchase a foreign currency by selling an
offsetting contract, in which case it will realize a gain or a loss.
2. RISKS
Foreign currency transactions involve certain costs and risks. The Fund incurs
foreign exchange expenses in converting assets from one currency to another.
Forward contracts involve a risk of loss if the Adviser is inaccurate in its
prediction of currency movements. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The precise matching of forward contract
amounts and the value of the securities involved is generally not possible.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency if the market value of the security is less than the amount of the
foreign currency the Fund is obligated to deliver under the forward contract and
the decision is made to sell the security and make delivery of the foreign
currency. The use of forward contracts as a hedging technique does not eliminate
fluctuations in the prices of the underlying securities the Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. Although forward
contracts can reduce the risk of loss due to a decline in the value of the
hedged currencies, they also limit any potential gain that might result from an
increase in the value of the currencies.
D. OPTIONS AND FUTURES CONTRACTS
1. GENERAL
The Fund may purchase or write (sell) put and call options to enhance the Fund's
performance or to hedge against a decline in the value of securities owned by
the Fund or an increase in the price of securities that the Fund plans to
purchase. The Fund may purchase or write (sell) options on securities,
currencies and stock indices. The Fund may also invest in stock index and
foreign currency futures contracts and options on those contracts. The Fund may
purchase put and call options written by others and may write covered calls. The
Fund may not write puts on futures contracts and may only write covered put
options on securities, foreign currencies and stock indices to effect closing
transactions. The Fund may only invest in options that trade on an exchange or
over-the-counter.
2. OPTIONS AND FUTURES STRATEGIES
OPTIONS ON SECURITIES. A call option is a contract under which the purchaser of
the call option, in return for a premium paid, has the right to buy the security
(or index) underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price. A put option gives
its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy, upon exercise of the
option, the underlying security (or a cash amount equal to the value of the
index) at the exercise price. The amount of a premium received or paid for an
option is based upon certain factors, including the market price of the
underlying security, the relationship of the exercise price to the market price,
the historical price volatility of the underlying security, the option period
and interest rates.
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OPTIONS ON INDICES. An index assigns relative values to the securities in the
index, and the index fluctuates with changes in the market values of the
securities included in the index. Index options operate in the same way as the
more traditional options on securities except that index options are settled
exclusively in cash and do not involve delivery of securities. Thus, upon
exercise of index options, the purchaser will realize and the writer will pay an
amount based on the differences between the exercise price and the closing price
of the index.
OPTIONS ON FOREIGN CURRENCY. Options on foreign currency operate in the same way
as more traditional options on securities except that currency options are
settled exclusively in the currency subject to the option. The value of a
currency option is dependent upon the value of the currency relative to the U.S.
dollar and has no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, the Fund may be disadvantaged by having to deal in an
odd lot market (generally consisting in transactions of less than $1 million)
for the underlying currencies at prices that are less favorable than round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies are open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
OPTIONS ON FUTURES. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell a security or currency, at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position to the holder of the option will be
accompanied by transfer to the holder of an accumulated balance representing the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future.
FUTURES CONTRACTS AND INDEX FUTURES CONTRACTS. A futures contract is a bilateral
agreement where one party agrees to accept, and the other party agrees to make,
delivery of cash, an underlying debt security or a currency, as called for in
the contract, at a specified date and at an agreed upon price. An index futures
contract involves the delivery of an amount of cash equal to a specified dollar
amount multiplied by the difference between the index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the securities comprising the index
is made. Generally, these futures contracts are closed out prior to the
expiration date of the contracts.
3. LIMITATIONS ON OPTIONS AND FUTURES TRANSACTIONS
The Fund will not selling futures contracts, buying put options and writing call
options if, as a result, more than 25% of the Fund's total assets would be
hedged through the use of options and futures contracts. The Fund will not buy
futures contracts or write put options whose underlying value exceeds 25% of the
Fund's total assets. The Fund will not purchase call options if the value of
option premiums purchased would exceed 5% of the Fund's total assets.
The 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.
4. RISKS OF OPTIONS AND FUTURES TRANSACTIONS
There are certain investment risks associated with options and futures
transactions. These risks include: (1) dependence on the Adviser's ability to
predict movements in the prices of individual securities and fluctuations in the
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general securities markets; (2) imperfect correlations between movements in the
prices of options and movements in the price of the securities (or indices)
hedged or used for cover which may cause a given hedge not to achieve its
objective; (3) the fact that the skills and techniques needed to trade these
instruments are different from those needed to select the securities in which a
Fund invests; and (4) lack of assurance that a liquid secondary market will
exist for any particular instrument at any particular time, which, among other
things, may hinder a Fund's ability to limit exposures by closing its positions.
Other risks include the inability of a Fund, as the writer of covered call
options, to benefit from any appreciation of the underlying securities above the
exercise price, and the possible loss of the entire premium paid for options
purchased by the Fund. In addition, the futures exchanges may limit the amount
of fluctuation permitted in certain futures contract prices on related options
during a single trading day. A Fund may be forced, therefore, to liquidate or
close out a futures contract position at a disadvantageous price. There is no
assurance that a counterparty in an over-the-counter option transaction will be
able to perform its obligations. A Fund may use various futures contracts that
are relatively new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market in those
contracts will develop or continue to exist. A Fund's activities in the futures
and options markets may result in higher portfolio turnover rates and additional
brokerage costs, which could reduce a Fund's yield.
E. LEVERAGE TRANSACTIONS
1. GENERAL
The Fund may use leverage to increase potential returns. Leverage involves
special risks and may involve speculative investment techniques. Leverage exists
when cash made available to a Fund through an investment technique is used to
make additional Fund investments. Borrowing for other than temporary or
emergency purposes, lending portfolio securities, entering into reverse
repurchase agreements, and purchasing securities on a when-issued, delayed
delivery or forward commitment basis are transactions involving leverage. The
Fund uses these investment techniques only when the Adviser believes that the
leveraging and the returns available to the Fund from investing the cash will
provide investors a potentially higher return.
REVERSE REPURCHASES. The Fund may also enter into reverse repurchase agreements.
A reverse repurchase agreement is a transaction in which a Fund sells securities
to a bank or securities dealer and simultaneously commits to repurchase the
security from the bank or dealer at an agreed upon date and at a price
reflecting a market rate of interest unrelated to the sold security. An
investment of a Fund's assets in reverse repurchase agreements will increase the
volatility of the Fund's net asset value per unit. A Fund will use the proceeds
of reverse repurchase agreements to fund redemptions or to make investments.
SECURITIES LENDING. The Fund may lend portfolio securities or participate in
repurchase agreements in an amount up to 33 1/3% of its total assets to brokers,
dealers and other financial institutions. Repurchase agreements are transactions
in which a Fund purchases a security and simultaneously agrees to resell that
security to the seller at an agreed upon price on an agreed upon future date,
normally, one to seven days later. If a Fund enters into a repurchase agreement,
it will maintain possession of the purchased securities and any underlying
collateral. Securities loans and repurchase agreements must be continuously
collateralized and the collateral must have market value at least equal to the
value of the Fund's loaned securities, plus accrued interest or, in the case of
repurchase agreements, equal to the repurchase price of the securities, plus
accrued interest. In a portfolio securities lending transaction, 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 as well as the
interest on the collateral securities, less any fees (such as finders or
administrative fees) the Fund pays in arranging the loan. The Fund may share the
interest it receives on the collateral securities with the borrower. The terms
of a Fund's loans permit the Fund to reacquire loaned securities on five
business days' notice or in time to vote on any important matter. Loans are
subject to termination at the option of a Fund or the borrower at any time, and
the borrowed securities must be returned when the loan is terminated.
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WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Fund may purchase securities
offered on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. When these transactions are negotiated, the price,
which is generally expressed in yield terms, is fixed at the time the commitment
is made, but delivery and payment for the securities take place at a later date.
Normally, the settlement date occurs within two months after the transaction,
but delayed settlements beyond two months may be negotiated. During the period
between a commitment and settlement, no payment is made for the securities
purchased by the purchaser and, thus, no interest accrues to the purchaser from
the transaction. At the time a Fund makes the commitment to purchase securities
on a when-issued or delayed delivery basis, the Fund will record the transaction
as a purchase and thereafter reflect the value each day of such securities in
determining its net asset value.
2. RISKS
Leverage creates the risk of magnified capital losses. Borrowings and other
liabilities that exceed the equity base of the Fund may magnify losses incurred
by a Fund. Leverage may involve the creation of a liability that requires a Fund
to pay interest (for instance, reverse repurchase agreements) or the creation of
a liability that does not entail any interest costs (for instance, forward
commitment costs).
The risks of leverage include a higher volatility of the net asset value of the
Fund's securities and the relatively greater effect on the net asset value of
the securities caused by favorable or adverse market movements or changes in the
cost of cash obtained by leveraging and the yield from invested cash. So long as
a Fund is able to realize a net return on its investment portfolio that is
higher than interest expense incurred, if any, leverage will result in higher
current net investment income for the Fund than if the Fund were not leveraged.
Changes in interest rates and related economic factors could cause the
relationship between the cost of leveraging and the yield to change so that
rates involved in the leveraging arrangement may substantially increase relative
to the yield on the obligations in which the proceeds of the leveraging have
been invested. To the extent that the interest expense involved in leveraging
approaches the net return on a Fund's investment portfolio, the benefit of
leveraging will be reduced, and, if the interest expense on borrowings were to
exceed the net return to investors, the Fund's use of leverage would result in a
lower rate of return than if the Fund were not leveraged. In an extreme case, if
a Fund's current investment income were not sufficient to meet the interest
expense of leveraging, it could be necessary for the Fund to liquidate certain
of its investments at an inappropriate time.
SEGREGATED ACCOUNTS. In order to attempt to reduce the risks involved in various
transactions involving leverage, each Fund's custodian will set aside and
maintain, in a segregated account, cash and liquid securities. The account's
value, which is marked to market daily, will be at least equal to a Fund's
commitments under these transactions.
F. ILLIQUID AND RESTRICTED SECURITIES
1. GENERAL
The Fund may not acquire securities or invest in repurchase agreements if, as a
result, more than 15% of the Fund's net assets (taken at current value) would be
invested in illiquid securities.
The term "illiquid securities" 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. Illiquid securities include: (1)
repurchase agreements not entitling the holder to payment of principal within
seven days (2) purchased over-the-counter options; (3) securities which are not
readily marketable; and (4) except as otherwise determined by the Adviser,
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act ("restricted securities").
2. RISKS
Limitations on resale may have an adverse effect on the marketability of a
security and the Fund might also have to register a restricted security in order
to dispose of it, resulting in expense and delay. A Fund might not be able to
dispose of restricted or illiquid securities promptly or at reasonable prices
and might thereby experience difficulty
7
<PAGE>
satisfying redemptions. There can be no assurance that a liquid market will
exist for any security at any particular time. Any security, including
securities determined by the Adviser to be liquid, can become illiquid.
3. DETERMINATION OF LIQUIDITY
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid and has delegated the function of making
determinations of liquidity to the Adviser, pursuant to guidelines approved by
the Board. The Adviser determines and monitors the liquidity of the portfolio
securities and reports periodically on its decisions to the Board. The Adviser
takes into account a number of factors in reaching liquidity decisions,
including but not limited to: (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer.
An institutional market has developed for certain restricted securities.
Accordingly, contractual or legal restrictions on the resale of a security may
not be indicative of the liquidity of the security. If such securities are
eligible for purchase by institutional buyers in accordance with Rule 144A under
the 1933 Act or other exemptions, the Adviser may determine that the securities
are not illiquid.
G. FOREIGN SECURITIES
The Fund may invest in foreign securities. Investments in the securities of
foreign issuers may involve risks in addition to those normally associated with
investments in the securities of U.S. issuers. All foreign investments are
subject to risks of (1) foreign political and economic instability; (2) adverse
movements in foreign exchange rates; (3) the imposition or tightening of
exchange controls or other limitations on repatriation of foreign capital; and
(4) changes in foreign governmental attitudes towards private investment,
including potential nationalization, increased taxation or confiscation of your
assets.
Dividends payable on foreign securities may be subject to foreign withholding
taxes, thereby reducing the income available for distribution to you. Commission
rates payable on foreign transactions are generally higher than in the United
States. Foreign accounting, auditing and financial reporting standards differ
from those in the United States, and therefore, less information may be
available about foreign companies than is available about issuers of comparable
U.S. companies. Foreign securities also may trade less frequently and with lower
volume and may exhibit greater price volatility than United States securities.
Changes in foreign exchange rates will affect the U.S. dollar value of all
foreign currency-denominated securities held by a Fund. Exchange rates are
influenced generally by the forces of supply and demand in the foreign currency
markets and by numerous other political and economic events occurring outside
the United States, many of which may be difficult, if not impossible, to
predict.
Income from foreign securities will be received and realized in foreign
currencies, and a Fund is required to compute and distribute income in U.S.
dollars. Accordingly, a decline in the value of a particular foreign currency
against the U.S. dollar after a Fund's income has been earned and computed in
U.S. dollars may require the Fund to liquidate portfolio securities to acquire
sufficient U.S. dollars to make a distribution. Similarly, if the exchange rate
declines between the time a Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the Fund may be required to liquidate additional foreign
securities to purchase the U.S. dollars required to meet such expenses.
H. TEMPORARY DEFENSIVE POSITION
The Fund may assume a temporary defensive position and may invest without limit
in money market instruments that are of prime quality. Prime quality money
market instruments are those instruments that are rated in one of the two
short-term highest rating categories by an NRSRO or, if not rated, determined by
the Adviser to be of comparable quality.
8
<PAGE>
Money market instruments usually have maturities of one year or less and fixed
rates of return. The money market instruments in which the Fund may invest
include U.S. Government Securities, commercial paper, time deposits, bankers
acceptances and certificates of deposit issued by domestic banks, corporate
notes and short-term bonds and money market mutual funds. The Fund may only
invest in money market mutual funds to the extent permitted by the 1940 Act.
The money market instruments in which the Fund may invest may have variable or
floating rates of interest. These obligations include master demand notes that
permit investment of fluctuating amounts at varying rates of interest pursuant
to direct arrangement with the issuer of the instrument. The issuer of these
obligations often has the right, after a given period, to prepay the outstanding
principal amount of the obligations upon a specified number of days' notice.
These obligations generally are not traded, nor generally is there an
established secondary market for these obligations. To the extent a demand note
does not have a 7-day or shorter demand feature and there is no readily
available market for the obligation, it is treated as an illiquid security.
2. INVESTMENT LIMITATIONS
For purposes of all investment policies of the Fund: (1) the term 1940 Act
includes the rules thereunder, SEC interpretations and any exemptive order upon
which the Fund may rely; and (2) the term Code includes the rules thereunder,
IRS interpretations and any private letter ruling or similar authority upon
which the Fund may rely.
Except as required by the 1940 Act or the Code, 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.
A fundamental policy of the Fund and the Fund's investment objective, cannot be
changed without the affirmative vote of the lesser of: (1) 50% of the
outstanding shares of the Fund; or (2) 67% of the shares of the Fund present or
represented at a shareholders meeting at which the holders of more than 50% of
the outstanding shares of the Fund are present or represented. A nonfundamental
policy of the Fund may be changed by the Board without shareholder approval.
A. FUNDAMENTAL LIMITATIONS
The Fund has adopted the following investment limitations, which are fundamental
policies of the Fund. The Fund may not:
1. BORROWING
Borrow money, except that the Fund may enter into commitments to
purchase securities in accordance with its investment program,
including delayed-delivery and when-issued securities and reverse
repurchase agreements, provided that the total amount of any such
borrowing does not exceed 33 1/3% of the Fund's total assets.
2. CONCENTRATION
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. DIVERSIFICATION
With respect to 75% of the value of its total assets, purchase
securities, other than U.S. Government Securities, of any one issuer,
if: (1) more than 5% of the Fund's total assets taken at market value
9
<PAGE>
would at the time of purchase be invested in the securities of that
issuer; or (2) 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. UNDERWRITING ACTIVITIES
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
Make loans to other persons except for loans of portfolio securities
and except through the use of repurchase agreements and through the
purchase of debt securities which are otherwise permissible
investments.
6. PURCHASES AND SALES OF REAL ESTATE
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. PURCHASES AND SALES OF COMMODITIES
Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent a Fund from purchasing or selling options and futures contracts
or from investing in securities or other instruments backed by physical
commodities).
8. ISSUANCE OF SENIOR SECURITIES
Issue any senior security (as defined in the 1940 Act), except that:
(1) the Fund may engage in transactions that may result in the issuance
of senior securities to the extent permitted under applicable
regulations and interpretations of the 1940 Act or an exemptive order;
(2) the Fund may acquire securities to the extent otherwise permitted
by its investment policies, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (3) subject to the
restrictions set forth above, the Fund may borrow money as authorized
by the 1940 Act.
B. NONFUNDAMENTAL LIMITATIONS
The Fund has adopted the following nonfundamental investment limitations that
may be changed by the Board without shareholder approval. The Fund may not:
1. BORROWING
May borrow money for temporary or emergency purposes in an amount not
exceeding 5% of the value of its total assets at the time when the loan
is made; provided that any such temporary or emergency borrowings
representing more than 5% of the Fund's total assets must be repaid
before the Fund may make additional investments
May not purchase securities for investment while any borrowing equaling
5% or more of the Fund's total assets is outstanding or borrow money,
except for temporary or emergency purposes (including the meeting of
redemption requests), in an amount exceeding 5% of the value of the
Fund's total assets.
10
<PAGE>
2. PLEDGING
May not pledge, mortgage or hypothecate its assets, except to secure
permitted indebtedness. The deposit in escrow of securities in
connection with the writing of put and call options, collateralized
loans of securities and collateral arrangements with respect to margin
for futures contracts are not deemed to be pledges or hypothecations
for this purpose.
3. INVESTMENTS IN OTHER INVESTMENT COMPIES
May not invest in securities of another registered investment company,
except in connection with a merger, consolidation, acquisition or
reorganization; and except that the Fund may invest in money market
funds and privately-issued mortgage related securities to the extent
permitted by the 1940 Act.
4. MARGIN AND SHORT SELLING
May not purchase securities on margin, or make short sales of
securities (except short sales against the box), except for the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities, but the Fund may make margin deposits in
connection with permitted transactions in options, futures contracts
and options on futures contracts.
5. ILLIQUID SECURITIES
May not acquire securities or invest in repurchase agreements with
respect to any securities if, as a result, more than (i) 15% of the
Fund's net assets (taken at current value) would be invested in
repurchase agreements not entitling the holder to payment of principal
within seven days and in securities which are not readily marketable,
including securities that are illiquid by virtue of restrictions on the
sale of such securities to the public without registration under the
Securities Act of 1933 ("Restricted Securities") or (ii) 10% of the
Fund's total assets would be invested in Restricted Securities.
3. PERFORMANCE DATA AND ADVERTISING
A. PERFORMANCE DATA
The Fund may quote performance in various ways. All performance information
supplied in advertising, sales literature, shareholder reports or other
materials is historical and is not intended to indicate future returns.
The Fund may compare any of its performance information with:
o Data published by independent evaluators such as Morningstar, Inc.,
Lipper, Inc., IBC Financial Data, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment
companies ("Fund Tracking Companies").
o The performance of other mutual funds.
o The performance of recognized stock, bond and other indices, including
but not limited to the Standard & Poor's 500(R) Index, the Russell
2000(R) Index, the Russell MidcapTM Index, the Russell 1000(R) Value
Index, the Russell 2500(R) Index, the Morgan Stanley - Europe,
Australian and Far East Index, the Dow Jones Industrial Average, the
Salomon Brothers Bond Index, the Shearson Lehman Bond Index, U.S.
Treasury bonds, bills or notes and changes in the Consumer Price Index
as published by the U.S. Department of Commerce.
Performance information may be presented numerically or in a table, graph, or
similar illustration.
11
<PAGE>
Indices are not used in the management of the Fund but rather are standards by
which the Fund's Adviser and shareholders may compare the performance of the
Fund to an unmanaged composite of securities with similar, but not identical,
characteristics as the Fund.
The Fund may refer to: (1) general market performances over past time periods
such as those published by Ibbotson Associates (for instance, its "Stocks,
Bonds, Bills and Inflation Yearbook"); (2) mutual fund performance rankings and
other data published by Fund Tracking Companies; and (3) material and
comparative mutual fund data and ratings reported in independent periodicals,
such as newspapers and financial magazines.
The Fund's performance will fluctuate in response to market conditions and other
factors.
B. PERFORMANCE CALCULATIONS
The Fund's performance may be quoted in terms of yield or total return. Table 1
in Appendix C includes performance information for the Fund.
1. SEC YIELD
Standardized SEC yields for the Fund used in advertising are computed by
dividing the Fund's interest income (in accordance with specific standardized
rules) for a given 30 day or one month period, net of expenses, by the average
number of shares entitled to receive income 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 accordance
with specific standardized rules) in order to arrive at an annual percentage
rate.
Capital gains and losses generally are excluded from these calculations.
Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for the Fund may differ from the rate of
distribution of income from the Fund 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 the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day and that the 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. Financial intermediaries may charge their customers that
invest in the Fund fees in connection with that investment. This will have the
effect of reducing the Fund's after-fee yield to those shareholders.
The yields of the Fund are not fixed or guaranteed, and an investment in the
Fund is not insured or guaranteed. Accordingly, yield information should not be
used to compare shares of the 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 that are insured or
guaranteed.
Yield quotations are based on amounts invested in the Fund net of any applicable
sales charges that may be paid by an investor. A computation of yield that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
The Fund does not charge a sales charges.
12
<PAGE>
Yield is calculated according to the following formula:
a - b
Yield = 2[(------ + 1)6 - 1]
cd
Where:
a = ividends and interest earned during the period
b = xpenses accrued for the period (net of reimbursements)
c = he average daily number of shares outstanding during
the period that were entitled to receive dividends
d = he maximum offering price per share on the last day of
the period
2. TOTAL RETURN CALCULATIONS
The Fund's total return shows its overall change in value, including changes in
share price and assuming all of the Fund's distributions are reinvested.
Total return figures may be based on amounts invested in a fund net of sales
charges that may be paid by an investor. A computation of total return that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
The Fund does not charge asales charge.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is calculated using a
formula prescribed by the SEC. To calculate standard average annual total
returns the Fund: (1) determines the growth or decline in value of a
hypothetical historical investment in the Fund over a stated period; and (2)
calculates the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. For example, a cumulative return of 100% over ten years would produce an
average annual total return of 7.18%. While average annual returns are a
convenient means of comparing investment alternatives, investors should realize
that performance is not constant over time but changes from year to year, and
that average annual returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.
Average annual total return is calculated 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
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
Because average annual returns tend to smooth out variations in the Fund's
returns, shareholders should recognize that they are not the same as actual
year-by-year results.
OTHER MEASURES OF TOTAL RETURN. Standardized total return quotes may be
accompanied by non-standardized total return figures calculated by alternative
methods.
The Fund may quote unaveraged or cumulative total returns that reflect
a Fund's performance over a stated period of time.
Total returns may be stated in their components of income and capital
(including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to
total return.
13
<PAGE>
Any total return may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over any time period. Total returns may be quoted with or without
taking into consideration a fund's front-end sales charge or contingent deferred
sales charge (if applicable).
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
C. OTHER MATTERS
The Fund may also include various information in its advertising, sales
literature, shareholder reports or other materials including, but not limited
to: (1) portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer or by maturity; (2) statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
by an investor to meet specific financial goals, such as funding retirement,
paying for children's education and financially supporting aging parents; (3)
information (including charts and illustrations) showing the effects of
compounding interest (compounding is the process of earning interest on
principal plus interest that was earned earlier; interest can be compounded at
different intervals, such as annually, quarterly or daily); (4) information
relating to inflation and its effects on the dollar; (for example, after ten
years the purchasing power of $25,000 would shrink to $16,621, $14,968, $13,465
and $12,100, respectively, if the annual rates of inflation were 4%, 5%, 6% and
7%, respectively); (5) information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar-cost
averaging; (6) biographical descriptions of the Fund's portfolio managers and
the portfolio management staff of the Fund's investment adviser, summaries of
the views of the portfolio managers with respect to the financial markets, or
descriptions of the nature of the Adviser's and its staff's management
techniques; (7) the results of a hypothetical investment in the Fund over a
given number of years, including the amount that the investment would be at the
end of the period; (8) the effects of investing in a tax-deferred account, such
as an individual retirement account or Section 401(k) pension plan; (9) the net
asset value, net assets or number of shareholders of the Fund as of one or more
dates; and (10) a comparison of the Fund's operations to the operations of other
funds or similar investment products, such as a comparison of the nature and
scope of regulation of the products and the products' weighted average maturity,
liquidity, investment policies, and the manner of calculating and reporting
performance.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,188 at the end
of the second year (an increase of $98). The extra $8 that was earned on the $90
interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of a Fund's performance.
The Fund may advertise information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar cost
averaging. In a dollar-cost averaging program, an investor invests a fixed
dollar amount in the Fund at periodic intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not insure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in the Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
14
<PAGE>
<TABLE>
<S> <C> <C> <C>
SYSTEMATIC SHARE SHARES
PERIOD INVESTMENT PRICE PURCHASED
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
TOTAL AVERAGE TOTAL
INVESTED $600 PRICE $15.17 SHARES 41.81
</TABLE>
In connection with its advertisements, a Fund may provide "shareholder's
letters" which serve to provide shareholders or investors with an introduction
into the Fund's, the Trust's or any of the Trust's service provider's policies
or business practices
4. MANAGEMENT
A. TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Trust, their positions with the
Trust, address, date of birth and 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 (*).
<TABLE>
<S> <C>
- -------------------------------------------- ----------------------------------------------------------------------
NAME, POSITION WITH THE TRUST, PRINCIPAL OCCUPATION(S) DURING
DATE OF BIRTH AND ADDRESS PAST 5 YEARS
- -------------------------------------------- ----------------------------------------------------------------------
John Y. Keffer*, Chairman and President President, Forum Financial Group, LLC (a mutual fund services
Born: July 15, 1942 holding company)
Two Portland Square President, Forum Fund Services, LLC. (Trust's underwriter)
Portland, Maine 04101 Chairman and President*, Core Trust (Delaware) (registered
investment company)
- -------------------------------------------- ----------------------------------------------------------------------
Costas Azariadas, Trustee Professor of Economics, University of California-Los Angeles
Born: February 15, 1943 Trustee, Core Trust (Delaware)
Department of Economics
University of California
Los Angeles, CA 90024
- -------------------------------------------- ----------------------------------------------------------------------
James C. Cheng, Trustee President, Technology Marketing Associates
Born: July 26, 1942 (marketing company for small and medium size businesses in New
27 Temple Street England)
Belmont, MA 02718 Trustee, Core Trust (Delaware)
- -------------------------------------------- ----------------------------------------------------------------------
J. Michael Parish, Trustee Partner-Thelen Reid & Priest LLP (law firm) since 1995
Born: November 9, 1943 Partner-Winthrop Stimson Putnam & Roberts (law firm) from 1989-1995
40 West 57th Street Trustee, Core Trust (Delaware)
New York, NY 10019
- -------------------------------------------- ----------------------------------------------------------------------
David I. Goldstein, Vice President General Counsel, Forum Financial Group
Born: August 3, 1961 Secretary, Forum Fund Services, Inc. (Trust's underwriter)
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Stacey Hong, Treasurer Director, Fund Accounting, Forum Financial Group, LLC
Born: May 10, 1966 Treasurer, Core Trust (Delaware)
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------- ----------------------------------------------------------------------
Dawn Taylor, Asst. Treasurer Manager/Senior Tax Specialist, Tax Department, Forum Financial
Born: May 14, 1964 Group, LLC since 1997
Two Portland Square Senior Tax Accountant, Pardy Bingham &Burrell during 1997
Portland, Maine 04101 Senior Tax Specialist, Forum Financial Group, LLC from 1994 to 1997
- -------------------------------------------- ----------------------------------------------------------------------
Leslie K. Klenk, Secretary Assistant Counsel, Forum Financial Group, LLC since 1998
Born: August 24, 1964 Vice President/Associate General Counsel, Smith Barney Inc.
Two Portland Square (brokerage firm) from 1993 through 1998
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
Pamela Stutch, Asst. Secretary Fund Administrator, Forum Financial Group, LLC since 1998
Born: June 29, 1967 Law Student, Temple University from 1994-1997
Two Portland Square
Portland, Maine 04101
- -------------------------------------------- ----------------------------------------------------------------------
</TABLE>
B. COMPENSATION OF TRUSTEES AND OFFICERS
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 $1,000 for each audit committee
meeting attended on a date when a Board meeting is not held. In addition to the
$1,000 for each Board meeting attended, each Trustee is paid $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.
Trustees that are affiliated with the Adviser receive no compensation for their
services or reimbursement for their associated expenses. No officer of the Trust
is compensated by the Trust.
The following table sets forth the fees paid to each Trustee by the Trust for
the fiscal year ended March 31, 1999.
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
Compensation Total Compensation from Trust
Trustee from Trust Benefits Retirement and Fund Complex
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
John Y. Keffer $0 $0 $0 $0
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
Costas Azariadis $301.71 $0 $0 $301.71
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
James C. Cheng $301.71 $0 $0 $301.71
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
J. Michael Parish $301.71 $0 $0 $301.71
- ------------------------- ------------------ -------------- ---------------- ----------------------------------
</TABLE>
C. INVESTMENT ADVISER
1. SERVICES OF ADVISER
The Adviser serves as investment adviser to the Fund pursuant to an investment
advisory agreement (the "Agreement") with the Trust. Under the Agreement, the
Adviser furnishes at its own expense all services, facilities and personnel
necessary in connection with managing a Fund's investments and effecting
portfolio transactions for a Fund.
2. OWNERSHIP OF ADVISER
The Adviser is a privately-owned company controlled by Peter A. Vlachos.
16
<PAGE>
3. FEES
The Adviser's fee is calculated as a percentage of the Fund's average net
assets. The fee is accrued daily by the Fund and is paid monthly based on
average net assets for the previous month.
In addition to receiving its advisory fee from the Fund, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets they invested in the Fund. If you have a separately managed account with
the Adviser with assets invested in the Fund, the Adviser will credit an amount
equal to all or a portion of the fees received by the Adviser against any
investment management fee received from the client.
Table 1 in Appendix B shows the dollar amount of the fees payable by the Fund to
the Adviser, the amount of fees waived by the Adviser, and the actual fees
received by the Adviser. The data are for the past three fiscal years.
4. OTHER PROVISIONS OF ADVISER'S AGREEMENT
The Agreement remains in effect for a period of one year from the date of its
effectiveness. Subsequently, the Agreement must be approved at least annually by
the Board or by majority vote of the shareholders, and in either case by a
majority of the Trustees who are not parties to the agreement or interested
persons of any such party.
The Agreement is terminable without penalty by the Trust regarding the Fund on
60 days' written notice when authorized either by vote of the Fund's
shareholders or by a majority vote of the Board, or by the Adviser on 60 days'
written notice to the Trust. The Agreement terminates immediately upon
assignment.
Under the Agreement, the Adviser is not liable for any error of judgment,
mistake of law, for any loss arising out of any investment, or in any event
whatsoever except for willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of its obligations
and duties under the agreement.
D. DISTRIBUTOR
1. DISTRIBUTOR; SERVICES AND COMPENSATION OF DISTRIBUTOR
FFS, the distributor (also known as principal underwriter) of the shares of the
Fund, is located at Two Portland Square, Portland, Maine 04101. FFS is a
registered broker-dealer and is a member of the National Association of
Securities Dealers, Inc. Prior to August 1, 1999, Forum Financial Services, Inc.
("FFSI") was the distributor of each Fund pursuant to similar terms and
compensation.
FFS, FAdS, FAcS and the Transfer Agent are each controlled indirectly by Forum
Financial Group, LLC. John Y. Keffer controls forum Financial Group, LLC.
Under a distribution agreement with the Trust (the "Distribution Agreement"),
FFS acts as the agent of the Trust in connection with the offering of shares of
the Fund. FFS continually distributes shares of the Fund on a best effort basis.
FFS has no obligation to sell any specific quantity of Fund shares.
FFS may enter into arrangements with various financial institutions through
which you may purchase or redeem shares. FFS may, at its own expense and from
its own resources, compensate certain persons who provide services in connection
with the sale or expected sale of shares of the Fund.
FFS 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.
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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 the 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.
FFS does not receive any compensation for distributing the Fund's shares. FFSI,
the Fund's distributor prior to August 1, 1999 also did not receive compensation
for distributing the Fund's shares.
2. OTHER PROVISIONS OF DISTRIBUTOR'S AGREEMENT
The Distribution Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party.
The Distribution Agreement is terminable without penalty by the Trust with
respect to the Fund on 60 days' written notice when authorized either by vote of
the Fund's shareholders or by a majority vote of the Board, or by FFS on 60
days' written notice to the Trust.
Under the Distribution Agreement, FFS is not liable to the Trust or the Trust's
shareholders for any error of judgment or mistake of law, for any loss arising
out of any investment or for any act or omission in the performance of its
duties to a Fund, except for willful misfeasance, bad faith or gross negligence
in the performance of its duties or by reason of reckless disregard of its
obligations and duties under the agreement.
Under the Distribution Agreement, FFS and certain related parties (such as FFS's
officers and persons that control FFS) are indemnified by the Trust against all
claims and expenses in any way related to alleged untrue statements of material
fact contained in a Fund's Registration Statement or any alleged omission of a
material fact required to be stated in the Registration Statement to make
statements contained therein not misleading. The Trust, however, will not
indemnify FSS for any such misstatements or omissions if they were made in
reliance upon information provided in writing by FSS in connection with the
preparation of the Registration Statement.
E. OTHER FUND SERVICE PROVIDERS
1. ADMINISTRATOR
As administrator, pursuant to an administration agreement with the Trust (the
"Admin Agreement"), FAdS is responsible for the supervision of the overall
management of the Trust, providing the Trust with general office facilities and
providing persons satisfactory to the Board to serve as officers of the Trust.
For its services, FAdS receives a fee from a Fund at an annual rate of 0.25% of
the average daily net assets of each Fund. The fee is accrued daily by the Fund
and is paid monthly based on average net assets for the previous month.
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The Admin Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Admin Agreement is terminable without penalty by the Trust or by FAdS
with respect to a Fund on 60 days' written notice.
Under the Admin Agreement, FAdS is not liable to the Trust or the Trust's
shareholders for any act or omission, 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 agreement. Under the
Agreement, FAdS and certain related parties (such as FAdS's officers and persons
who control FAdS) are indemnified by the Trust against any and all claims and
expenses related to FAdS's actions or omissions that are consistent with FAdS's
contractual standard of care.
Table 2 in Appendix B shows the dollar amount of the fees payable by the Funds
to FAdS, the amount of the fee waived by FAdS, and the actual fees received by
FAdS. The data are for the past three fiscal years.
2. FUND ACCOUNTANT
As fund accountant, pursuant to an accounting agreement with the Trust (the
"Accounting Agreement"), FAcS provides fund accounting services to the Fund.
These services include calculating the NAV per share of the Fund and preparing
the Fund's financial statements and tax returns.
For its services, FAcS receives a fee from the Fund at an annual rate of $36,000
and certain surcharges based upon the number and type of the Fund's portfolio
transactions and positions. The fee is accrued daily by the Fund and is paid
monthly based on the transactions and positions for the previous month.
The Accounting Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Accounting Agreement is terminable without penalty by the Trust or by
FAcS with respect to a Fund on 60 days' written notice.
Under the Accounting Agreement, FAcS is not liable for any action or omission in
the performance of its duties to a Fund, except for willful misfeasance, bad
faith, gross negligence or by reason of reckless disregard of its obligations
and duties under the agreement. Under the Accounting Agreement, FAcS and certain
related parties (such as FAcS's officers and persons who control FAcS) are
indemnified by the Trust against any and all claims and expenses related to
FAcS's actions or omissions that are consistent with FAcS's contractual standard
of care.
Under the Accounting Agreement, in calculating a Fund's NAV per share, FAcS is
deemed not to have committed an error if the NAV per share it calculates is
within 1/10 of 1% of the actual NAV per share (after recalculation). The
agreement also provides that FAcS will not be liable to a shareholder for any
loss incurred due to an NAV difference if such difference is less than or equal
1/2 of 1% or less than or equal to $10.00. In addition, FAcS is not liable for
the errors of others, including the companies that supply securities prices to
FAcS and the Fund.
Table 3 in Appendix B shows the dollar amount of the fees payable by the Fund to
FAcS, the amount of the fee waived by FAcS, and the actual fees received by
FAcS. The data are for the past three fiscal years.
3. TRANSFER AGENT
As transfer agent and distribution paying agent, pursuant to a transfer agent
agreement with the Trust (the "Transfer Agent Agreement"), the Transfer Agent
maintains an account for each shareholder of record of the Fund and is
responsible for processing purchase and redemption requests and paying
distributions to shareholders of record. The Transfer Agent is located at Two
Portland Square, Portland, Maine 04101 and is registered as a transfer agent
with the SEC.
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For its services, the Transfer Agent receives with respect to the Fund an annual
fee of $12,000 plus $25 per shareholder account.
The Transfer Agent Agreement must be approved at least annually by the Board or
by majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Transfer Agent Agreement is terminable without penalty by the Trust
or by the Transfer Agent with respect to a Fund on 60 days' written notice.
Under the Transfer Agent Agreement, the Transfer Agent is not liable for any act
in the performance of its duties to a Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties under the agreement.
Under the agreement, the Transfer Agent and certain related parties (such as the
Transfer Agent's officers and persons who control the Transfer Agent) are
indemnified by the Trust against any and all claims and expenses related to
FAdS's actions or omissions that are consistent with FAdS's contractual standard
of care.
Table 4 in Appendix B shows the dollar amount of the fees payable by the Fund to
FSS, the amount of the fee waived by FSS, and the actual fees received by FSS.
The data are for the past three fiscal years.
4. CUSTODIAN
As custodian, pursuant to an agreement with the Trust, Forum Trust, LLC
safeguards and controls the Fund's cash and securities, determines income and
collects interest on Fund investments. The Custodian may employ subcustodians to
provide custody of a Fund's domestic and foreign assets. The Custodian is
located at Two Portland Square, Portland, Maine 04101.
For its services, the Custodian receives an annualized percentage of the average
daily net assets of the Fund. The Fund also pays an annual domestic custody fee
as well as certain other transaction fees. These fees are accrued daily by the
Fund and are paid monthly based on average net assets and transactions for the
previous month.
5. LEGAL COUNSEL
Seward & Kissel LLP, 1200 G Street, N.W., Washington, D.C. 20005 passes upon
legal matters in connection with the issuance of shares of the Trust.
6. INDEPENDENT AUDITORS
Deloitte & Touche LLP, 200 Berkeley Street, 14th Floor, Boston, Massachusetts,
02116-5022, independent auditors, have been selected as auditors for the Fund.
The auditors audit the annual financial statements of the Fund and provide the
Fund with an audit opinion. The auditors also review certain regulatory filings
of the Fund and the Fund's tax returns.
5. PORTFOLIO TRANSACTIONS
A. HOW SECURITIES ARE PURCHASED AND SOLD
Purchases and sales of portfolio securities that are fixed income securities
(for instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom the Fund
purchases or to whom the Fund sells is acting on its own behalf (and not as the
agent of some other party such as its customers). These securities normally are
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for these
securities.
Purchases and sales of portfolio securities that are equity securities (for
instance common stock and preferred stock) are generally effected: (1) if the
security is traded on an exchange, through brokers who charge commissions; and
(2) if the security is traded in the "over-the-counter" markets, in a principal
transaction directly from a market maker. In transactions on stock exchanges,
commissions are negotiated. When transactions are executed in an
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over-the-counter market, the Adviser will seek to deal with the primary market
makers; but when necessary in order to obtain best execution, the Adviser will
utilize the services of others.
Purchases of securities from underwriters of the securities include a disclosed
fixed 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 price.
In the case of fixed income and equity securities traded in the over-the-counter
markets, there is generally no stated commission, but the price usually includes
an undisclosed commission or markup.
B. COMMISSIONS PAID
Table 5 in Appendix B shows the aggregate brokerage commissions with respect to
each Fund. The data presented are for the past three fiscal years.
C. ADVISER RESPONSIBILITY FOR PURCHASES AND SALES
The Adviser places orders for the purchase and sale of securities with brokers
and dealers selected by and in the discretion of the Adviser. No Fund has any
obligation to deal with any specific broker or dealer in the execution of
portfolio transactions. 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 each Fund rather than by
any formula.
The Adviser seeks "best execution" for all portfolio transactions. This means
that the Adviser seeks the most favorable price and execution available. The
Adviser's primary consideration in executing transactions for the Fund is prompt
execution of orders in an effective manner and at the most favorable price
available.
1. CHOOSING BROKER-DEALERS
The Fund may not always pay the lowest commission or spread available. Rather,
in determining the amount of commissions (including certain dealer spreads) paid
in connection with securities transactions, the Adviser takes into account
factors such as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the research services described below)
and any risk assumed by the executing broker.
Consistent with applicable rules and the Adviser's duties, the Adviser may: (1)
consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for a Fund; and (2) take into
account payments made by brokers effecting transactions for a Fund (these
payments may be made to the Fund or to other persons on behalf of the Fund for
services provided to the Fund for which those other persons would be obligated
to pay.)
2. OBTAINING RESEARCH FROM BROKERS
The Adviser may give consideration to research services furnished by brokers to
the Adviser for its use and may cause the Fund to pay these brokers a higher
amount of commission than may be charged by other brokers. This research is
designed to augment the Adviser's own internal research and investment strategy
capabilities. This research may be used by the Adviser in connection with
services to clients other than the Fund, and not all research services may be
used by the Adviser in connection with the Fund. The Adviser's fees are not
reduced by reason of the Adviser's receipt of research services.
The Adviser has full brokerage discretion. It evaluates the range and quality of
a broker's services in placing trades including securing best price,
confidentiality, clearance and settlement capabilities, promptness of execution
and the financial stability of the broker-dealer. Under certain circumstances,
the value of research provided by a broker-dealer may be a factor in the
selection of a broker. This research would include reports that are common in
the industry. Typically, the research will be used to service all of the
Adviser's accounts although a particular client
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may not benefit from all the research received on each occasion. The nature of
the services purchased for clients include industry research reports and
periodicals, quotation systems, software for portfolio management and formal
databases.
Occasionally, the Adviser utilize a broker and pay a slightly higher commission
than another broker may charge. The higher commission is paid because of the
Adviser's need for specific research, for specific expertise a firm may have in
a particular type of transaction (due to factors such as size or difficulty), or
for speed/efficiency in execution. Since most of the Adviser's brokerage
commissions for research are for economic research on specific companies or
industries, and since the Adviser is involved with a limited number of
securities, most of the commission dollars spent for industry and stock research
directly benefit the clients.
There are occasions on which portfolio transactions may be executed as part of
concurrent authorizations to purchase or sell the same securities for more than
one account served by the Adviser, some of which accounts may have similar
investment objectives. Although such concurrent authorizations potentially could
be either advantageous or disadvantageous to any one or more particular
accounts, they will be effected only when the Adviser believes that to do so
will be in the best interest of the affected accounts. When such concurrent
authorizations occur, the objective will be to allocate the execution in a
manner equitable to the accounts involved. Clients are typically allocated
securities with prices averaged on a per-share or per-bond basis.
3. COUNTERPARTY RISK
The Adviser monitors the creditworthiness of counterparties to each Fund's
transactions and intends to enter into a transaction only when it believes that
the counterparty presents minimal and appropriate credit risks.
4. TRANSACTIONS THROUGH AFFILIATES
The Adviser may effect brokerage transactions through affiliates of the Adviser
(or affiliates of those persons) pursuant to procedures adopted by the Trust.
5. OTHER ACCOUNTS OF THE ADVISER
Investment decisions for the Fund are made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. Investment decisions are the product of many
factors, including 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. In addition, two or more clients may
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 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 a portfolio
security for one client could have an adverse effect on another client that has
a position in that security. In addition, when purchases or sales of the same
security for a Fund and other client accounts managed by the Adviser occurs
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
6. PORTFOLIO TURNOVER
The frequency of portfolio transactions of the Fund (the portfolio turnover
rate) will vary from year to year depending on many factors. From time to time
the Fund may engage in active short-term trading to take advantage of price
movements affecting individual issues, groups of issues or markets. An annual
portfolio turnover rate of 100% would occur if all of the securities in the Fund
were replaced once in a period of one year. Higher portfolio turnover rates may
result in increased brokerage costs to a Fund and a possible increase in
short-term capital gains or losses.
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D. SECURITIES OF REGULAR BROKER-DEALERS
From time to time the Fund may acquire and hold securities issued by its
"regular brokers and dealers" or the parents of those brokers and dealers. For
this purpose, regular brokers and dealers are the 10 brokers or dealers that:
(1) received the greatest amount of brokerage commissions during the Fund's last
fiscal year; (2) engaged in the largest amount of principal transactions for
portfolio transactions of the Fund during the Fund's last fiscal year; or (3)
sold the largest amount of the Fund's shares during the Fund's last fiscal year.
Table 6 in Appendix B lists the regular brokers and dealers of each fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of the Funds' most recent fiscal year.
6. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A. GENERAL INFORMATION
You may effect purchases or redemptions or request any shareholder privilege in
person at the Transfer Agent's offices located at Two Portland Square, Portland,
Maine 04101.
The Fund accepts orders for the purchase or redemption of shares on any weekday
except days when the New York Stock Exchange is closed.
B. ADDITIONAL PURCHASE INFORMATION
Shares of the Fund are sold on a continuous basis by the distributor at net
asset value ("NAV") per share without any sales charge. Accordingly, the
offering price per share is the same as the NAV per share.
The Fund reserves the right to refuse any purchase request.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, the Fund may accept portfolio securities that meet the investment
objective and policies of the Fund as payment for Fund shares. The Fund will
only accept securities that: (1) are not restricted as to transfer by law and
are not illiquid; and (2) have a value that is readily ascertainable (and not
established only by valuation procedures).
1. IRAS
All contributions into an IRA through the automatic investing service are
treated as IRA contributions made during the year the investment is received.
2. UGMAS/UTMAS
If the trustee's name is not in the account registration of a gift or transfer
to minor ("UGMA/UTMA") account, the investor must provide a copy of the trust
document.
3. PURCHASES THROUGH FINANCIAL INSTITUTIONS
You may purchase and redeem shares through certain broker-dealers, banks and
other financial institutions. Financial institutions may charge their customers
a fee for their services and are responsible for promptly transmitting purchase,
redemption and other requests to the Fund.
If you purchase shares through a financial institution, you will be subject to
the institution's procedures, which may include charges, limitations, investment
minimums, cutoff times and restrictions in addition to, or different from, those
applicable when you invest in a Fund directly. When you purchase a Fund's shares
through a financial institution, you may or may not be the shareholder of record
and, subject to your institution's procedures, you may have Fund shares
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transferred into your name. There is typically a three-day settlement period for
purchases and redemptions through broker-dealers. Certain financial institutions
may also enter purchase orders with payment to follow.
You may not be eligible for certain shareholder services when you purchase
shares through a financial institution. Contact your institution for further
information. If you hold shares through a financial institution, the Fund may
confirm purchases and redemptions to the financial institution, which will
provide you with confirmations and periodic statements. The Fund is not
responsible for the failure of any financial institution to carry out its
obligations.
Investors purchasing shares of the Fund through a financial institution should
read any materials and information provided by the financial institution to
acquaint themselves with its procedures and any fees that the institution may
charge.
C. ADDITIONAL REDEMPTION INFORMATION
A Fund may redeem shares involuntarily to reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to
transactions effected for the benefit of a shareholder which is applicable to a
Fund's shares as provided in the Prospectus.
1. SUSPENSION OF RIGHT OF REDEMPTION
The right of redemption may not be suspended, except for any period during
which: (1) the New York Stock Exchange, Inc. is closed (other than customary
weekend and holiday closings) or during which the Securities and Exchange
Commission determines that trading thereon is restricted; (2) an emergency (as
determined by the SEC) exists as a result of which disposal by a Fund of its
securities is not reasonably practicable or as a result of which it is not
reasonably practicable for a Fund fairly to determine the value of its net
assets; or (3) the SEC may by order permit for the protection of the
shareholders of a Fund.
2. REDEMPTION-IN-KIND
Redemption proceeds normally are paid in cash. Payments may be made wholly or
partly in portfolio securities, however, if the Board determines conditions
exist which would make payment in cash detrimental to the best interests of a
Fund. If redemption proceeds are paid wholly or partly in portfolio securities,
brokerage costs may be incurred by the shareholder in converting the securities
to cash. The Trust has filed an election with the SEC pursuant to which a Fund
may only effect a redemption in portfolio securities if the particular
shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
D. NAV DETERMINATION
In determining a Fund's NAV per share, securities for which market quotations
are readily available are valued at current market value using the last reported
sales price. If no sale price is reported, the average of the last bid and ask
price is used. If no average price is available, the last bid price is used. If
market quotations are not readily available, then securities are valued at fair
value as determined by the Board (or its delegate).
E. DISTRIBUTIONS
Distributions of net investment income will be reinvested at a Fund's NAV per
share as of the last day of the period with respect to which the distribution is
paid. Distributions of capital gain will be reinvested at the NAV per share of a
Fund on the payment date for the distribution. Cash payments may be made more
than seven days following the date on which distributions would otherwise be
reinvested.
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7. TAXATION
The tax information set forth in the Prospectus and the information in this
section relates solely to U.S. federal income tax law and assumes that the Fund
qualifies as a regulated investment company (as discussed below). Such
information is only a summary of certain key federal income tax considerations
affecting each Fund and its shareholders that are not described in the
prospectus. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or the implications to shareholders. The
discussions here and in the prospectus are not intended as substitutes for
careful tax planning.
This "Taxation" section is based on the Code and applicable regulations in
effect on the date hereof. Future legislative or administrative changes or court
decisions may significantly change the tax rules applicable to the Fund and
their shareholders. Any of these changes or court decisions may have a
retroactive effect.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX PROVISIONS APPLICABLE TO THEM.
A. QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund intends for each tax year to qualify as a "regulated investment
company" under the Code. This qualification does not involve governmental
supervision of management or investment practices or policies of a Fund.
The tax year-end of the Fund is March 31 (the same as the Fund's fiscal year
end).
1. MEANING OF QUALIFICATION
As a regulated investment company, the Fund will not be subject to federal
income tax on the portion of its net investment company taxable income (such as
taxable interest, dividends, net short-term capital gains and other taxable
ordinary income, net of expenses) and net capital gain (that is, the excess of
net long-term capital gains over net short-term capital losses) that it
distributes to shareholders. In order to qualify to be taxed as a regulated
investment company a Fund must satisfy the following requirements:
o The Fund must distribute at least 90% of its investment company taxable
income for the tax year. (Certain distributions made by a Fund after
the close of its tax year are considered distributions attributable to
the previous tax year for purposes of satisfying this requirement.)
o The Fund must derive at least 90% of its gross income from certain
types of income derived with respect to its business of investing in
securities.
o The Fund must satisfy the following asset diversification test at the
close of each quarter of the Fund's tax year: (1) at least 50% of the
value of the Fund's assets must consist of cash and cash items, U.S.
government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in
securities of the issuer and as to which the Fund does not hold more
than 10% of the outstanding voting securities of the issuer); and (2)
no more than 25% of the value of the Fund's total assets may be
invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which
are engaged in the same or similar trades or businesses.
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2. FAILURE TO QUALIFY
If for any tax year the Fund does not qualify as a regulated investment company,
all of its taxable income (including its net capital gain) will be subject to
tax at regular corporate rates without any deduction for dividends to
shareholders, and the dividends will be taxable to the shareholders as ordinary
income to the extent of the Fund's current and accumulated earnings and profits.
A portion of these distributions generally may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Failure to qualify as a regulated investment company would thus have a negative
impact on a Fund's income and performance. It is possible that a Fund will not
qualify as a regulated investment company in any given tax year.
B. FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its investment company
taxable income for each tax year. These distributions are taxable to you as
ordinary income. A portion of these distributions may qualify for the 70%
dividends-received deduction for corporate shareholders.
The Fund anticipates distributing substantially all of its net capital gain for
each tax year. These distributions generally are made only once a year, usually
in November or December, but the Fund may make additional distributions of net
capital gain at any time during the year. These distributions are taxable to you
as long-term capital gain, regardless of how long you have held shares. These
distributions may not qualify for the dividends-received deduction.
Distributions by the Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital. Return of capital
distributions reduces your tax basis in the shares and are treated as gain from
the sale of the shares to the extent your basis would be reduced below zero.
All distributions by the Fund will be treated in the manner described above
regardless of whether the distribution is paid in cash or reinvested in
additional shares of the Fund (or of another Fund). If you receive a
distribution in the form of additional shares, you will be treated as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date.
You may purchase shares whose net asset value at the time reflects undistributed
net investment income or recognized capital gain, or unrealized appreciation in
the value of the assets of the Fund. Distributions of these amounts are taxable
to you in the manner described above, although the distribution economically
constitutes a return of capital to you.
If you purchase shares of the Fund just prior to the ex-dividend date of a
distribution, you will be taxed on the entire amount of the distribution
received, even though the net asset value per share on the date of the purchase
reflected the amount of the distribution.
Ordinarily, you are required to take distributions by the Fund into account in
the year in which they are made. A distribution declared in October, November or
December of any year and payable to shareholders of record on a specified date
in those months, however, is deemed to be received by you (and made by the Fund)
on December 31 of that calendar year if the distribution is actually paid in
January of the following year.
You will be advised annually as to the U.S. federal income tax consequences of
distributions made (or deemed made) to them during the year.
C. CERTAIN TAX RULES APPLICABLE TO THE FUND'S TRANSACTIONS
For federal income tax purposes, when put and call options purchased by the Fund
expire unexercised, the premiums paid by the Fund give rise to short- or
long-term capital losses at the time of expiration (depending on the length of
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the respective exercise periods for the options). When put and call options
written by the Fund expire unexercised, the premiums received by the Fund give
rise to short-term capital gains at the time of expiration. When the Fund
exercises a call, the purchase price of the underlying security is increased by
the amount of the premium paid by the Fund. When the Fund exercises a put, the
proceeds from the sale of the underlying security are decreased by the premium
paid. When a put or call written by the Fund is exercised, the purchase price
(selling price in the case of a call) of the underlying security is decreased
(increased in the case of a call) for tax purposes by the premium received.
Certain listed options, regulated futures contracts and forward currency
contracts are considered "Section 1256 contracts" for federal income tax
purposes. Section 1256 contracts held by the Fund at the end of each tax year
are "marked to market" and treated for federal income tax purposes as though
sold for fair market value on the last business day of the tax year. Gains or
losses realized by the Fund on Section 1256 contracts generally are considered
60% long-term and 40% short-term capital gains or losses. The Fund can elect to
exempt its Section 1256 contracts, which are part of a "mixed straddle" (as
described below) from the application of Section 1256.
Any option, futures contract, or other position entered into or held by the Fund
in conjunction with any other position held by the Fund may constitute a
"straddle" for federal income tax purposes. A straddle of which at least one,
but not all, the positions are Section 1256 contracts, may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of the Fund's gains and losses with respect to straddle
positions by requiring, among other things, that: (1) the loss realized on
disposition of one position of a straddle may not be recognized to the extent
that the Fund has unrealized gains with respect to the other position in such
straddle; (2) the Fund's holding period in straddle positions be suspended while
the straddle exists (possibly resulting in gain being treated as short-term
capital gain rather than long-term capital gain); (3) the losses recognized with
respect to certain straddle positions which are part of a mixed straddle and
which are non-Section 1256 positions be treated as 60% long-term and 40%
short-term capital loss; (4) losses recognized with respect to certain straddle
positions which would otherwise constitute short-term capital losses be treated
as long-term capital losses; and (5) the deduction of interest and carrying
charges attributable to certain straddle positions may be deferred. Various
elections are available to the Fund, which may mitigate the effects of the
straddle rules, particularly with respect to mixed straddles. In general, the
straddle rules described above do not apply to any straddles held by the Fund
all of the offsetting positions of which consist of Section 1256 contracts.
D. FEDERAL EXCISE TAX
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to: (1) 98% of its
ordinary taxable income for the calendar year; and (2) 98% of its capital gain
net income for the one-year period ended on October 31 of the calendar year. The
balance of the Fund's income must be distributed during the next calendar year.
The Fund will be treated as having distributed any amount on which it is subject
to income tax for any tax year.
For purposes of calculating the excise tax, the Fund: (1) reduces its capital
gain net income (but not below its net capital gain) by the amount of any net
ordinary loss for the calendar year and (2) excludes foreign currency gains and
losses incurred after October 31 of any year in determining the amount of
ordinary taxable income for the current calendar year. The Fund will include
foreign currency gains and losses incurred after October 31 in determining
ordinary taxable income for the succeeding calendar year.
The Fund intends to make sufficient distributions of its ordinary taxable income
and capital gain net income prior to the end of each calendar year to avoid
liability for the excise tax. Investors should note, however, that the Fund
might in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.
E. SALE OR REDEMPTION OF SHARES
In general, a shareholder will recognize gain or loss on the sale or redemption
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale or redemption and the shareholder's adjusted tax basis in the
shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases (for example, by reinvesting dividends) other shares of
the Fund within 30 days before or after the sale or redemption (a so called
"wash sale"). If disallowed, the loss will be reflected in an upward adjustment
to the basis of the
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shares purchased. In general, any gain or loss arising from the sale or
redemption of shares of the Fund will be considered capital gain or loss and
will be long-term capital gain or loss if the shares were held for longer than
one year. Any capital loss arising from the sale or redemption of shares held
for six months or less, however, is treated as a long-term capital loss to the
extent of the amount of capital gain distributions received on such shares. In
determining the holding period of such shares for this purpose, any period
during which a shareholder's risk of loss is offset by means of options, short
sales or similar transactions is not counted. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
F. WITHHOLDING TAX
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of distributions, and the proceeds of redemptions of shares, paid
to any shareholder: (1) who has failed to provide its correct taxpayer
identification number; (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly; or (3)
who has failed to certify to the Fund that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient." Backup
withholding is not an additional tax; any amounts so withheld may be credited
against a shareholder's federal income tax liability or refunded.
G. FOREIGN SHAREHOLDERS
Taxation of a shareholder who under the Code is a nonresident alien individual,
foreign trust or estate, foreign corporation, or foreign partnership ("foreign
shareholder"), depends on whether the income from the Fund is "effectively
connected" with a U.S. trade or business carried on by the foreign shareholder.
If the income from the Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, distributions of ordinary income
(an short-term capital gains) paid to a foreign shareholder will be subject to
U.S. withholding tax at the rate of 30% (or lower applicable treaty rate) upon
the gross amount of the distribution. The foreign shareholder generally would be
exempt from U.S. federal income tax on gain realized on the sale of shares of
the Fund and distributions of net capital gain from the Fund and amounts
retained by the Fund.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income
distributions, capital gain distributions, and any gain realized upon the sale
of shares of the Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or U.S. corporations.
In the case of a noncorporate foreign shareholder, the Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding (or taxable at a reduced treaty rate), unless
the shareholder furnishes the Fund with proper notification of its foreign
status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty might be different from those described herein.
The tax rules of other countries with respect to distributions from the Fund can
differ from the U.S. federal income taxation rules described above. These
foreign rules are not discussed herein. Foreign shareholders are urged to
consult their own tax advisers as to the consequences of foreign tax rules with
respect to an investment in a Fund.
H. STATE AND LOCAL TAXES
The tax rules of the various states of the U.S. and their local jurisdictions
with respect to distributions from the Fund can differ from the rules for U.S.
federal income taxation described above. These state and local rules are not
discussed herein. Shareholders are urged to consult their tax advisers as to the
consequences of state and local tax
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rules with respect to an investment in the Fund, distributions from the Fund and
the applicability of state and local taxes and related matters.
8. OTHER MATTERS
A. THE TRUST AND ITS SHAREHOLDERS
1. GENERAL INFORMATION
Forum Funds 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.
The Trust is registered as an open-end, management investment company under the
1940 Act. The Trust offers shares of beneficial interest in its series. As of
the date hereof, the Trust consisted of the following shares of beneficial
interest:
Investors Bond Fund Payson Value Fund
TaxSaver Bond Fund Payson Balanced Fund
Investors High Grade Bond Fund Austin Global Equity Fund
Maine Municipal Bond Fund Polaris Global Value Fund
New Hampshire Bond Fund Investors Equity Fund
Daily Assets Government Fund(1) Equity Index Fund
Daily Assets Treasury Obligations Fund(1) Investors Growth Fund
Daily Assets Cash Fund(1) BIA Small-Cap Growth Fund
Daily Assets Government Obligations Fund(1) BIA Growth Equity Fund
Daily Assets Municipal Fund(1)
(1) The Trust offers shares of beneficial interest in an institutional,
institutional service, and investor share class of these series.
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 series and may divide series into classes of
shares; the costs of doing so will be borne by the Trust.
The Trust and each Fund will continue indefinitely until terminated.
2. SERIES AND CLASSES OF THE TRUST
Each series or class of the Trust may have a different expense ratio and its
expenses will affect each class' performance. For more information on any other
class of shares of the Fund, investors may contact the Transfer Agent.
3. SHAREHOLDER VOTING AND OTHER RIGHTS
Each share of each series 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, shareholder service 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 pertains to the class and other matters
for which separate class voting is appropriate under applicable law. Generally,
shares will be voted separately by individual series except if: (1) the 1940 Act
requires shares to be voted in the aggregate and not by individual series; and
(2) when the Trustees determine that the matter affects more than one series and
all affected series must vote. The Trustees may also determine that a matter
only affects certain classes of the Trust and thus only those classes are
entitled to vote on the
29
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matter. 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. 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.
A shareholder in a series is entitled to the shareholder's pro rata share of all
distributions arising from that series' assets and, upon redeeming shares, will
receive the portion of the series' net assets represented by the redeemed
shares.
Shareholders representing 10% or more of the Trust's (or a series') outstanding
shares may, as set forth in the Trust Instrument, call meetings of the Trust (or
series) for any purpose related to the Trust (or series), including, in the case
of a meeting of the Trust, the purpose of voting on removal of one or more
Trustees.
4. CERTAIN REORGANIZATION TRANSACTIONS
The Trust or any series may be terminated upon the sale of its assets to, or
merger with, another open-end, management investment company or series thereof,
or upon liquidation and distribution of its assets. Generally such terminations
must be approved by the vote of the holders of a majority of the outstanding
shares of the Trust or a Fund. The Trustees may, without prior shareholder
approval, change the form of organization of the Trust by merger, consolidation
or incorporation. Under the Trust Instrument, the Trustees may, without
shareholder vote, cause the Trust or certain series to merge or consolidate into
one or more trusts, partnerships or corporations or cause the Trust to be
incorporated under Delaware law, so long as the surviving entity is an open-end,
management investment company that will succeed to or assume the Trust's
registration statement.
B. FUND OWNERSHIP
As of July 1, 1999, the percentage of shares owned by all officers and trustees
of the Trust as a group was as follows. To the extent officers and trustees own
less than 1% of the shares of each class of shares of a Fund (or of the Trust),
the table reflects "N/A" for not applicable.
PERCENTAGE OF SHARES
FUND (OR TRUST) OWNED
- ------------------------------------------------------------------------------
The Trust N/A
Austin Global Equity Fund N/A
Also as of that date, certain shareholders of record owned 5% or more of a class
of shares of the Fund. Shareholders known by a Fund to own beneficially 5% or
more of a class of shares of the Fund are listed in Table 7 in Appendix B.
From time to time, certain shareholders may own a large percentage of the shares
of the Fund. Accordingly, those shareholders may be able to greatly affect (if
not determine) the outcome of a shareholder vote. As of July 1, 1999, no person
beneficially owned 25% or more of the shares of the Fund (or of the Trust).
C. LIMITATIONS ON SHAREHOLDERS' AND TRUSTEES' LIABILITY
Delaware law provides that Fund shareholders are entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. In the past, the Trust believes that the securities
regulators of some states, however, have indicated that they and the courts in
their state may decline to apply Delaware law on this point. The Forum Funds'
Trust Instrument (the document that governs the operation of the Trust contains
an express disclaimer of shareholder liability for the debts, liabilities,
obligations and expenses of the Trust. The Trust Instrument provides for
indemnification out of each series' property of any shareholder or former
shareholder held personally liable for the obligations of the series. The Trust
Instrument also provides that each series shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the series and
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satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which Delaware law does not apply, no contractual limitation of liability was
in effect, and the portfolio is unable to meet its obligations. FAdS believes
that, in view of the above, there is no risk of personal liability to
shareholders.
The Trust Instrument provides that the Trustees shall not be liable to any
person other than the Trust and its shareholders. In addition, the Trust
Instrument provides that the Trustees shall not be liable for any conduct
whatsoever, provided that a Trustee is not protected against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
D. REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby. The registration statement, including
the exhibits filed therewith, may be examined at the office of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents are not necessarily complete, and, in each instance,
are qualified by, reference to the copy of such contract or other documents
filed as exhibits to the registration statement.
FINANCIAL STATEMENTS
The financial statements of Austin Global Equity Fund for the year ended March
31, 1999, which are included in the Annual Report to Shareholders of each Fund,
are incorporated herein by reference. These financial statements only include
the schedules of investments, statements of assets and liabilities, statements
of operations, statements of changes in net assets, financial highlights, notes
and independent auditors' reports.
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APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
A. CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
1. MOODY'S INVESTORS SERVICE
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." 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.
AA 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 risk,
appear somewhat larger than the Aaa securities.
A 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.
BAA Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments 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.
BA 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.
B 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.
CAA 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. Ca 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.
C 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
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
A-1
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2. STANDARD AND POOR'S CORPORATION
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
NOTE Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
NOTE Plus (+) or minus (-). 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.
The "r" symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
A-2
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currencies, or commodities; obligations exposed to severe prepayment
risk-such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse
floaters.
3. DUFF & PHELPS CREDIT RATING CO.
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+
AA High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+
A, A- Protection factors are average but adequate. However, risk factors are
more variable in periods of greater economic stress.
BBB+
BBB
BBB- Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
BB+
BB
BB- Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according
to industry conditions. Overall quality may move up or down frequently
within this category.
B+
B, B- Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
4. FITCH IBCA, INC.
INVESTMENT GRADE
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A-3
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A High credit quality. `A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC
CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates
that default of some kind appears probable. `C' ratings signal imminent
default.
DDD
DD, D Default. Securities are not meeting current obligations and are
extremely speculative. `DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For
U.S. corporates, for example, `DD' indicates expected recovery
of 50% - 90% of such outstandings, and `D' the lowest recovery
potential, i.e. below 50%.
B. PREFERRED STOCK
1. MOODY'S INVESTORS SERVICE
AAA An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated "aa" is considered a high- grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
A An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in
the "aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA An issue which is rated "baa" is considered to be 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.
BA An issue which is 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
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periods. Uncertainty of position characterizes preferred stocks in this
class.
B 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.
CAA 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.
CA 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 payments.
C This is the lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor prospects of
ever attaining any real investment standing.
NOTE Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: 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
issue ranks in the lower end of its generic rating category.
2. STANDARD & POOR'S
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA 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.
A 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.
BBB 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.
BB
B, CCC Preferred stock rated BB, B, and CCC is 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. While such issues will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating CC is reserved for a preferred stock issue that is in
arrears on dividends or sinking fund payments, but that is currently
paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in
default on debt instruments.
A-5
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N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
NOTE Plus (+) or minus (-). To provide more detailed indications of
preferred stock quality, 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.
C. SHORT TERM RATINGS
1. MOODY'S INVESTORS SERVICE
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) 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.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above 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.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
NOT
PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.
2. STANDARD AND POOR'S
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-6
<PAGE>
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
3. FITCH IBCA, INC.
F1 Obligations assigned this rating have the highest capacity for timely
repayment under Fitch IBCA's national rating scale for that country,
relative to other obligations in the same country. This rating is
automatically assigned to all obligations issued or guaranteed by the
sovereign state. Where issues possess a particularly strong credit
feature, a "+" is added to the assigned rating.
F2 Obligations supported by a strong capacity for timely repayment
relative to other obligors in the same country. However, the relative
degree of risk is slightly higher than for issues classified as `A1'
and capacity for timely repayment may be susceptible to adverse changes
in business, economic, or financial conditions.
F3 Obligations supported by an adequate capacity for timely repayment
relative to other obligors in the same country. Such capacity is more
susceptible to adverse changes in business, economic, or financial
conditions than for obligations in higher categories.
B Obligations for which the capacity for timely repayment is uncertain
relative to other obligors in the same country. The capacity for timely
repayment is susceptible to adverse changes in business, economic, or
financial conditions.
C Obligations for which there is a high risk of default to other obligors
in the same country or which are in default.
A-7
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
The following table shows the dollar amount of fees payable to the Adviser with
respect to the Fund, the amount of fee that was waived by the Adviser, if any,
and the actual fee received by the Adviser.
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE PAYABLE ADVISORY FEE WAIVED ADVISORY FEE RETAINED
AUSTIN GLOBAL EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $274,672 $0 $274,672
Year Ended March 31, 1998 $195,053 $24,463 $170,590
Year Ended March 31, 1997 $118,156 $69,562 $48,594
TABLE 2 - ADMINISTRATION FEES
The following table shows the dollar amount of fees payable to FAdS with respect
to the Fund, the amount of fee that was waived by FAdS, if any, and the actual
fee received by FAdS.
ADMINISTRATION FEE ADMINISTRATION FEE WAIVED ADMINISTRATION FEE
AUSTIN GLOBAL EQUITY FUND PAYABLE RETAINED
- -------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $45,779 $0 $45,779
Year Ended March 31, 1998 $32,509 $0 $32,509
Year Ended March 31, 1997 $19,693 $0 $19,693
TABLE 3 - ACCOUNTING FEES
The following table shows the dollar amount of fees payable to FAcS with respect
to the Fund, the amount of fee that was waived by FAcS, if any, and the actual
fee received by FAcS.
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE
AUSTIN GLOBAL EQUITY FUND RETAINED
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $36,000 $0 $36,000
Year Ended March 31, 1998 $36,000 $0 $36,000
Year Ended March 31, 1997 $27,000 $0 $27,000
TABLE 4 - TRANSFER AGENCY FEES
The following table shows the dollar amount of shareholder service fees payable
to the Transfer Agent with respect to Shares of the Fund.
TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
AUSTIN GLOBAL EQUITY FUND PAYABLE WAIVED RETAINED
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 $19,647 $0 $19,647
Year Ended March 31, 1998 $25,482 $0 $25,482
Nine Months Ended March 31, 1997 $20,781 $0 $20,781
</TABLE>
B-1
<PAGE>
TABLE 5 - COMMISSIONS
The following table shows the aggregate brokerage commissions with respect to
the Fund that incurred brokerage costs. The data are for the past three fiscal
years or shorter period if the Fund has been in operation for a shorter period.
<TABLE>
<S> <C> <C> <C>
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
AUSTIN GLOBAL EQUITY FUND $26,205 $19,974 $11,976
</TABLE>
TABLE 6 - SECURITIES OF REGULAR BROKERS OR DEALERS
The following table lists the regular brokers and dealers of the Fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Fund's holdings of those
securities as of the Fund's most recent fiscal year.
REGULAR BROKER DEALER VALUE HELD
- ------------------------------------------------------------------------
Dreyfus Cash Management $250,000
TABLE 7 - 5% SHAREHOLDERS
The following table lists the persons who owned of record 5% or more of the
outstanding shares of the Fund as of July 1, 1999.
<TABLE>
<S> <C> <C>
NAME AND ADDRESS SHARES % OF FUND
- ------------------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp.
1 Metrotech Center North
Brooklyn, NY 11201 338,239.731 23.84
</TABLE>
B-2
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - TOTAL RETURNS
The average annual total return without sales charges of the Fund for the period
ended March 31, 1999, was as follows.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
CALENDAR SINCE INCEPTION
AUSTIN GLOBAL EQUITY ONE MONTH THREE MONTHS YEAR TO DATE ONE YEAR THREE FIVE YEARS (ANNUALIZED)
FUND YEARS
- ----------------------------------------------------------------------------------------------------------------------
2.73% (0.36)% (0.36)% 9.51% 18.46% 17.08% 15.77%
</TABLE>
