STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1999
AS AMENDED JULY 1, 2000
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.
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TABLE OF CONTENTS
Glossary......................................................................1
1. Investment Policies And Risks.............................................2
2. Certain Information Concerning The States Of Maine And New Hampshire.....14
3. Investment Limitations...................................................21
4. Performance Data And Advertising.........................................32
5. Management...............................................................36
6. Portfolio Transactions...................................................41
7. Purchase And Redemption Information......................................44
8. Taxation.................................................................47
9. Other Matters............................................................52
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
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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.
"FAcS" means Forum Accounting Services, LLC, the fund accountant of
each Fund.
"FAdS" means Forum Administrative Services, LLC, the administrator of
each Fund.
"Fitch" means Fitch IBCA, Inc.
"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.
"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
Fund may also invest in commercial paper, bankers acceptances, certificates of
deposits and other money market instruments rated in one of the two 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
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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 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.
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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 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. Investors High
Grade Bond Fund may not invest in privately issued mortgage-related securities.
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. Investors High Grade Bond Fund may
not invest in stripped mortgage-related securities.
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.
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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.
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). Normally, TaxSaver Bond Fund will not invest
greater than 25% of its total assets in issuers located in any one state,
territory or possession. New Hampshire Bond Fund may invest up to 25% of its
total assets in municipal securities issued by Puerto Rico, other United States
territories or possessions and their subdivisions, authorities and corporations
the income from which is not subject to Federal income tax or New Hampshire
state interest and dividends taxes. Maine Municipal Bond Fund may invest up to
25% of its total assets in issuers located in any one territory or possession of
the United States.
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. TaxSaver Bond Fund will not invest more
than 25% of its total assets in a single type of revenue bond. 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
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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 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. 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,
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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 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
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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 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
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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.
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.
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
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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").
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
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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 technique is used to
make additional Fund investments. Borrowing for other than temporary or
emergency purposes, lending portfolio securities, entering into 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.
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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.
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.
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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. 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.
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.
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I. YEAR 2000
The date change transition to the Year 2000 prompted concern that certain
computer systems may not process date-related information properly on and after
January 1, 2000. The Adviser and each Fund's administrator have addressed and
continue to monitor this Year 2000 issue and its possible impact on their
systems. Each Fund's other service providers have informed the Fund that they
are taking similar measures. Services provided to each Fund or any companies in
which it invests could still be adversely affected by a computer's failure to
accurately process date related information and, therefore, may lower the value
of your shares. While no adverse consequences have yet arisen, or have been
reported to the Adviser or each Fund's administrator, there is still the
possibility that certain computer systems may not be able to process
date-related information at some point during the year.
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
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.
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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 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.
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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 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.
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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 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
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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."
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 issues also 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
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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, 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
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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.
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
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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.
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.
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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.
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.
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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.
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.
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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.
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
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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
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.)
25
<PAGE>
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.
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
26
<PAGE>
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.
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
27
<PAGE>
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.
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.
28
<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.
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.
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.
29
<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,
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.
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.
30
<PAGE>
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.
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.
INVESTMENTS 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.
31
<PAGE>
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., iMoneyNet, 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
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
32
<PAGE>
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.
Maine Municipal Bond Fund, New Hampshire Bond Fund and TaxSaver Bond Fund may
also quote tax equivalent yields, which show the taxable yields a shareholder
would have to earn to equal a fund's tax-free yield after taxes. A tax
equivalent yield is calculated by dividing the fund's tax-free yield by one
minus a stated Federal, state or combined Federal and state tax rate.
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
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
33
<PAGE>
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:
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
34
<PAGE>
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:
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
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.
35
<PAGE>
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
-------------------------------------------- -----------------------------------------------------------------------
-------------------------------------------- -----------------------------------------------------------------------
Joh Y. Keffer*, Chairman and President Member and Director, Forum Financial Group, LLC (a mutual fund
Born: July 15, 1942 services holding company)
Two Portland Square Director, Forum Fund Services, LLC (Trust's underwriter)
Portland, ME 04101 Officer of six other investment companies for which Forum Financial
Group, LLC provides services
-------------------------------------------- -----------------------------------------------------------------------
Costas Azariadas, Trustee Professor of Economics, University of California - Los Angeles
Born: February 15, 1943 Visiting Professor of Economics, Athens University of Economics and
Department of Economics Business 1998 - 1999
University of California Trustee of one other investment company for which Forum Financial
Los Angeles, CA 90024 Group, LLC provides services
-------------------------------------------- -----------------------------------------------------------------------
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 of one other investment company for which Forum Financial
Group, LLC provides services
-------------------------------------------- -----------------------------------------------------------------------
J. Michael Parish, Trustee Partner, Thelen Reid & Priest LLP (law firm) since 1995
Born: November 9, 1943 Partner, Winthrop, Stimson, Putnam & Roberts (law firm) 1989 - 1995
40 West 57th Street Trustee of one other investment company for which Forum Financial
New York, NY 10019 Group, LLC provides services
-------------------------------------------- -----------------------------------------------------------------------
Stehpen J. Barrett, Vice President Manager of Client Services and Senior Relationship Manager, Forum
Born: November 14, 1968 Financial Group, LLC since 1996
Two Portland Square Senior Product Manager, Fidelity Investments, 1994 - 1996
Portland, Maine 04101 Officer of four other investment companies for which Forum
Financial Group, LLC provides services
-------------------------------------------- -----------------------------------------------------------------------
David I. Goldstein, Vice President Counsel and General Counsel, Forum Financial Group LLC
Born: August 3, 1961 Officer of five other investment companies for which Forum Financial
Two Portland Square Group, LLC provides services
Portland, ME 04101
-------------------------------------------- -----------------------------------------------------------------------
Ronald H. Hirsch, Treasurer Managing Director, Operations/Finance and Operations/Sales, Forum
Born: October 14, 1943 Financial Group, LLC since 1999
Two Portland Square Member of the Board - Citibank Germany 1991 - 1998
Portland, ME 040101 Officer of six other investment companies for which Forum Financial
Group, LLC provides services
-------------------------------------------- -----------------------------------------------------------------------
Leslie K. Klenk, Secretary Assistant Counsel and Counsel, Forum Financial Group, LLC since 1998
Born: August 24, 1964 Associate General Counsel, Smith Barney Inc. (brokerage firm) 1993 -
Two Portland Square 1998
Portland, ME 04101 Officer of one other investment company for which Forum Financial
Group, LLC provides services
-------------------------------------------- -----------------------------------------------------------------------
</TABLE>
36
<PAGE>
B. COMPENSATION OF TRUSTEES AND OFFICERS
Effective February 7, 2000, each Trustee of the Trust will be paid a quarterly
retainer fee of $1,750 for his service to the Trust. In addition, each Trustee
will be paid a fee of $500 for each Board meeting attended (whether in person or
by electronic communication). Trustees are also reimbursed for travel and
related expenses incurred in attending Board meetings. Mr. Keffer receives no
compensation (other than reimbursement for travel and related expenses) for his
service as Trustee of the Trust. No officer of the Trust is compensated by the
Trust but officers are reimbursed for travel and related expenses incurred in
attending Board meetings held outside of Portland, Maine.
The following table sets forth the fees paid to each Trustee by the Trust and
the Fund Complex that includes all series of the Trust and another investment
company for which Forum Financial Group, LLC provides services for the fiscal
year ended March 31, 1999.
<TABLE>
<S> <C> <C> <C> <C>
Total Compensation
Compensation from from Trust
Trustee the Trust Benefits Retirement and Fund Complex
John Y. Keffer $0 $0 $0 $0
Costas Azariadis $11,200 $0 $0 $18,500
James C. Cheng $12,700 $0 $0 $20,000
J. Michael Parish $12,700 $0 $0 $20,000
</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 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).
37
<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 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 FSS 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.
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.
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<PAGE>
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.
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
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 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.
39
<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 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"), FSS 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. FSS is located at Two Portland Square, Portland, Maine
04101 and is registered as a transfer agent with the SEC.
For its services, FSS 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 FSS with respect to a Fund on 60 days' written notice.
Under the Transfer Agent Agreement, FSS 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, FSS and certain related parties (such as
FSS's officers and persons who control FSS) 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.
40
<PAGE>
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 Funds 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 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.
41
<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. 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 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
42
<PAGE>
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 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.
43
<PAGE>
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. PURCHASE AND REDEMPTION INFORMATION
A. GENERAL INFORMATION
You may effect purchases or redemptions or request any shareholder privilege in
person at FSS's offices located at Two Portland Square, Portland, Maine 04101.
Each Fund accepts orders for the purchase or redemption of shares on any weekday
except days when the New York Stock Exchange is closed.
Not all classes or funds of the Trust may be available for sale in the sate in
which you reside. Please check with your investment professional to determine a
class or fund's availability.
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.
<TABLE>
<S> <C> <C> <C>
INVESTORS HIGH
GRADE BOND INVESTORS BOND TAXSAVER BOND
FUND 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
---------------------------------------------- ---------------- ----------------- -----------------
44
<PAGE>
MAINE NEW
MUNICIPAL BOND HAMPSHIRE
FUND BOND 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 reserves 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 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.
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<PAGE>
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. If deemed appropriate and
advisable by the Adviser, a Fund may satisfy a redemption request from a
shareholder by distributing portfolio securities pursuant to procedures adopted
by the Board. 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.
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 FSS 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
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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 aggregate 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.
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.
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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.
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.
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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.
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
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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 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.
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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 Trust, Funds' investment adviser and the principal underwriter have adopted
codes of ethics under Rule 17j-1, as amended, of the 1940 Act. These codes
permit personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund. The Board will consider
approving amendments to the code of ethics for the Trust, the Funds' invesmtent
adviser and the principal underwriter at its next regularly scheduled meeting.
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 FSS.
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 the matter. Delaware law does not require the Trust to hold
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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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CONTROLLING PERSON INFORMATION
<TABLE>
<S> <C> <C>
PERCENTAGE OF
FUND (OR TRUST) SHAREHOLDER SHARES OWNED
Investors High Grade Bond Fund Babb & Co. (incorporated in New
Hampshire)
C/O Bank of New hampshire
PO Box 477 98.81%
Concord, NH 03302
Investors Bond Fund FirsTrust (incorporated in Indiana)
National City Bank Trust Dept.
227 Main Street
Evansville, IN 47708 40.21%
FirsTrust (incorporated in Indiana)
National City Bank Trust Dept.
227 Main Street
Evansville, IN 47708 28.05%
TaxSaver Fund FirsTrust (incorporated in Indiana)
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 40.21%
Manchester, NH 03101
</TABLE>
Bank of New Hampshire is the parent company of Babb & Co. National City Bank of
Evansville is the parent company of FirsTrust.
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.
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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, 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.
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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,
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.
A-2
<PAGE>
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
periods. Uncertainty of position characterizes preferred stocks in this
class.
A-4
<PAGE>
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
INVESTORS HIGH GRADE BOND FUND
<TABLE>
<S> <C> <C> <C>
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
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.
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
B-4
<PAGE>
TABLE 5 - TRANSFER AGENCY FEES
The following table shows the dollar amount of shareholder service fees payable
to FSS with respect to Shares of each Fund.
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/CLASS OF SHARES NAME AND ADDRESS SHARES FUND
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 THREE TO DATE ONE THREE FIVE TEN SINCE INCEPTION
MONTH MONTHS YEAR YEARS YEARS 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>
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALENDAR YEAR
ONE THREE TO DATE ONE THREE FIVE TEN SINCE INCEPTION
MONTH MONTHS YEAR YEARS 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>
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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.
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Fund sponsors understand that even the most efficiently and creatively designed
fund can disappoint shareholders if it is inadequately serviced. That is the
reason why fund sponsors have relied on Forum to meet all of a fund's complex
compliance, regulatory, and filing needs.
Forum's full service commitment includes providing state-of-the-art accounting
support (Forum has 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.
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The Forum Family of Funds provides conservative investment opportunities that
reduce the risk of loss of capital, using underlying money market investments
U.S. Government securities (although the shares of the Forum Funds are neither
insured nor guaranteed by the U.S. Government or its agencies), thus cushioning
the investment against market volatility. These funds offer regular income,
ready access to your money, and flexibility to buy or sell at any time.
In the less conservative but still not aggressive category are funds in the
Forum Family that seek to provide steady income and, in certain cases, tax-free
earnings. Such investments provide important diversification to an investment
portfolio.
Growth funds in the Forum Family more aggressively pursue a high return at the
risk of market volatility. These funds include domestic and international stock
mutual funds."
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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.
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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:John Burns, Director, Forum Investment Advisers, LLC, (207)
879-1900 X 6132
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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