FORUM FUNDS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999
AS AMENDED AUGUST 25, 2000
INVESTMENT ADVISER:
POLARIS GLOBAL VALUE FUND
Polaris Capital Management, Inc.
125 Summer Street
Boston, MA 02110
ACCOUNT INFORMATION AND SHAREHOLDER SERVICES:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
(207) 879-0001
(888) 263-5594
This Statement of Additional Information (the "SAI") supplements the Prospectus
dated October 1, 1999, as may be amended from time to time, offering shares of
Polaris Global Value Fund (the "Fund"), a separate series of Forum Funds, a
registered, open-end management investment company (the "Trust"). This SAI is
not a prospectus and should only be read in conjunction with the Prospectus. You
may obtain the Prospectus without charge by contacting Forum Shareholder
Services, LLC at the address or telephone number listed above.
Financial Statements for the Fund for the year ended May 31, 1999, included in
the Annual Report to shareholders, are incorporated into this SAI by reference.
Copies of the Annual Report may be obtained, without charge, upon request by
contacting Forum Shareholder Services, LLC at the address or telephone number
listed above.
<PAGE>
TABLE OF CONTENTS
GLOSSARY.....................................................................1
INVESTMENT POLICIES AND RISKS................................................2
INVESTMENT LIMITATIONS......................................................10
PERFORMANCE DATA AND ADVERTISING............................................12
MANAGEMENT..................................................................17
PORTFOLIO TRANSACTIONS......................................................22
PURCHASE AND REDEMPTION INFORMATION.........................................25
TAXATION....................................................................27
OTHER MATTERS...............................................................32
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS.............................A-1
APPENDIX B - MISCELLANEOUS TABLES..........................................B-1
APPENDIX C - PERFORMANCE DATA..............................................C-1
<PAGE>
GLOSSARY
As used in this SAI, the following terms have the meanings listed.
"Adviser" means Polaris Capital Management, Inc.
"Board" means the Board of Trustees of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"CFTC" means Commodities Future Trading Commission
"Custodian" means the custodian of the Fund's assets.
"FAcS" means Forum Accounting Services, LLC, the fund accountant of the Fund.
"FAdS" means Forum Administrative Services, LLC, the administrator of the Fund.
"Fitch" means Fitch IBCA, Inc.
"FFS" means Forum Fund Services, LLC, the distributor of the Fund's shares.
"FSS" means Forum Shareholder Services, LLC, the transfer agent of the Fund.
"Fund" means Polaris Global Value Fund.
"IRS" means Internal Revenue Service.
"Moody's" means Moody's Investors Service.
"NRSRO" means a nationally recognized statistical rating organization.
"NAV" means net asset value per share.
"SAI" means this Statement of Additional Information
"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.
1
<PAGE>
INVESTMENT POLICIES AND RISKS
The Fund is a diversified series of the Trust. This section discusses in greater
detail than the Fund's Prospectus certain investments that the Fund may make.
SECURITY RATINGS INFORMATION
The Fund's investments in convertible securities are subject to the credit risk
relating to the financial condition of the issuers of the convertible securities
that the Fund holds. To limit credit risk, the Fund may only invest in: (1)
convertible debt securities that are rated "Baa" or higher by Moody's or "BBB"
or higher by S&P at the time of purchase; and (2) preferred stock rated "baa" or
higher by Moody's or "BBB" or higher by S&P at the time of purchase. The Fund
may purchase unrated convertible securities if, at the time of purchase, the
Adviser believes that they are of comparable quality to rated securities that
the Fund may purchase.
Unrated securities may not be as actively traded as rated securities. The Fund
may retain securities whose rating has been lowered below the lowest permissible
rating category (or that are unrated and determined by the Adviser to be of
comparable quality to securities whose rating has been lowered below the lowest
permissible rating category) if the Adviser determines that retaining such
security is in the best interests of the Fund. Because a downgrade often results
in a reduction in the market price of the security, sale of a downgraded
security may result in a loss.
Moody's, S&P, and other NRSROs are private services that provide ratings of the
credit quality of debt obligations, including convertible securities. A
description of the range of ratings assigned to various types of bonds and other
securities by several NRSROs is included in Appendix A to this SAI. The 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 the Fund, the Adviser will determine whether the Fund should
continue to hold the obligation. To the extent that the ratings given by an
NRSRO may change as a result of changes in such organization or its rating
systems, the Adviser will attempt to substitute comparable ratings. Credit
ratings attempt to 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.
EQUITY SECURITIES
COMMON AND PREFERRED STOCK
GENERAL. Common stock represents an equity (ownership) interest in a company,
and usually possesses voting rights and earns dividends. Dividends on common
stock are not fixed but are declared at the discretion of the issuer. Common
stock generally represents the riskiest investment in a company. In addition,
common stock generally has the greatest appreciation and depreciation potential
because increases and decreases in earnings are usually reflected in a company's
stock price.
Preferred stock is a class of stock having a preference over common stock as to
the payment of dividends and the recovery of investment should a company be
liquidated, although preferred stock is usually junior to the debt securities of
the issuer. Preferred stock typically does not possess voting rights and its
market value may change based on changes in interest rates.
RISKS. The fundamental risk of investing in common and preferred stock is the
risk that the value of the stock might decrease. Stock values fluctuate in
response to the activities of an individual company or in response to general
market and/or economic conditions. Historically, common stocks have provided
greater long-term returns and have entailed greater short-term risks than
preferred stocks, fixed-income and money market investments. The market value of
2
<PAGE>
all securities, including common and preferred stocks, is based upon the
market's perception of value and not necessarily the book value of an issuer or
other objective measure of a company's worth. If you invest in the Fund, you
should be willing to accept the risks of the stock market and should consider an
investment in the Fund only as a part of your overall investment portfolio.
CONVERTIBLE SECURITIES
GENERAL. Convertible securities include debt securities, preferred stock or
other securities that may be converted into or exchanged for a given amount of
common stock of the same or a different issuer during a specified period and at
a specified price in the future. A convertible security entitles the holder to
receive interest on debt or the dividend on preferred stock until the
convertible security matures or is redeemed, converted or exchanged.
Convertible securities rank senior to common stock in a company's capital
structure but are usually subordinated to comparable nonconvertible securities.
Convertible securities have unique investment characteristics in that they
generally: (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities; (2) are less subject to fluctuation in
value than the underlying stocks since they have fixed income characteristics;
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security is called for redemption, the Fund will be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.
RISKS. Investment in convertible securities generally entails less risk than an
investment in the issuer's common stock. Convertible securities are typically
issued by smaller capitalized companies whose stock price may be volatile.
Therefore, the price of a convertible security may reflect variations in the
price of the underlying common stock in a way that nonconvertible debt does not.
The extent to which such risk is reduced, however, depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
WARRANTS
GENERAL. Warrants are securities, typically issued with preferred stock or
bonds, that give the holder the right to purchase a given number of shares of
common stock at a specified price and time. The price of the warrant usually
represents a premium over the applicable market value of the common stock at the
time of the warrant's issuance. Warrants have no voting rights with respect to
the common stock, receive no dividends and have no rights with respect to the
assets of the issuer. The Fund will limit its purchase of warrants to not more
than 5% of the value of its total assets.
RISKS. Investments in warrants involve certain risks, including the possible
lack of a liquid market for the resale of the warrants, potential price
fluctuations due to adverse market conditions or other factors and failure of
the price of the common stock to rise. If the warrant is not exercised within
the specified time period, it becomes worthless.
DEPOSITARY RECEIPTS
GENERAL. The Fund may invest in sponsored and unsponsored American Depositary
Receipts ("ADRs"). ADRs typically are issued by a U.S. bank or trust company,
evidence ownership of underlying securities issued by a foreign company, and are
designed for use in U.S. securities markets. The Fund invests in depositary
receipts in order to obtain exposure to foreign securities markets.
RISKS. Unsponsored depositary receipts may be created without the participation
of the foreign issuer. Holders of these receipts generally bear all the costs of
the depositary receipt facility, whereas foreign issuers typically bear certain
costs of a sponsored depository receipt. The bank or trust company depositary of
an unsponsored depositary receipt may be under no obligation to distribute
shareholder communications received from the foreign issuer or to pass through
3
<PAGE>
voting rights. Accordingly, available information concerning the issuer may not
be current and the prices of unsponsored depositary receipts may be more
volatile than the prices of sponsored depositary receipts.
FOREIGN CURRENCIES TRANSACTIONS
GENERAL
Investments in foreign companies will usually involve currencies of foreign
countries. The Fund may temporarily hold funds in bank deposits in foreign
currencies during the completion of investment programs. The Fund may conduct
foreign currency exchange transactions either on a spot (cash) basis at the spot
rate prevailing in the foreign exchange market or by entering into a forward
foreign currency contract. A forward currency contract ("forward contract")
involves an obligation to purchase or sell a specific amount of a specific
currency at a future date, which may be any fixed number of days (usually less
than one year) from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. Forward contracts are considered
"derivatives" -- financial instruments whose performance is derived, at least in
part, from the performance of another asset (such as a security, currency or an
index of securities). The Fund enters into forward contracts in order to "lock
in" the exchange rate between the currency it will deliver and the currency it
will receive for the duration of the contract. In addition, the Fund may enter
into forward contracts to hedge against risks arising from securities the Fund
owns or anticipates purchasing, or the U.S. dollar value of interest and
dividends paid on those securities. The Fund does not intend to enter into
forward contracts on a regular or continuing basis and the Fund will not enter
these contracts for speculative purposes. The Fund will not have more than 25%
of its total assets committed to forward contracts, or maintain a net exposure
to forward contracts that would obligate the Fund to deliver an amount of
foreign currency in excess of the value of the Fund's investment securities or
other assets denominated in that currency.
At or before settlement of a forward currency contract, the Fund may either
deliver the currency or terminate its contractual obligation to deliver the
currency by purchasing an offsetting contract. If the Fund makes delivery of the
currency at or before the settlement of a forward contract, it may be required
to obtain the currency through the conversion of assets of the Fund into the
currency. The Fund may close out a forward contract obligating it to purchase
currency by selling an offsetting contract, in which case, it will realize a
gain or a loss.
RISKS
Foreign currency transactions involve certain costs and risks. The Fund incurs
foreign exchange expenses in converting assets from one currency to another.
Forward contracts involve a risk of loss if the Adviser is inaccurate in its
prediction of currency movements. The projection of short-term currency market
movements is extremely difficult and the successful execution of a short-term
hedging strategy is highly uncertain. The precise matching of forward contract
amounts and the value of the securities involved is generally not possible.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency if the market value of the security is less than the amount of the
foreign currency the Fund is obligated to deliver under the forward contract and
the decision is made to sell the security and make delivery of the foreign
currency. The use of forward contracts as a hedging technique does not eliminate
fluctuations in the prices of the underlying securities the Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. Although forward
contracts can reduce the risk of loss due to a decline in the value of the
hedged currencies, they also limit any potential gain that might result from an
increase in the value of the currencies. There is also the risk that the other
party to the transaction may fail to deliver currency when due which may result
in a loss to the Fund.
OPTIONS AND FUTURES
GENERAL
The Fund may write covered call options to enhance the Fund's performance. To
hedge against a decline in the value of securities owned by the Fund or an
increase in the price of securities that the Fund plans to purchase, the Fund
may purchase or write (sell) covered options on equity securities, currencies
and stock related indices and may also invest in stock index and foreign
4
<PAGE>
currency futures contracts, and purchases options and write covered options on
those contracts. The Fund may only write a put option as a closing transaction.
The Fund may buy or sell both exchange-traded and over-the-counter options. The
Fund will only purchase or write an option that is traded on a U.S. options
exchange or over-the-counter market or if the Adviser believes that a liquid
secondary market for the option exists.
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 STOCK INDICES. A stock index assigns relative values to the stock
included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional options on securities except that stock index
options are settled exclusively in cash and do not involve delivery of
securities. Thus, upon exercise of stock 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 stock index.
OPTIONS ON FOREIGN CURRENCY. Options on foreign currency operate in the same way
as more traditional options on securities except that currency options are
settled exclusively in the currency subject to the option. The value of a
currency option is dependent upon the value of the currency relative to the U.S.
dollar and has no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, the Fund may be disadvantaged by having to deal in an
odd lot market (generally consisting in transactions of less than $1 million)
for the underlying currencies at prices that are less favorable than round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies are open, significant price and rate movements may take
place in the underlying markets that can not be reflected in the options
markets.
OPTIONS ON FUTURES. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell a security or currency, at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position to the holder of the option will be
accompanied by transfer to the holder of an accumulated balance representing the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future.
CURRENCY FUTURES 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 or a currency as called for in the contract, at a specified
date and at an agreed upon price. An index futures contract involves the
delivery of an amount of cash equal to a specified dollar amount multiplied by
the difference between the index value at the close of trading of the contract
and the price at which the futures contract. No physical delivery of the
securities comprising the index is made. Generally, currency and index futures
contracts are closed out prior to the expiration date of the contracts.
5
<PAGE>
RISKS OF OPTIONS AND FUTURES TRANSACTIONS
There are certain investment risks associated with options and futures
transactions. These risks include: (1) dependence on the Adviser's ability to
predict movements in the prices of individual securities and fluctuations in the
general securities markets; (2) imperfect correlation 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
the Fund invests; and (4) lack of assurance that a liquid secondary market will
exist for any particular instrument at any particular time, which, among other
things, may hinder the Fund's ability to limit exposures by closing its
positions. The potential loss to the Fund from investing in certain types of
futures transactions is unlimited.
Other risks include the inability of the 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. The 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. The Fund may invest in 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. The Fund's activities in
the futures and options markets may result in higher portfolio turnover rates
and additional brokerage costs, which could reduce the Fund's yield.
LIMITS ON OPTIONS AND FUTURES
The Fund will not use leverage in its hedging strategy. The Fund will not hedge
more than 25% of its total assets by selling futures contracts, buying put
options and writing call options. In addition, the Fund will not buy futures
contracts or write put options whose underlying value exceeds 25% of the Fund's
total assets and will not purchase call options if the value of purchased call
options would exceed 5% of the Fund's total assets.
The Fund will only invest in futures contracts, options on futures contracts and
other options contracts that are subject to the jurisdiction of the CFTC after
filing a notice of eligibility and otherwise complying with the requirements of
Section 4.5 of the rules of the CFTC. Under that section the Fund would be
permitted to purchase such futures or options contracts only for bona fide
hedging purposes within the meaning of the rules of the CFTC; provided, however,
that in addition, with respect to positions in commodity futures and option
contracts not established for bona fide hedging purposes, the Fund represents
that the aggregate initial margin and premiums required to establish these
positions (subject to certain exclusions) will not exceed 5% of the liquidation
value of the Fund's assets after taking into account unrealized profits and
losses on any such contract the Fund has entered into.
LEVERAGE TRANSACTIONS
GENERAL
The Fund may use leverage to increase potential returns. Leverage involves
special risks and may involve speculative investment techniques. Leverage exists
when cash made available to the Fund through an investment technique is used to
make additional Fund investments. Leverage transactions include borrowing for
other than temporary or emergency purposes, lending portfolio securities,
entering into reverse repurchase agreements, and purchasing securities on a
when-issued, delayed delivery or forward commitment basis. The Fund uses these
investment techniques only when the Adviser believes that the leveraging and the
returns available to the Fund from investing the cash will provide investors a
potentially higher return.
BORROWING AND REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money from a
bank in amounts up to 33 1/3% of the Fund's total assets. The Fund will
generally borrow money to increase its returns. Typically, if a security
6
<PAGE>
purchased with borrowed funds increases in value, the Fund may sell the
security, repay the loan, and secure a profit. The Fund may also enter into
reverse repurchase agreements. A reverse repurchase agreement is a transaction
in which the Fund sells securities to a bank or securities dealer and
simultaneously commits to repurchase the securities from the bank or dealer at
an agreed upon date and at a price reflecting a market rate of interest
unrelated to the sold securities. An investment of the Fund's assets in reverse
repurchase agreements will increase the volatility of the Fund's net asset value
per share. A counterparty to a reverse repurchase agreements must be primary
dealer that reports to the Federal Reserve Bank of New York or one of the
largest 100 commercial banks in the United States.
SECURITIES LENDING AND REPURCHASE AGREEMENTS. The Adviser is generally opposed
to securities lending and has not loaned securities in the past but may do so in
the future. The Fund may lend portfolio securities or participate in repurchase
agreements in an amount up to 50% of its total assets to brokers, dealers and
other financial institutions. The Fund may pay fees to arrange for securities
loans. Repurchase agreements are transactions in which the Fund purchases a
security and simultaneously agrees to resell that security to the seller at an
agreed upon price on an agreed upon future date, normally, one to seven days
later. If the Fund enters into a repurchase agreement, it will maintain
possession of the purchased securities and any underlying collateral. Securities
loans and repurchase agreements must be continuously collateralized and the
collateral must have market value at least equal to the value of the Fund's
loaned securities, plus accrued interest or, in the case of repurchase
agreements, equal to the repurchase price of the securities, plus accrued
interest. In a portfolio securities lending transaction, the Fund receives from
the borrower an amount equal to the interest paid or the dividends declared on
the loaned securities during the term of the loan as well as the interest on the
collateral securities, less any fees (such as finders or administrative fees)
the Fund pays in arranging the loan. The Fund may share the interest it receives
on the collateral securities with the borrower. The terms of the 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 the Fund or the borrower at any time, and the borrowed securities must
be returned when the loan is terminated.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The Fund may purchase securities
offered on a "when-issued" (including a delayed delivery basis) 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 the Fund
makes the commitment to purchase securities on a when-issued 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 when-issued or
forward commitments will be made by the fund if, as a result, more than 10% of
the Fund's total assets would be committed to such transactions.
SHORT SALES. The Fund may sell a security which it does not own in anticipation
of a decline in the market value of that security. To sell short, the Fund will
borrow the security from a broker, sell it and maintain the proceeds of the
transaction in its brokerage account. The broker will charge the Fund interest
during the period it borrows the security. The Fund may close the short sale by
purchasing the security in the open market at the market price. If the proceeds
received from the short sale (less the interest charges) exceeds the amount paid
for the security, the Fund will incur a gain on the transaction. If the proceeds
received from the short sale (less the interest charges) are less than the
amount paid for the security, the Fund will incur a loss on the transaction.
RISKS
Leverage creates the risk of magnified capital losses. Leverage may involve the
creation of a liability that requires the Fund to pay interest (for instance,
reverse repurchase agreements) or the creation of a liability that does not
entail any interest costs (for instance, forward commitment costs).
7
<PAGE>
The risks of leverage include a higher volatility of the net asset value of the
Fund's securities and the net asset value of the Fund due to favorable or
adverse market movements or changes in the cost of cash obtained by leveraging
and the yield from invested cash. So long as the Fund is able to realize a net
return on its investment portfolio that is higher than interest expense
incurred, if any, leverage will result in higher current net investment income
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 the
Fund's investment portfolio, the benefit of leveraging will be reduced, and, if
the interest expense incurred as a result of leveraging 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 the Fund's
current investment income were not sufficient to meet the interest expense of
leveraging, it could be necessary for the Fund to liquidate certain of its
investments at an inappropriate time.
SEGREGATED ACCOUNTS. In order to attempt to reduce the risks involved in various
transactions involving leverage, the 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 the Fund's
commitments under these transactions.
ILLIQUID AND RESTRICTED SECURITIES
GENERAL
The Fund may not acquire securities or invest in repurchase agreements if, as a
result, more than 15% of the Fund's net assets (taken at current value) would be
invested in illiquid securities.
The term "illiquid securities" means securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the securities. Illiquid securities include: (1)
repurchase agreements not entitling the holder to payment of principal within
seven days; (2) purchased over-the-counter options; (3) securities which are not
readily marketable and (4) securities subject to contractual or legal
restrictions on resale because they have not been registered under the 1933 Act
("restricted securities").
RISKS
Limitations on resale may have an adverse effect on the marketability of a
security and the Fund might also have to register a restricted security in order
to dispose of it, resulting in expense and delay. The Fund might not be able to
dispose of restricted or illiquid securities promptly or at reasonable prices
and might thereby experience difficulty satisfying redemption requests. There
can be no assurance that a liquid market will exist for any security at any
particular time. Any security, including securities determined by the Adviser to
be liquid, can become illiquid.
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.
8
<PAGE>
FOREIGN SECURITIES
The Fund may invest in foreign securities. Although the Adviser currently
intends to invest the Fund's assets in issuers located in at least 5 countries,
there is no limit on the amount of the Fund's assets that may be invested in
issuers located in any one country or region. To the extent that the Fund has
concentrated its investments in issuers located in any one country or region,
the Fund is more susceptible to factors adversely affecting the economy of that
country or region than if the Fund was invested in a more geographically diverse
portfolio. Investments in the securities of foreign issuers may involve risks in
addition to those normally associated with investments in the securities of U.S.
issuers. All foreign investments are subject to risks of: (1) foreign political
and economic instability; (2) adverse movements in foreign exchange rates; (3)
the imposition or tightening of exchange controls or other limitations on
repatriation of foreign capital and (4) and changes in foreign governmental
attitudes towards private investment, including potential nationalization,
increased taxation or confiscation of the Fund's assets.
In addition, dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income available for distribution to
you. Some foreign brokerage commissions and custody fees are higher than those
in the United States. Foreign accounting, auditing and financial reporting
standards differ from those in the United States, and therefore, less
information may be available about foreign companies than is available about
issuers of comparable U.S. companies. Foreign securities also may trade less
frequently and with lower volume and may exhibit greater price volatility than
United States securities.
Changes in foreign exchange rates will affect the U.S. dollar value of all
foreign currency-denominated securities held by the Fund. Exchange rates are
influenced generally by the forces of supply and demand in the foreign currency
markets and by numerous other political and economic events occurring outside
the United States, many of which may be difficult, if not impossible, to
predict.
Income from foreign securities will be received and realized in foreign
currencies, and the Fund is required to compute and distribute income in U.S.
dollars. Accordingly, a decline in the value of a particular foreign currency
against the U.S. dollar after the Fund's income has been earned and computed in
U.S. dollars may require the Fund to liquidate portfolio securities to acquire
sufficient U.S. dollars to make a distribution. Similarly, if the exchange rate
declines between the time the Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the Fund may be required to liquidate additional foreign
securities to purchase the U.S. dollars required to meet such expenses.
TEMPORARY DEFENSIVE POSITION
The Fund may invest in prime quality money market instruments, pending
investment of cash balances. The Fund may also assume a temporary defensive
position and may invest without limit in prime quality money market instruments.
Prime quality instruments are those instruments that are rated in one of the two
highest short-term rating categories by an NRSRO or, if not rated, determined by
the Adviser to be of comparable quality.
Money market instruments usually have maturities of one year or less and fixed
rates of return. The money market instruments in which the Fund may invest
include short-term U.S. Government Securities, commercial paper, bankers'
acceptances, certificates of deposit, interest-bearing savings deposits of
commercial banks, repurchase agreements concerning securities in which the Fund
may invest and money market mutual funds.
CORE AND GATEWAY(R)
The Fund may seek to achieve its investment objective by converting to a Core
and Gateway structure. A fund operating under a Core and Gateway 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 structure if it would materially
increase costs to the Fund's shareholders. The Board will not convert the Fund
to a Core and Gateway structure without notice to the shareholders.
9
<PAGE>
INVESTMENT LIMITATIONS
For purposes of all investment policies of the Fund: (1) the term 1940 Act
includes the rules thereunder, SEC interpretations and any exemptive order upon
which the Fund may rely; and (2) the term Code includes the rules thereunder,
IRS interpretations and any private letter ruling or similar authority upon
which the Fund may rely.
Except as required by the 1940 Act or the Code, if any percentage restriction on
investment or utilization of assets is adhered to at the time an investment is
made, a later change in percentage resulting from a change in the market values
of the Fund's assets or purchases and redemptions of shares will not be
considered a violation of the limitation.
A fundamental policy of the Fund and the Fund's investment objective, cannot be
changed without the affirmative vote of the lesser of: (1) 50% of the
outstanding shares of the Fund; or (2) 67% of the shares of the Fund present or
represented at a shareholders meeting at which the holders of more than 50% of
the outstanding shares of the Fund are present or represented. A nonfundamental
policy of the Fund may be changed by the Board without shareholder approval.
FUNDAMENTAL LIMITATIONS
The Fund has adopted the following investment limitations, that cannot be
changed by the Board without shareholder approval. The Fund may not:
BORROWING MONEY
Borrow money if, as a result, outstanding borrowings would exceed an amount
equal to 33 1/3% of the Fund's total assets. The following are not subject to
this limitation to the extent they are fully collateralized: (1) the delayed
delivery of purchased securities (such as the purchase of when-issued
securities); (2) reverse repurchase agreements and (3) dollar-roll transactions.
CONCENTRATION
Purchase securities, other than U.S. Government Securities, repurchase
agreements covering U.S. Government Securities, or securities of other regulated
investment companies, 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 determining industry concentration (1) there is no limit on
investments in tax-exempt securities issued by the states, territories or
possessions of the United States or foreign government securities; and (2) the
Fund treats the assets of investment companies in which it invests as its own
except to the extent that the Fund invests in other investment companies
pursuant to Section 12(d)(1)(A) of the 1940 Act.
10
<PAGE>
DIVERSIFICATION
With respect to 75% of its assets, purchase a security (other than a U.S.
Government Security or a security of an investment company) if, as a result: (1)
more than 5% of the Fund's total assets would be invested in the securities of a
single issuer, or (2) the Fund would own more than l0% of the outstanding voting
securities of any single issuer.
UNDERWRITING ACTIVITIES
Underwrite (as that term is defined in the 1933 Act) securities issued by other
persons except, to the extent that in connection with the disposition of the
Fund's assets, the Fund may be deemed to be an underwriter.
MAKING LOANS
Make loans to other parties. For purposes of this limitation, entering into
repurchase agreements, lending securities and acquiring any debt security are
not deemed to be the making of loans.
PURCHASES AND SALES OF REAL ESTATE
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business).
PURCHASES AND SALES OF COMMODITIES
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Fund from
purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).
ISSUANCE OF SENIOR SECURITIES
Issue senior securities except to the extent permitted by the 1940 Act.
NONFUNDAMENTAL LIMITATIONS
The Fund has adopted the following investment limitations that may be changed by
the Board without shareholder approval. The Fund may not:
PLEDGES
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.
SECURITIES OF INVESTMENT COMPANIES
Invest in securities of another registered investment company, except to the
extent permitted by the 1940 Act.
11
<PAGE>
SHORT SALES
Enter into short sales if, as a result, more than 25% of the Fund's total assets
would be so invested or the Fund's short positions (other than those positions
"against the box") would represent more than 2% of the outstanding voting
securities of any single issuer or of any class of securities of any single
issuer.
ILLIQUID SECURITIES
Invest more than 15% of its net assets in illiquid assets such as: (1)
securities that cannot be disposed of within seven days at their then-current
value, (2) repurchase agreements not entitling the holder to payment of
principal within seven days and (3) securities subject to restrictions on the
sale of the securities to the public without registration under the 1933 Act
("restricted securities") that are not readily marketable. The Fund may treat
certain restricted securities as liquid pursuant to guidelines adopted by the
Board.
Except as required by the 1940 Act, whenever an amended or restated investment
policy or limitation states a maximum percentage of the Fund's assets that may
be invested, such percentage limitation will be determined immediately after and
as a result of the acquisition of such security or other asset. Any subsequent
change in values, assets or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
or limitations.
PERFORMANCE DATA AND ADVERTISING
PERFORMANCE DATA
On June 1, 1998, a limited partnership managed by the Adviser reorganized into
the Fund. The predecessor limited partnership maintained an investment objective
and investment policies that were, in all material respects, equivalent to those
of the Fund. The Fund's performance for periods before June 1, 1998 is that of
the limited partnership's performance. Had the limited partnership's performance
been readjusted to reflect the first year expenses of the Fund, the Fund's
performance for all periods except "Since Inception" would have been lower. The
limited partnership was not registered under the Investment Company Act of 1940
("1940 Act") and was not subject to certain investment limitations,
diversification requirements, and other restrictions imposed by the 1940 Act and
the Internal Revenue Code, which, if applicable, may have adversely affected its
performance.
Including the limited partnership performance, the Fund's average annual total
return for the 1-year, 3-year, 5-year and since inception (July 31, 1989)
periods as of May 31, 1999 was -11.95%, 12.74%, 15.71% and 11.27%, respectively.
Total return includes reinvestment of dividends and capital gains.
The Fund may quote performance in various ways. All performance information
supplied in advertising, sales literature, shareholder reports or other
materials is historical and is not intended to indicate future returns.
The Fund may compare any of its performance information with:
o Data published by independent evaluators such as Morningstar, Inc.,
Lipper, Inc., 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.
12
<PAGE>
o The performance of recognized stock, bond and other indices, including
but not limited to the Standard & Poor's 500(R) Index, the Russell
2000(R) Index, the Russell MidcapTM Index, the Russell 1000(R) Value
Index, the Russell 2500(R) Index, the Morgan Stanley - Europe,
Australian and Far East Index, the Dow Jones Industrial Average, the
Salomon Brothers Bond Index, the Shearson Lehman Bond Index, U.S.
Treasury bonds, bills or notes and changes in the Consumer Price Index
as published by the U.S. Department of Commerce.
Performance information may be presented numerically or in a table, graph or
similar illustration.
Indices are not used in the management of the Fund but rather are standards by
which the Fund's Adviser and shareholders may compare the performance of the
Fund to an unmanaged composite of securities with similar, but not identical,
characteristics as the Fund.
The Fund may refer to: (1) general market performances over past time periods
such as those published by Ibbotson Associates (for instance, its "Stocks,
Bonds, Bills and Inflation Yearbook"); (2) mutual fund performance rankings and
other data published by Fund Tracking Companies; and (3) material and
comparative mutual fund data and ratings reported in independent periodicals,
such as newspapers and financial magazines.
The Fund's performance will fluctuate in response to market conditions and other
factors.
PERFORMANCE CALCULATIONS
The Fund's performance may be quoted in terms of yield or total return. Table 1
in Appendix C includes performance information for the Fund.
SEC YIELD
Standardized SEC yields for the Fund used in advertising are computed by
dividing the Fund's interest income (in accordance with specific standardized
rules) for a given 30 day or one month period, net of expenses, by the average
number of shares entitled to receive income distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income in accordance
with specific standardized rules) in order to arrive at an annual percentage
rate.
Capital gains and losses generally are excluded from these calculations.
Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for the Fund may differ from the rate of
distribution of income from the Fund over the same period or the rate of income
reported in the Fund's financial statements.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day and that the Fund's yield for any given period is not an
indication or representation by the Fund of future yields or rates of return on
the Fund's shares. Financial intermediaries may charge their customers that
invest in the Fund fees in connection with that investment. This will have the
effect of reducing the Fund's after-fee yield to those shareholders.
The yields of the Fund are not fixed or guaranteed, and an investment in the
Fund is not insured or guaranteed. Accordingly, yield information should not be
used to compare shares of the Fund with investment alternatives, which, like
money market instruments or bank accounts, may provide a fixed rate of interest.
Also, it may not be appropriate to compare the Fund's yield information directly
to similar information regarding investment alternatives, which are insured or
guaranteed.
13
<PAGE>
Yield quotations are based on amounts invested in the Fund net of any applicable
sales charges that may be paid by an investor. A computation of yield that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges. The Fund
does not charge a sales charge.
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
TOTAL RETURN CALCULATIONS
The Fund's total return shows its overall change in value, including changes in
share price, and assumes all of the Fund's distributions are reinvested.
Total return figures may be based on amounts invested in the Fund net of sales
charges that may be paid by an investor. A computation of total return that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges. The Fund
does not charge a sales charge.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is calculated using a
formula prescribed by the SEC. To calculate standard average annual total return
the Fund: (1) determines the growth or decline in value of a hypothetical
historical investment in the Fund over a stated period; and (2) calculates the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. For
example, a cumulative return of 100% over ten years would produce an average
annual total return of 7.18%. While average annual total returns are a
convenient means of comparing investment alternatives, investors should realize
that performance is not constant over time but changes from year to year, and
that average annual total 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 total 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. For instance, the Fund may quote unaveraged or cumulative total
returns, which reflect the Fund's performance over a stated period of time.
Moreover, 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.
14
<PAGE>
Any total return may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over any time period. Total returns may be quoted with or without
taking into consideration a fund's front-end sales charge or contingent deferred
sales charges. The Fund does not charge a sales charge.
Period total return is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return
The other definitions are the same as in average annual total
return above
OTHER MATTERS
The Fund may also include various information in its advertising, sales
literature, shareholder reports or other materials including, but not limited
to: (1) portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer or by maturity; (2) statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
by an investor to meet specific financial goals, such as funding retirement,
paying for children's education and financially supporting aging parents; (3)
information (including charts and illustrations) showing the effects of
compounding interest (compounding is the process of earning interest on
principal plus interest that was earned earlier; interest can be compounded at
different intervals, such as annually, quarterly or daily); (4) information
relating to inflation and its effects on the dollar; (for example, after ten
years the purchasing power of $25,000 would shrink to $16,621, $14,968, $13,465
and $12,100, respectively, if the annual rates of inflation were 4%, 5%, 6% and
7%, respectively); (5) information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar-cost
averaging; (6) biographical descriptions of the Fund's portfolio managers and
the portfolio management staff of the Fund's investment adviser, summaries of
the views of the portfolio managers with respect to the financial markets, or
descriptions of the nature of the Adviser's and its staff's management
techniques; (7) the results of a hypothetical investment in the Fund over a
given number of years, including the amount that the investment would be at the
end of the period; (8) the effects of investing in a tax-deferred account, such
as an individual retirement account or Section 401(k) pension plan; (9) the net
asset value, net assets or number of shareholders of the Fund as of one or more
dates; and (10) a comparison of the Fund's operations to the operations of other
funds or similar investment products, such as a comparison of the nature and
scope of regulation of the products and the products' weighted average maturity,
liquidity, investment policies and the manner of calculating and reporting
performance.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,118 at the end
of the second year (an increase in $98). The extra $8 that was earned on the $90
interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of the Fund's performance.
The Fund may advertise information regarding the effects of systematic
investment and systematic withdrawal plans, including the principal of dollar
cost averaging. In a dollar-cost averaging program, an investor invests a fixed
dollar amount in the Fund at periodic intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not insure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in the Fund, the following will be the relationship between
average cost per share ($14.35 in the example given) and average price per
share:
15
<PAGE>
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, the Fund may provide "shareholder's
letters" which serve to provide shareholders or investors with an introduction
into the Fund's, the Trust's or any of the Trust's service providers' policies
or business practices.
16
<PAGE>
MANAGEMENT
TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Trust, their positions with the
Trust, address, date of birth and principal occupations during the past five
years are set forth below. Each Trustee who is an "interested person" (as
defined by the 1940 Act) of the Trust is indicated by an asterisk (*).
<TABLE>
<S> <C>
NAME, POSITION WITH THE TRUST, PRINCIPAL OCCUPATION(S) DURING
DATE OF BIRTH AND ADDRESS PAST 5 YEARS
-------------------------------------------- -----------------------------------------------------------------------
John Y. Keffer*, Chairman and President 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
-------------------------------------------- -----------------------------------------------------------------------
Thomas G. Sheehan Managing Director, Forum Financial Group, LLC since 1993
Two Portland Square Special Counsel, Division of Investment Management, SEC
Portland, Maine 04101 Officer of two other investment companies for which Forum Financial
Group, LLC provides services
-------------------------------------------- -----------------------------------------------------------------------
David I. Goldstein, Vice President General Counsel, Forum Financial Group LLC
Born: August 3, 1961 Officer of two 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 04101 Officer of six other investment companies for which Forum Financial
Group, LLC provides services
-------------------------------------------- -----------------------------------------------------------------------
Leslie K. Klenk, Secretary 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>
17
<PAGE>
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 compensation 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 May 31, 1999.
<TABLE>
<S> <C> <C> <C> <C>
TOTAL COMPENSATION
COMPENSATION FROM FROM TRUST AND FUND
TRUSTEE TRUST BENEFITS RETIREMENT COMPLEX
John Y. Keffer $0 $0 $0 $0
Costas Azariadis $13,300 $0 $0 $23,800
James C. Cheng $14,800 $0 $0 $25,300
J. Michael Parish $14,800 $0 $0 $25,300
</TABLE>
INVESTMENT ADVISER
SERVICES OF ADVISER
The Adviser serves as investment adviser to the Fund pursuant to an investment
advisory agreement with the Trust. Under that agreement, the Adviser furnishes,
at its own expense, all services, facilities and personnel necessary in
connection with managing the Fund's investments and effecting portfolio
transactions for the Fund.
OWNERSHIP OF ADVISER
The Adviser is a privately owned company controlled by Bernard R. Horn, Jr.
FEES
The Adviser's fee is calculated as a percentage of the applicable Fund's average
net assets. The fee is accrued daily by the Fund and is paid monthly based on
average net assets for the previous month.
In addition to receiving its advisory fee from the Fund, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets they invested in the Fund. If you have a separately managed account with
the Adviser with assets invested in the Fund, the Adviser will credit an amount
equal to all or a portion of the fees received by the Adviser against any
investment management fee received from you.
Table 1 in Appendix B shows the dollar amount of the fees payable by the Fund to
the Adviser, the amount of fees waived by the Adviser, and the actual fees
received by the Adviser. The data are for the past three fiscal years (or
shorter period depending on the Fund's commencement of operations).
OTHER PROVISIONS OF ADVISER'S AGREEMENT
The Adviser's agreement remains in effect for a period of two year from the date
of its effectiveness and then the agreement must be approved 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.
18
<PAGE>
The Adviser's agreement is terminable without penalty by the Trust regarding the
Fund on 60 days' written notice when authorized either by vote of the Fund's
shareholders or by a majority vote of the Board, or by the Adviser on 60 days'
written notice to the Trust. The Agreement terminates immediately upon
assignment.
Under its agreement, the Adviser is not liable for any error of judgment,
mistake of law, or in any event whatsoever except for willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the agreement.
DISTRIBUTOR
DISTRIBUTOR; SERVICES AND COMPENSATION OF DISTRIBUTOR
FFS, the distributor (also known as principal underwriter) of the shares of the
Fund, is located at Two Portland Square, Portland, Maine 04101. FFS is a
registered broker-dealer and is a member of the National Association of
Securities Dealers, Inc. Prior to August 1, 1999, FFSI was the distributor of
the Fund pursuant to similar terms and compensation.
FFS, FAdS, FAcS and FSS are each controlled indirectly by Forum Financial Group,
LLC, which is controlled by John Y. Keffer.
Under a distribution agreement (the "Distribution Agreement") with the Trust,
FFS acts as the agent of the Trust in connection with the offering of shares of
the Fund. FFS continually distributes shares of the Fund on a best effort basis.
FFS has no obligation to sell any specific quantity of Fund shares.
FFS may enter into arrangements with various financial institutions through
which you may purchase or redeem shares. FFS may, at its own expense and from
its own resources, compensate certain persons who provide services in connection
with the sale or expected sale of shares of the Fund.
FFS may enter into agreements with selected broker-dealers, banks or other
financial institutions for distribution of shares of the Fund. These financial
institutions may charge a fee for their services and may receive shareholders
service fees even though shares of the Fund are sold without a sales charge.
These financial institutions may otherwise act as processing agents, and will be
responsible for promptly transmitting purchase, redemption and other requests to
the Fund.
Investors who purchase shares in this manner will be subject to the procedures
of the institution through whom they purchase shares, which may include charges,
investment minimums, cutoff times and other restrictions in addition to, or
different from, those listed herein. Information concerning any charges or
services will be provided to customers by the financial institution. Investors
purchasing shares of the Fund in this manner should acquaint themselves with
their institution's procedures and should read this Prospectus in conjunction
with any materials and information provided by their institution. The financial
institution, and not its customers, will be the shareholder of record, although
customers may have the right to vote shares depending upon their arrangement
with the institution.
FFS does not receive a fee for services performed under the Distribution
Agreement.
OTHER PROVISIONS OF DISTRIBUTOR'S AGREEMENT
The Distribution Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party.
The Distribution Agreement is terminable without penalty by the Trust with
respect to the Fund on 60 days' written notice when authorized either by vote of
the Fund's shareholders, by a majority vote of the Board or by FFS on 60 days'
written notice to the Trust.
19
<PAGE>
Under the Distribution Agreement, FFS is not liable to the Trust or the Trust's
shareholders for any error of judgment or mistake of law, for any loss arising
out of any investment or for any act or omission in the performance of its
duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties under the agreement.
Under the Distribution Agreement, FFS and certain related parties (such as FFS's
officers and persons that control FFS) are indemnified by the Trust against all
claims and expenses in any way related to alleged untrue statements of material
fact contained in the Fund's Registration Statement or any alleged omission of a
material fact required to be stated in the Registration Statement to make
statements contained therein not misleading. The Trust, however, will not
indemnify FFS for any such misstatements or omissions if they were made in
reliance upon information provided in writing by FFS in connection with the
preparation of the Registration Statement.
OTHER FUND SERVICE PROVIDERS
ADMINISTRATOR
As administrator, pursuant to an agreement with the Trust, FAdS is responsible
for the supervision of the overall management of the Trust, providing the Trust
with general office facilities and providing persons satisfactory to the Board
to serve as officers of the Trust.
For its services, FAdS receives a fee from the Fund at an annual rate of 0.10%
of the first $150 million of the Fund's average daily net assets and 0.05% of
the Fund's average daily net assets in excess of $150 million. The fee is
accrued daily by the Fund and is paid monthly based on average net assets for
the previous month.
The Administration Agreement must be approved at least annually by the Board or
by majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. FAdS's agreement is terminable without penalty by the Trust or by FAdS
with respect to the Fund on 60 days' written notice.
Under the Administration Agreement, FAdS is not liable to the Trust or the
Trust's shareholders for any act or omission, except for willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the agreement. Under the
agreement, FAdS and certain related parties (such as FAdS's officers and persons
who control FAdS) are indemnified by the Trust against any and all claims and
expenses related to FAdS's actions or omissions that are consistent with FAdS's
contractual standard of care.
Table 2 in Appendix B shows the dollar amount of the fees payable by the Fund to
FAdS, the amount of the fee waived by FAdS, and the actual fees received by
FAdS. The data is for the past three fiscal years (or shorter period depending
on the Fund's commencement of operations).
FUND ACCOUNTANT
As fund accountant, pursuant to an agreement with the Trust (the "Accounting
Agreement") FAcS provides fund accounting services to the Fund. These services
include calculating the NAV per share of the Fund (and class) and preparing the
Fund's financial statements and tax returns.
For its services, FAcS receives a fee from the Fund at an annual rate of
$36,000, plus $2,200 for the preparation of tax returns and certain surcharges
based upon the number and type of the Fund's portfolio transactions and
positions. The fee is accrued daily by the Fund and is paid monthly based on the
transactions and positions for the previous month.
20
<PAGE>
The Accounting Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case by a majority of the
Trustees who are not parties to the agreement or interested persons of any such
party. The Accounting Agreement is terminable without penalty by the Trust or by
FAcS with respect to the Fund on 60 days' written notice.
Under the Accounting Agreement, FAcS is not liable for any action or omission in
the performance of its duties to the Fund, except for willful misfeasance, bad
faith, gross negligence or by reason of reckless disregard of its obligations
and duties under the agreement. Under the 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 the Fund's NAV per share, FAcS is
deemed not to have committed an error if the NAV per share it calculates is
within 1/10 of 1% of the actual NAV per share (after recalculation). The
agreement also provides that FAcS will not be liable to a shareholder for any
loss incurred due to an NAV difference if such difference is less than or equal
1/2 of 1% or less than or equal to $10.00. In addition, FAcS is not liable for
the errors of others, including the companies that supply securities prices to
FAcS and the Fund.
Table 3 in Appendix B shows the dollar amount of the fees payable by the Fund to
FAcS, the amount of the fee waived by FAcS, and the actual fees received by
FAcS. The data is for the past three fiscal years (or shorter period depending
on the Fund's commencement of operations).
TRANSFER AGENT
As transfer agent and distribution paying agent, pursuant to an agreement with
the Trust ("Transfer Agency Agreement"), FSS maintains an account for each
shareholder of record of the Fund and is responsible for processing purchase and
redemption requests and paying distributions to shareholders of record. 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 a fee from the Fund at an annual rate of $24,000
plus $25 per shareholder account. The fee is accrued daily by the Fund and is
paid monthly based on the average net assets for the previous month.
The Transfer Agency 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 Agency Agreement is terminable without penalty by the Trust
or by FSS with respect to the Fund on 60 days' written notice.
Under the Transfer Agency Agreement, FSS is not liable for any act in the
performance of its duties to the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of its duties under the agreement. Under
the agreement, FSS and certain related parties (such as FSS's officers and
persons who control the Transfer FSS) are indemnified by the Trust against any
and all claims and expenses related to FSS's actions or omissions that are
consistent with FSS's contractual standard of care.
Table 4 in Appendix B shows the dollar amount of the fees payable by the Fund to
FSS, the amount of the fee waived by FSS, and the actual fees received by FSS.
The data is for the past three fiscal years (or shorter period depending on the
Fund's commencement of operations).
SHAREHOLDER SERVICING AGENT
Pursuant to a Shareholder Service Plan (the "Plan") between the Trust and FAdS
effective March 18, 1998, FAdS is authorized to perform, or arrange for the
performance of, certain activities relating to the servicing and maintenance of
shareholder accounts not otherwise provided by FSS ("Shareholder Servicing
Activities"). Under the Plan, FAdS may enter into shareholder service agreements
with financial institutions or other persons who provide Shareholder Servicing
Activities for their clients invested in the Fund.
21
<PAGE>
Shareholder Servicing Activities shall include one or more of the following: (a)
establishing and maintaining accounts and records for shareholders of the Fund;
(b) answering client inquiries regarding the manner in which purchases,
exhchanges and redemptions of shares of the Trust may be effected and other
matters pertaining to the Trust's services; (c) providing necessary personnel
and facilities to establish and maintain client accounts and records; (d)
assisting clients in arranging for processing purchase, exchange and redemption
transactions; (e) arranging for the wiring of funds; (f) guaranteeing
shareholder signatures in connection with redemption orders and transfers and
changes shareholder-designated accounts; (g) integrating periodic statements
with other shareholder transactions; and (h) providing such other related
services as the shareholder may request.
As compensation for the Shareholder Servicing Activities, the Trust pays the
shareholder servicing agent, through FAdS, a fee up to 0.25% of the average
daily net assets of the shares owned by investors for which the shareholder
servicing agent maintains a servicing relationship.
Any material amendment to the Plan must be approved by the Board, including a
majority of the Disinterested Trustees. The Plan may be terminated without
penalty at any time: (1) by vote of a majority of the Board, including a
majority of the Trustees who are not parties to the Plan or interested persons
of any such party or (2) by FAdS.
CUSTODIAN
As custodian, pursuant to an agreement with the Trust, Forum Trust, LLC
safeguards and controls the Fund's cash and securities, determines income and
collects interest on Fund investments. The Custodian may employ subcustodians to
provide custody of the Fund's domestic and foreign assets. The Custodian is
located at Two Portland Square, Portland, Maine 04101.
For its services, the Custodian receives an annualized percentage of the average
daily net assets of the Fund. The Fund also pays an annual domestic custody fee
as well as certain other transaction fees. These fees are accrued daily by the
Fund and are paid monthly based on average net assets and transactions for the
previous month.
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.
INDEPENDENT AUDITORS
Deloitte & Touche, LLP, 125 Summer Street, Boston, Massachusetts 02110,
independent auditors have been selected as auditors for the Fund. The auditors
audit the annual financial statements of the Fund and provide the Fund with an
audit opinion. The auditors also review certain regulatory filings of the Fund
and the Fund' tax returns.
PORTFOLIO TRANSACTIONS
HOW SECURITIES ARE PURCHASED AND SOLD
Purchases and sales of portfolio securities that are fixed income securities
(for instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom the Fund
purchases or to whom the Fund sells is acting on its own behalf (and not as the
agent of some other party such as its customers). These securities normally are
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for these
securities.
Purchases and sales of portfolio securities that are equity securities (for
instance common stock and preferred stock) are generally effected if; (1) the
security is traded on an exchange, through brokers who charge commissions and
(2) the security is traded in the "over-the-counter" markets, in a principal
transaction directly from a market maker. In transactions on stock exchanges,
22
<PAGE>
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.
The price of securities from underwriters of the securities includes a disclosed
fixed commission or concession paid by the issuer to the underwriter, and prices
of securities from dealers serving as market makers reflects the spread between
the bid and asked price.
In the case of fixed income and equity securities traded in the over-the-counter
markets, there is generally no stated commission, but the price usually includes
an undisclosed commission or markup.
COMMISSIONS PAID
Table 5 in Appendix B shows the aggregate brokerage commissions paid by the Fund
as well as aggregate commissions paid to an affiliate of the Fund or the
Adviser. The data presented are for the past three fiscal years (or shorter
period depending on the Fund's commencement of operations).
ADVISER RESPONSIBILITY FOR PURCHASES AND SALES
The Adviser places orders for the purchase and sale of securities with brokers
and dealers selected by and in the discretion of the Adviser. The Fund has no
obligation to deal with a specific broker or dealer in the execution of
portfolio transactions. Allocations of transactions to brokers and dealers and
the frequency of transactions are determined by the Adviser in its best judgment
and in a manner deemed to be in the best interest of the Fund rather than by any
formula.
The Adviser seeks "best execution" for all portfolio transactions. This means
that the Adviser seeks the most favorable price and execution available. The
Adviser's primary consideration in executing transactions for the Fund is prompt
execution of orders in an effective manner and at the most favorable price
available.
CHOOSING BROKER-DEALERS
The Fund may not always pay the lowest commission or spread available. Rather,
in determining the amount of commissions (including certain dealer spreads) paid
in connection with securities transactions, the Adviser takes into account
factors such as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the research services described below)
and any risk assumed by the executing broker.
Consistent with applicable rules and the Adviser's duties, the Adviser may
consider: (1) sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund and (2) payments
made by brokers effecting transactions for the Fund (these payments may be made
to the Fund or to other persons on behalf of the Fund for services provided to
the Fund for which those other persons would be obligated to pay).
OBTAINING RESEARCH FROM BROKERS
The Adviser may give consideration to research services furnished by brokers to
the Adviser for its use and may cause the Fund to pay these brokers a higher
amount of commission than may be charged by other brokers. This research is
designed to augment the Adviser's own internal research and investment strategy
capabilities. This research may be used by the Adviser in connection with
services to clients other than the Fund, and not all research services may be
used by the Adviser in connection with the Fund. The Adviser's fees are not
reduced by reason of the Adviser's receipt of research services.
The Adviser has full brokerage discretion. It evaluates the range and quality of
a broker's services in placing trades including securing best price,
confidentiality, clearance and settlement capabilities, promptness of execution
and the financial stability of the broker-dealer. Under certain circumstances,
the value of research provided by a broker-dealer may be a factor in the
23
<PAGE>
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 obtained for
clients include industry research reports and periodicals, quotation systems,
software for portfolio management and formal databases.
Occasionally, the Adviser utilizes a broker and pays a slightly higher
commission than another might charge. The higher commission is paid because of
the Adviser's need for specific research, for specific expertise a firm may have
in a particular type of transaction (due to factors such as size or difficulty),
or for speed/efficiency in execution. Since most of the Adviser's brokerage
commissions for research are for economic research on specific companies or
industries, and since the Adviser follows a limited number of securities, most
of the commission dollars spent for industry and stock research directly benefit
the Adviser's clients and the Fund's investors.
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. 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.
COUNTERPARTY RISK
The Adviser monitors the creditworthiness of counterparties to the Fund's
transactions and intends to enter into a transaction only when it believes that
the counterparty presents minimal and appropriate credit risks.
TRANSACTIONS THROUGH AFFILIATES
The Adviser may effect transactions through affiliates of the Adviser (or
affiliates of those persons) pursuant to procedures adopted by the Trust.
OTHER ACCOUNTS OF THE ADVISER
Investment decisions for the Fund are made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. Investment decisions are the product of many
factors, including basic suitability for the particular client involved.
Likewise, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may sell
a particular security to another client. In addition, two or more clients may
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as is possible, averaged as to price
and allocated between such clients in a manner which, in the Adviser's opinion,
is equitable to each and in accordance with the amount being purchased or sold
by each. There may be circumstances when purchases or sales of a portfolio
security for one client could have an adverse effect on another client that has
a position in that security. In addition, when purchases or sales of the same
security for the Fund and other client accounts managed by the Adviser occurs
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
PORTFOLIO TURNOVER
The frequency of portfolio transactions of the Fund (the portfolio turnover
rate) will vary from year to year depending on many factors. From time to time,
the Fund may engage in active short-term trading to take advantage of price
movements affecting individual issues, groups of issues or markets. An annual
portfolio turnover rate of 100% would occur if all the securities in the Fund
were replaced once in a period of one year. The Adviser anticipates that the
24
<PAGE>
annual turnover in the Fund will not be in excess of 50%. High portfolio
turnover rates may result in increased brokerage costs to the Fund and a
possible increase in short-term capital gains or losses.
SECURITIES OF REGULAR BROKER-DEALERS
From time to time, the Fund may acquire and hold securities issued by its
"regular brokers and dealers" or the parents of those brokers and dealers. For
this purpose, regular brokers and dealers means 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.
During the Fund's last fiscal year, the Fund acquired no securities issued by
its regular brokers and dealers.
PURCHASE AND REDEMPTION INFORMATION
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.
The 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 state in
which you reside. Please check with your investment professional to determine a
class or fund's availability.
ADDITIONAL PURCHASE INFORMATION
Shares of the Fund are sold on a continuous basis by the distributor at net
asset value ("NAV") per share without any sales charge. Accordingly, the
offering price per share is the same as the NAV per share.
The Fund reserves the right to refuse any purchase request.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, the Fund may accept portfolio securities that meet the investment
objective and policies of the Fund as payment for Fund shares. The Fund will
only accept securities that: (1) are not restricted as to transfer by law and
are not illiquid and (2) have a value that is readily ascertainable (and not
established only by valuation procedures).
IRAS
All contributions into an IRA through the automatic investing service are
treated as IRA contributions made during the year the investment is received.
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.
25
<PAGE>
PURCHASES THROUGH FINANCIAL INSTITUTIONS
You may purchase and redeem shares through certain broker-dealers, banks and
other financial institutions. Financial institutions may charge their customers
a fee for their services and are responsible for promptly transmitting purchase,
redemption and other requests to the Fund.
If you purchase shares through a financial institution, you will be subject to
the institution's procedures, which may include charges, limitations, investment
minimums, cutoff times and restrictions in addition to, or different from, those
applicable when you invest in the Fund directly. When you purchase the Fund's
shares through a financial institution, you may or may not be the shareholder of
record and, subject to your institution's procedures, you may have Fund shares
transferred into your name. There is typically a three-day settlement period for
purchases and redemptions through broker-dealers. Certain financial institutions
may also enter purchase orders with payment to follow.
You may not be eligible for certain shareholder services when you purchase
shares through a financial institution. Contact your institution for further
information. If you hold shares through a financial institution, the Fund may
confirm purchases and redemptions to the financial institution, which will
provide you with confirmations and periodic statements. The Fund is not
responsible for the failure of any financial institution to carry out its
obligations.
Investors purchasing shares of the Fund through a financial institution should
read any materials and information provided by the financial institution to
acquaint themselves with its procedures and any fees that the institution may
charge.
ADDITIONAL REDEMPTION INFORMATION
The Fund may redeem shares involuntarily to: (1) reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased or (2) to collect any charge relating to transactions effected
for the benefit of a shareholder which is applicable to the Fund's shares as
provided in the Prospectus.
SUSPENSION OF RIGHT OF REDEMPTION
The right of redemption may not be suspended, except for any period during
which: (1) the New York Stock Exchange is closed (other than customary weekend
and holiday closings) or during which the SEC determines that trading thereon is
restricted; (2) an emergency (as determined by the SEC) exists as a result of
which disposal by the Fund of its securities is not reasonably practicable or as
a result of which it is not reasonably practicable for the Fund fairly to
determine the value of its net assets; or (3) the SEC may by order permit for
the protection of the shareholders of the Fund.
REDEMPTION IN-KIND
Redemption proceeds normally are paid in cash. Payments may be made wholly or
partly in portfolio securities, however, if the Board determines conditions
exist which would make payment in cash detrimental to the best interests of the
Fund. If redemption proceeds are paid wholly or partly in portfolio securities,
brokerage costs may be incurred by the shareholders in converting the securities
to cash. The Trust has filed an election with the SEC pursuant to which the Fund
may only effect a redemption in portfolio securities if the particular
shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
26
<PAGE>
NAV DETERMINATION
In determining the Fund's NAV per share, securities for which market quotations
are readily available are valued at current market value using the last reported
sales price provided by independent pricing services. If no sales price is
reported, the mean 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).
DISTRIBUTIONS
Distributions of net investment income will be reinvested at the Fund's NAV per
share (unless you elect to receive distributions in cash) 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 Fund's NAV per share (unless you elect to
receive distributions in cash) 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.
TAXATION
The tax information set forth in the Prospectus and the information in this
section relates solely to U.S. federal income tax law and assumes that the Fund
qualifies as a regulated investment company (as discussed below). The
information presented here is only a summary of certain key federal income tax
considerations affecting the Fund and its shareholders and is in addition to the
information provided in the Prospectus. No attempt has been made to present a
complete explanation of the federal tax treatment of the Fund or the
implications to shareholders. The discussions here and in the Prospectus are not
intended as substitutes for careful tax planning.
This "Taxation" section is based on the Code and applicable regulations in
effect on the date hereof. Future legislative or administrative changes or court
decisions may significantly change the tax rules applicable to the Fund and
their shareholders. Any of these changes or court decisions may have a
retroactive effect.
All investors should consult their own tax advisor as to the federal, state,
local and foreign tax provisions applicable to them.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund intends, for each tax year, to qualify as a "regulated investment
company" under the Code. This qualification does not involve governmental
supervision of management or investment practices or policies of the Fund.
The tax year-end of the Fund is May 31 (the same as the Fund's fiscal year end).
MEANING OF QUALIFICATION
As a regulated investment company, the Fund will not be subject to federal
income tax on the portion of its net investment company taxable income (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 the 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 the
Fund after the close of its tax year are considered distributions
attributable to the previous tax year for purposes of satisfying this
requirement.)
27
<PAGE>
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 an 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.
FAILURE TO QUALIFY
If for any tax year the Fund does not qualify as a regulated investment company,
all of its taxable income (including its net capital gain) will be subject to
tax at regular corporate rates without any deduction for dividends to
shareholders, and the dividends will be taxable to the shareholders as ordinary
income to the extent of the Fund's current and accumulated earnings and profits.
A portion of these distributions generally may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Failure to qualify as a regulated investment company would thus have a negative
impact on the Fund's income and performance. It is possible that the Fund will
not qualify as a regulated investment company in any given tax year.
FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its investment company
taxable income for each tax year. These distributions are taxable to you as
ordinary income. A portion of these distributions may qualify for the 70%
dividends-received deduction for corporate shareholders.
The Fund anticipates distributing substantially all of its net capital gain for
each tax year. These distributions generally are made only once a year, usually
in November or December, but the Fund may make additional distributions of net
capital gain at any time during the year. These distributions are taxable to you
as long-term capital gain regardless of how long you have held shares. These
distributions do not qualify for the dividends-received deduction.
Distributions by the Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital. Return of capital
distributions reduce your tax basis in the shares and are treated as gain from
the sale of the shares to the extent your basis would be reduced below zero.
All distributions by the Fund will be treated in the manner described above
regardless of whether the distribution is paid in cash or reinvested in
additional shares of the Fund (or of another Fund). If you receive distributions
in the form of additional shares, you will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date.
You may purchase shares whose net asset value at the time reflects undistributed
net investment income or recognized capital gain, or unrealized appreciation in
the value of the assets of the Fund. Distributions of these amounts are taxable
to you in the manner described above, although the distribution economically
constitutes a return of capital to you.
If you purchase shares of the Fund shortly before 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.
28
<PAGE>
Ordinarily, you are required to take distributions by the Fund into account in
the year in which they are made. A distribution declared in October, November or
December of any year and payable to shareholders of record on a specified date
in those months, however, is deemed to be received by you (and made by the Fund)
on December 31 of that calendar year even 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) during the year.
CERTAIN TAX RULES APPLICABLE TO THE FUND'S TRANSACTIONS
For federal income tax purposes, when put and call options purchased by the Fund
expire unexercised, the premiums paid by the Fund give rise to short- or
long-term capital losses at the time of expiration (depending on the length of
the respective exercise periods for the options). When put and call options
written by the Fund expire unexcercised, the premiums received by the Fund give
rise to short-term capital gains at the time of expiration. When the Fund
exercises a call, the purchase price of the underlying security is increased by
the amount of the premium paid by the Fund. When the Fund exercises a put, the
proceeds from the sale of the underlying security are decreased by the premium
paid. When a put or call written by the Fund is exercised, the purchase price
(selling price in the case of a call) of the underlying security is decreased
(increased in the case of a call) for tax purposes by the premium received.
Certain listed options, regulated futures contracts and forward currency
contracts are considered "Section 1256 contracts" for federal income tax
purposes. Section 1256 contracts held by the Fund at the end of each tax year
are "marked to market" and treated for federal income tax purposes as though
sold for fair market value on the last business day of the tax year. Gains or
losses realized by the Fund on Section 1256 contracts generally are considered
60% long-term and 40% short-term capital gains or losses. The Fund can elect to
exempt its Section 1256 contracts that are part of a "mixed straddle" (as
described below) from the application of Section 1256.
Any option, futures contract, or other position entered into or held by the Fund
in conjunction with any other position held by the Fund may constitute a
"straddle" for federal income tax purposes. A straddle of which at least one,
but not all, the positions are Section 1256 contracts, may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of the Fund's gains or losses with respect to straddle
positions by requiring, among other things, that: (1) the loss realized on
disposition of one position of a straddle may not be recognized to the extent
that the Fund has unrealized gains with respect to the other position in such
straddle; (2) the Fund's holding period in straddle positions be suspended while
the straddle exists (possibly resulting in gain being treated as short-term
capital gain rather than long-term capital gain); (3) the losses recognized with
respect to certain straddle positions which are part of a mixed straddle and
which are non-Section 1256 positions be treated as 60% long-term and 40%
short-term capital loss; (4) losses recognized with respect to certain straddle
positions which would otherwise constitute short-term capital losses be treated
as long-term capital losses; and (5) the deduction of interest and carrying
charges attributable to certain straddle positions may be deferred. Various
elections are available to the Fund which may mitigate the effects of the
straddle rules, particularly with respect to mixed straddles. In general, the
straddle rules described above do not apply to any straddles held by the Fund if
all of the offsetting positions consist of Section 1256 contracts.
FEDERAL EXCISE TAX
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to: (1) 98% of its
ordinary taxable income for the calendar year; and (2) 98% of its capital gain
net income for the one-year period ended on October 31 of the calendar year. The
balance of the Fund's income must be distributed during the next calendar year.
The Fund will be treated as having distributed any amount on which it is subject
to income tax for any tax year.
For purposes of calculating the excise tax, the Fund: (1) reduces its capital
gain net income (but not below its net capital gain) by the amount of any net
ordinary loss for the calendar year; and (2) excludes foreign currency gains and
29
<PAGE>
losses incurred after October 31 of any year in determining the amount of
ordinary taxable income for the current calendar year. The Fund will include
foreign currency gains and losses incurred after October 31 in determining
ordinary taxable income for the succeeding calendar year.
The Fund intends to make sufficient distributions of its ordinary taxable income
and capital gain net income prior to the end of each calendar year to avoid
liability for the excise tax. Investors should note, however, that the Fund may
in certain circumstances be required to liquidate portfolio investments to make
sufficient distributions to avoid excise tax liability.
SALE OR REDEMPTION OF SHARES
In general, a shareholder will recognize gain or loss on the sale or redemption
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale or redemption and your adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if you purchase (for
example, by reinvesting dividends) other shares of the Fund within 30 days
before or after the sale or redemption (a so called "wash sale"). If disallowed,
the loss will be reflected in an upward adjustment to the basis of the shares
purchased. In general, any gain or loss arising from the sale or redemption of
shares of the Fund will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year. Any
capital loss arising from the sale or redemption of shares held for six months
or less, however, is treated as a long-term capital loss to the extent of the
amount of capital gain distributions received on such shares. In determining the
holding period of such shares for this purpose, any period during which your
risk of loss is offset by means of options, short sales or similar transactions
are 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.
BACKUP WITHHOLDING
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of distributions, and the proceeds of redemptions of shares, paid
to any shareholder: (1) who has failed to provide its correct taxpayer
identification number; (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly; or (3)
who has failed to certify to the Fund that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient." Backup
withholding is not an additional tax; any amounts so withheld may be credited
against a shareholder's federal income tax liability or refunded.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who under the Code is a nonresident alien individual,
foreign trust or estate, foreign corporation, or foreign partnership ("foreign
shareholder"), depends on whether the income from the Fund is "effectively
connected" with an U.S. trade or business carried on by the foreign shareholder.
If the income from the Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, distributions of ordinary income
(including a short-term capital gains) paid to a foreign shareholder will be
subject to U.S. withholding tax at the rate of 30% (or lower applicable treaty
rate) upon the gross amount of the distribution. The foreign shareholder
generally would be exempt from U.S. federal income tax on gain realized on the
sale of shares of the Fund and distributions of net capital gain from the Fund
and amounts retained by the Fund.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income
distributions, capital gain distributions, and any gain realized upon the sale
of shares of the Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or U.S. corporations.
30
<PAGE>
In the case of a noncorporate foreign shareholder, the Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding (or taxable at a reduced treaty rate), unless
the shareholder furnishes the Fund with proper notification of its foreign
status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein.
The tax rules of other countries with respect to distributions from the Fund can
differ from the 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 the Fund.
STATE AND LOCAL TAXES
The tax rules of the various states of the U.S. and their local jurisdictions
with respect to distributions from the Fund can differ from the 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 the
Fund.
FOREIGN INCOME TAX
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that entitle the Fund to a
reduced rate of such taxes or exemption from taxes on such income. It is
impossible to know the effective rate of foreign tax in advance since the amount
of the Fund's assets to be invested within various countries cannot be
determined.
31
<PAGE>
OTHER MATTERS
THE TRUST AND ITS SHAREHOLDERS
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 TaxSaver Bond Fund
Daily Assets Government Fund(1) New Hampshire TaxSaver 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, the Fund's 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 be purchased or held by the Fund.
The Fund reserves the right to invest in one or more other investment companies
in a Core and Gateway(R) structure.
The Trust and the Fund will continue indefinitely until terminated.
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.
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 series or class (and certain other expenses
such as transfer agency, shareholder service and administration expenses) are
borne solely by those shares and each series or class votes separately with
respect to the provisions of any Rule 12b-1 plan which pertains to the series or
class and other matters for which separate series or 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
32
<PAGE>
all affected series must vote. The Trustees may also determine that a matter
only affects certain series or classes of the Trust and thus only those such
series or classes are entitled to vote on the matter. Delaware law does not
require the Trust to hold annual meetings of shareholders, and it is anticipated
that shareholder meetings will be held only when specifically required by
federal or state law. There are no conversion or preemptive rights in connection
with shares of the Trust.
All shares, when issued in accordance with the terms of the offering, will be
fully paid and nonassessable.
A shareholder in a series is entitled to the shareholder's pro rata share of all
distributions arising from that series' assets and, upon redeeming shares, will
receive the portion of the series' net assets represented by the redeemed
shares.
Shareholders representing 10% or more of the Trust's (or a series) shares may,
as set forth in the Trust's Bylaws, 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.
CERTAIN REORGANIZATION TRANSACTIONS
The Trust or any series may be terminated upon the sale of its assets to, or
merger with, another open-end, management investment company or series thereof,
or upon liquidation and distribution of its assets. Generally such terminations
must be approved by the vote of the holders of a majority of the outstanding
shares of the Trust or the Fund. The Trustees may, without prior shareholder
approval, change the form of organization of the Trust by merger, consolidation
or incorporation. Under the Trust Instrument, the Trustees may, without
shareholder vote, cause the Trust 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.
FUND OWNERSHIP
As of September 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 the Fund (or
of the Trust), the table reflects "N/A" for not applicable.
PERCENTAGE OF SHARES
FUND (OR TRUST) OWNED
----------------------------------------------------- ----------------------
The Trust N/A
----------------------------------------------------- ----------------------
Polaris Global Value Fund N/A
----------------------------------------------------- ----------------------
Also as of that date, certain shareholders of record owned 5% or more of a class
of shares of the Fund. Shareholders known by the Fund to own beneficially 5% or
more of a class of shares of the Fund are listed in Table 7 in Appendix B.
From time to time, certain shareholders may own a large percentage of the shares
of the Fund. Accordingly, those shareholders may be able to greatly affect (if
not determine) the outcome of a shareholder vote. As of September 1, 1999, no
person beneficially owned 25% or more of the shares of the 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.
LIMITATIONS ON SHAREHOLDERS' AND TRUSTEES' LIABILITY
Delaware law provides that Fund shareholders are entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. In the past, the Trust believes that the securities
regulators of some states, however, have indicated that they and the courts in
their states may decline to apply Delaware law on this point. The Trust's
33
<PAGE>
Trust Instrument (the document that governs the operation of the Trust) contains
an express disclaimer of shareholder liability for the debts, liabilities,
obligations and expenses of the Trust. The Trust's Trust Instrument provides for
indemnification out of each series' property of any shareholder or former
shareholder held personally liable for the obligations of the series. The Trust
Instrument also provides that each series shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the series and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which Delaware law does not apply no contractual limitation of
liability was in effect, and the Fund is unable to meet its obligations. FAdS
believes that, in view of the above, there is no risk of personal liability to
shareholders.
The Trust's 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.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby. The registration statement, including
the exhibits filed therewith, may be examined at the office of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents are not necessarily complete, and, in each instance,
are qualified by reference to the copy of such contract or other documents filed
as exhibits to the registration statement.
FINANCIAL STATEMENTS
The financial statements of Polaris Global Value Fund for the year ended May 31,
1999, which are included in the Fund's Annual Report to shareholders, are
incorporated herein by reference. These financial statements include the
schedules of investments, statements of assets and liabilities, statements of
operations, statement of changes in net assets, financial highlights, notes and
independent auditors' reports.
34
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
BA Bonds, which are rated Ba, are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest. Ca Bonds which are rated Ca represent
obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
A-1
<PAGE>
STANDARD AND POOR'S CORPORATION
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
NOTE Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
NOTE Plus (+) or minus (-). The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
A-2
<PAGE>
The "r" symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
currencies, or commodities; obligations exposed to severe prepayment
risk-such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse
floaters.
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.
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.
A-3
<PAGE>
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 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%.
PREFERRED STOCK
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.
A-4
<PAGE>
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.
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.
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.
A-5
<PAGE>
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.
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.
SHORT TERM RATINGS
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.
A-6
<PAGE>
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-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.
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 change
sin business, economic, or financial conditions.
F3 Obligations supported by an adequate capacity for timely repayment
relative to other obligors in the same country. Such capacity is more
susceptible to adverse changes in business, economic, or financial
conditions than for obligations in higher categories.
B Obligations for which the capacity for timely repayment is uncertain
relative to other obligors in the same country. The capacity for timely
repayment is susceptible to adverse changes in business, economic, or
financial conditions.
C Obligations for which there is a high risk of default to other obligors
in the same country or which are in default.
A-7
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
The following table shows the dollar amount of fees payable to the Adviser with
respect to the Fund, the amount of fee that was waived by the Adviser, if any,
and the actual fee received by the Adviser.
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE PAYABLE ADVISORY FEE WAIVED ADVISORY FEE RETAINED
POLARIS GLOBAL VALUE FUND
Year Ended May 31, 1999 $199,686 $62,378 $137,308
TABLE 2 - ADMINISTRATION FEES
The following table shows the dollar amount of fees payable to FAdS with respect
to the Fund, the amount of fee that was waived by FAdS, if any, and the actual
fee received by FAdS.
ADMINISTRATION ADMINISTRATION ADMINISTRATION FEE
POLARIS GLOBAL VALUE FUND FEE PAYABLE FEE WAIVED RETAINED
Year Ended May 31, 1999 $40,000 $0 $40,000
TABLE 3 - ACCOUNTING FEES
The following table shows the dollar amount of fees payable to FAcS with respect
to the Fund, the amount of fee that was waived by FAcS, if any, and the actual
fee received by FAcS.
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE
POLARIS GLOBAL VALUE FUND RETAINED
Year Ended May 31, 1999 $39,000 $0 $39,000
TABLE 4 - TRANSFER AGENCY FEES
The following table shows the dollar amount of fees payable to FSS with respect
to the Fund, the amount of fee that was waived by FSS, if any, and the actual
fee received by FSS.
TRANSFER AGENCY TRANSFER AGENCY TRANSFER AGENCY FEE
POLARIS GLOBAL VALUE FUND FEE PAYABLE FEE WAIVED RETAINED
Year Ended May 31, 1999 $28,356 $0 $28,356
</TABLE>
B-1
<PAGE>
TABLE 5 - COMMISSIONS
The following table shows the aggregate brokerage commissions with respect to
the Fund that incurred brokerage costs.
<TABLE>
<S> <C> <C> <C> <C>
TOTAL BROKERAGE % OF BROKERAGE % OF TRANSACTIONS
COMMISSIONS ($) PAID TO COMMISSIONS PAID TO EXECUTED BY AN
POLARIS GLOBAL VALUE FUND TOTAL BROKERAGE AN AFFILIATE OF THE AN AFFILIATE OF THE AFFILIATE OF THE
COMMISSIONS ($) FUND OR ADVISER FUND OR ADVISER FUND OR ADVISER
YEAR ENDED MAY 31, 1999 $53,949 0% 0% 0%
</TABLE>
TABLE 6 - SECURITIES OF REGULAR BROKERS OR DEALERS
The following table lists the regular brokers and dealers of the Fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Fund's holdings of those
securities as of the Fund's most recent fiscal year.
REGULAR BROKER DEALER VALUE HELD
None
TABLE 7 - 5% SHAREHOLDERS
The following table lists (1) the persons who owned of record 5% or more of the
outstanding shares of a class of shares of the Fund and (2) any person known by
the Fund to own beneficially 5% or more of a class of shares of the Fund, as of
July 1, 1999.
<TABLE>
<S> <C> <C> <C>
POLARIS GLOBAL VALUE FUND
NAME AND ADDRESS SHARES % OF FUND
Christopher K. McLeod 157,411.659 7.14
119 Chatman Road
Stamford, CT 06903
DCGT TR 130,975.349 5.94
FBO Audrey Lewis - Reg IRA
10 Rogers Street
Cambridge, MA 02142
David Solomont 129,298.613 5.86
P.O. Box 67385
Chestnut Hill, MA 02467
</TABLE>
B-2
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - TOTAL RETURNS
The average annual total return of the Fund for the period ended May 31, 1999,
was as follows.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
CALENDAR
POLARIS GLOBAL VALUE ONE MONTH THREE MONTHS YEAR TO DATE ONE YEAR THREE FIVE YEARS SINCE INCEPTION
FUND YEARS (ANNUALIZED)
(4.12)% 9.54% 4.49% (11.95)% 12.74% 15.71% 11.27%
</TABLE>
C-1
