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PROSPECTUS
DECEMBER 20, 2000
BROWNIA MARYLAND BOND FUND
THE FUND SEEKS HIGH CURRENT INCOME EXEMPT FROM BOTH FEDERAL AND MARYLAND STATE
INCOME TAXES WITHOUT ASSUMING UNDUE RISK BY INVESTING PRIMARILY IN MUNICIPAL
SECURITIES AND U.S. GOVERNMENT SECURITIES. YOU MAY PURCHASE FUND SHARES
WITHOUT A SALES CHARGE. THE FUND DOES NOT INCUR RULE 12B-1 (DISTRIBUTION) FEES.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THE FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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[LOGO] TABLE OF CONTENTS
RISK/RETURN SUMMARY 2
PERFORMANCE 3
FEE TABLE 4
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES
AND PRINCIPAL RISKS 6
MANAGEMENT 10
YOUR ACCOUNT 13
How to Contact the Fund 13
General Information 13
Buying Shares 14
Selling Shares 18
Exchange Privileges 20
OTHER INFORMATION 22
FINANCIAL HIGHLIGHTS 23
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RISK/RETURN SUMMARY [LOGO]
CONCEPTS TO UNDERSTAND
DEBT SECURITY means a security, such as a bond or note, that obligates the
issuer to pay the security owner a specified sum of money (interest) at set
intervals as well as to repay the principal amount of the security at its
maturity.
MATURITY means the date on which a debt security is (or may be) due and payable.
BOND means a debt security with a long-term maturity, usually 5 years or longer.
NOTE means a debt security with a short-term maturity, usually less than 1 year.
NRSRO means a "nationally recognized statistical rating organization," such as
Standard & Poor's, that rates debt securities by relative credit risk.
INVESTMENT GRADE SECURITY means a debt security rated in one of the four highest
long-term or two highest short-term ratings categories by an NRSRO or unrated
and determined to be of comparable quality by the Fund's Adviser at the time of
purchase.
MUNICIPAL SECURITY means a debt security issued by or on behalf of a state, its
local governments and public financing authorities, and by U.S. territories and
possessions.
INVESTMENT OBJECTIVE
BrownIA Maryland Bond Fund (the "Fund") seeks to provide a high level of current
income exempt from both Federal and Maryland State income taxes without undue
risk.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in investment grade Maryland municipal securities.
The Fund may also invest in municipal securities issued by U.S. territories and
possessions and U.S. Government securities. Generally, the weighted average
maturity of the Fund's portfolio securities will be between 5 and 10 years.
PRINCIPAL RISKS OF INVESTING IN THE FUND
You could lose money on your investment in the Fund or the Fund could
underperform other investments. The principal risks of an investment in the Fund
include:
o The Fund's share price, yield, and total return will fluctuate in response
to price movements in the debt securities markets
o The value of most debt securities fall when interest rates rise; the longer
a debt security's maturity and the lower its credit quality, the more its
value typically falls in response to an increase in interest rates
o The Fund cannot collect interest and principal payments on a debt security
if the issuer defaults
o Issuers may prepay fixed rate securities when interest rates fall, forcing
the Fund to invest in securities with lower interest rates
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o The Fund is non-diversified. The Fund may focus its investments in the
securities of a comparatively small number of issuers. Concentration of the
Fund in securities of a limited number of issuers exposes it to greater
market risk and potential monetary losses than if its assets were
diversified among the securities of a greater number of issuers
o Economic and political changes in Maryland may have a greater effect on the
Fund than if the Fund invested in municipal securities of various states
o The Fund's investment adviser (the "Adviser") may make poor investment
decisions
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for you if you:
o Are a Maryland resident
o Are an income-oriented investor in a high tax bracket and desire tax-exempt
income
o Seek income and more price stability than stocks offer
o Seek capital preservation
o Are pursuing a long-term goal
The Fund may NOT be appropriate for you if you:
o Are not a Maryland resident
o Are pursuing a short-term goal or are investing emergency reserves
o Are investing funds in a tax-deferred or tax-exempt account (such as an
IRA)
o Do not desire tax-exempt income
PERFORMANCE
Performance information is not provided because the Fund had not commenced
operations prior to the date of this Prospectus.
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FEE TABLE [LOGO]
The following tables describe the various fees and expenses that you will pay if
you invest in the Fund. Shareholder fees are charges you pay when buying,
selling, or exchanging shares of the Fund. Operating expenses, which include
fees of the Adviser, are paid out of the Fund's assets and are factored into the
Fund's share price rather than charged directly to shareholder accounts.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of the offering price) None
Maximum Sales Charge (Load) Imposed on Reinvested Distributions None
Maximum Deferred Sales Charge (Load) None
Redemption Fee None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES(1)
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees 0.50%
Distribution (12b-1) Fees None
Other Expenses 0.60%
TOTAL ANNUAL FUND OPERATING EXPENSES(2) 1.10%
(1) Based on estimated amounts for the Fund's fiscal year ending May 31, 2001.
(2) The Adviser has voluntarily undertaken to waive its fee so that total
annual fund expenses do not exceed 0.75% of the average daily net assets of
the Fund. Fee waivers may be reduced or eliminated at any time.
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EXAMPLE
The following is a hypothetical example intended to help you compare the cost of
investing in the Fund to the cost of investing in other mutual funds. This
example assumes that you invest $10,000 in the Fund for the time periods
indicated, you pay the maximum sales charge and then redeem all of your shares
at the end of each period. The example also assumes that your investment has a
5% annual return, that the Fund's operating expenses remain as stated in the
above table and that distributions are reinvested. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS
$112 $350
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INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES [LOGO]
AND PRINCIPAL RISKS
CONCEPTS TO UNDERSTAND
YIELD CURVE means a graph that plots the yield of all bonds of similar quality
against the bonds' maturities.
PRIVATE ACTIVITY BOND means a bond that is issued by or on behalf of public
authorities to finance privately operated facilities. Private activity bonds are
primarily revenue securities.
GENERAL OBLIGATION SECURITY means a security whose principal and interest
payments are secured by a municipality's full faith and credit and taxing power.
REVENUE SECURITY means a security whose principal and interest generally are
payable from revenues of a particular facility, class of facilities, or from the
proceeds of a special excise or other tax.
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income exempt from both
Federal and Maryland State income taxes without undue risk.
PRINCIPAL INVESTMENT STRATEGIES
THE ADVISER'S PROCESS The Adviser continuously monitors economic factors such as
interest rate outlook and technical factors such as the shape of the yield curve
in combination with the stated objective of the Fund to determine an appropriate
maturity profile for the Fund's investment portfolio. The Adviser then
principally searches for securities that satisfy the maturity profile of the
Fund and that provide the greatest potential return relative to the risk of the
security. The Adviser may sell a debt security if:
o Revised economic forecasts or interest rate outlook requires a
repositioning of the portfolio
o The security subsequently fails to meet the Adviser's investment criteria
o A more attractive security is found or funds are needed for another purpose
o The Adviser believes that the security has reached its appreciation
potential
PRINCIPAL INVESTMENT POLICIES The Fund invests primarily in investment grade
Maryland municipal securities. The Fund may also invest in municipal securities
issued by U.S. territories or possessions and U.S. Government securities. The
Fund may also invest in municipal securities issued by other states. Normally,
the Fund will invest at least 80% of the Fund's total assets in securities the
interest of which is exempt from Federal and Maryland State income taxes.
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Municipal securities include municipal bonds, notes, and leases. Municipal
leases are securities that permit government issuers to acquire property and
equipment without the security being subject to constitutional and statutory
requirements for the issuance of long-term debt securities. The Fund invests in
general obligation securities and revenue securities, including private activity
bonds. Generally, the average weighted maturity of the Fund's portfolio
securities will be between 5 and 10 years.
TEMPORARY DEFENSIVE MEASURES In order to respond to adverse market, economic, or
other conditions, the Fund may assume a temporary defensive position and invest
without limit in cash and prime quality cash equivalents such as commercial
paper and money market instruments. As a result, the Fund may be unable to
achieve its investment objective.
PRINCIPAL INVESTMENT RISKS
GENERAL The Fund's net asset value, yield, and total return will fluctuate based
upon changes in the value of its portfolio securities. The market value of
securities in which the Fund invests is based upon the market's perception of
value and is not necessarily an objective measure of the securities' value.
There is no assurance that the Fund will achieve its investment objective. An
investment in the Fund is not by itself a complete or balanced investment
program.
The value of your investment in the Fund may change in response to changes in
interest rates. An increase in interest rates typically causes a fall in the
value of the securities in which the Fund invests. The longer a debt security's
maturity, the more its value typically falls in response to an increase in
interest rates. An additional risk is that issuers may prepay fixed rate
securities when interest rates fall, forcing the Fund to invest in securities
with lower interest rates.
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Your investment in the Fund is also subject to the risk that the financial
condition of an issuer of a security held by the Fund may cause it to default or
become unable to pay interest or principal due on the security. This risk
generally increases as security credit ratings fall.
Your investment in the Fund is subject to the risk that the Adviser may make
poor investment decisions.
The Fund is non-diversified. The Fund may focus a larger percentage of its
assets in the securities of fewer issuers. Concentration of the Fund in
securities of a limited number of issuers exposes it to greater market risk and
potential monetary losses than if its assets were diversified among the
securities of a greater number of issuers.
SPECIFIC RISKS INVOLVING MARYLAND MUNICIPAL SECURITIES Economic or political
factors in Maryland may adversely affect issuers of Maryland municipal
securities. Adverse economic or political factors will affect the Fund's net
asset value more than if the Fund invested in more geographically diverse
investments. As a result, the value of the Fund's assets may fluctuate more
widely than the value of shares of a fund investing in securities relating to a
number of different states.
In addition to the state's general obligations, the Fund will invest a
significant portion of its assets in bonds that are rated according to the
issuer's individual creditworthiness, such as bonds of local governments and
public authorities. While local governments in Maryland depend principally on
their own revenue sources, they could experience budget shortfalls due to
cutbacks in state aid. Certain fund holdings do not rely on any government for
money to service their debt. Bonds issued by governmental authorities may depend
wholly on revenues generated by the project they financed or
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on other dedicated revenue streams. The credit quality of these "revenue" bonds
may vary from that of the state's general obligations.
The following is a summary of the NRSRO ratings for Maryland municipal
securities. As of July 19, 2000, 2000, Maryland general obligation bonds were
rated Aaa by Moody's Investor Services and AAA by Standard & Poor's and Fitch
IBCA, Inc. There can be no assurance that Maryland general obligation bonds or
the securities of any Maryland political subdivision, authority or corporation
owned by the Fund will be rated in any category or will not be downgraded by an
NRSRO. Further information concerning the State of Maryland is contained in the
Statement of Additional Information (the "SAI").
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MANAGEMENT [LOGO]
The Fund is a series of Forum Funds (the "Trust"), an open-end, management
investment company (mutual fund). The business of the Trust and of the Fund is
managed under the direction of the Board of Trustees (the "Board"). The Board
formulates the general policies of the Fund and meets periodically to review the
Fund's performance, monitor investment activities and practices, and discuss
other matters affecting the Fund. Additional information regarding the Board, as
well as the Trust's executive officers, may be found in the SAI.
THE ADVISER
The Fund's Adviser is Brown Advisory Incorporated, Furness House, 19 South
Street, Baltimore, Maryland 21202. The Adviser is a fully owned subsidiary of
Brown Investment Advisory & Trust Company, a trust company operating under the
laws of Maryland. Brown Investment Advisory & Trust Company is a fully-owned
subsidiary of Brown Capital Holdings Incorporated, a holdings company
incorporated under the laws of Maryland in 1998. Prior to 1998, Brown Investment
Advisory & Trust Company operated as a subsidiary of Bankers Trust under the
name Alex. Brown Capital Advisory & Trust Company.
Subject to the general control of the Board, the Adviser makes investment
decisions for the Fund. The Adviser receives an advisory fee of 0.50% of the
average daily net assets of the Fund. The Adviser has voluntarily agreed to
waive its fee in order to limit total annual operating expenses to 0.75% or less
of the Fund's average daily net assets. Fee waivers may be reduced or eliminated
at any time.
As of October 31, 2000, the Adviser and its affiliates had approximately $4.8
billion of assets under management.
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A committee of investment professionals makes all investment decisions for the
Fund and no other person is primarily responsible for making recommendations to
that committee.
OTHER SERVICE PROVIDERS
Forum Financial Group, LLC and its affiliates (collectively "Forum") provide
services to the Fund. As of October 31, 2000, Forum provided administration and
distribution services to investment companies and collective investment funds
with assets of approximately $123 billion.
Forum Fund Services, LLC, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., is the distributor (principal
underwriter) of the Fund's shares. The distributor acts as the representative of
the Trust in connection with the offering of the Fund's shares. The distributor
may enter into arrangements with banks, broker-dealers, or other financial
institutions through which investors may purchase or redeem shares and may, at
its own expense, compensate persons who provide services in connection with the
sale or expected sale of the Fund's shares.
Forum Administrative Services, LLC provides administrative services to the Fund,
Forum Accounting Services, LLC is the Fund's fund accountant, Forum Shareholder
Services, LLC ("Transfer Agent") is the Fund's transfer agent, and Forum Trust,
LLC is the Fund's custodian.
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FUND EXPENSES
The Fund pays for all of its expenses. The Fund's expenses are comprised of its
own expenses as well as Trust expenses that are allocated among the Fund and the
other funds of the Trust. The Adviser or other service providers may waive all
or any portion of their fees and/or reimburse certain expenses of the Fund. Any
waiver or expense reimbursement increases the Fund's performance for the period
during which the waiver or reimbursement is in effect and may not be recouped at
a later date.
The Adviser has voluntarily undertaken to waive its fee in order to limit the
Fund's expenses (excluding taxes, interest, portfolio transaction expenses and
extraordinary expenses) to 0.75% or less of the average daily net assets of the
Fund. Waivers may be reduced or eliminated at any time.
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[LOGO] YOUR ACCOUNT
HOW TO CONTACT
THE FUND
WRITE TO US AT:
BrownIA Funds
P.O. Box 446
Portland, Maine 04112
OVERNIGHT ADDRESS:
BrownIA Funds
Two Portland Square
Portland, Maine 04101
TELEPHONE US AT:
(800) 540-6807 (toll free) or
(207) 879-0001
WIRE INVESTMENTS
(OR ACH PAYMENTS) TO:
Bankers Trust Company
New York, New York
ABA #021001033
FOR CREDIT TO:
Forum Shareholder Services, LLC
Account # 01-465-547
BrownIA Maryland Bond Fund
(Your Name)
(Your Account Number)
GENERAL INFORMATION
You may purchase or sell (redeem) shares at the net asset value of a share (NAV)
next calculated after the Transfer Agent receives your request in proper form
(as described in this Prospectus on pages 14 through 21). For instance, if the
Transfer Agent receives your purchase request in proper form after 4:00 p.m.,
Eastern time, your transaction will be priced at the next business day's NAV.
The Fund cannot accept orders that request a particular day or price for the
transaction or any other special conditions.
The Fund does not issue share certificates.
If you purchase shares directly from the Fund, you will receive monthly
statements and a confirmation of each transaction. You should verify the
accuracy of all transactions in your account as soon as you receive your
confirmations.
The Fund reserves the right to waive minimum investment amounts and may
temporarily suspend (during unusual market conditions) or discontinue any
service or privilege.
WHEN AND HOW NAV IS DETERMINED The Fund calculates its NAV as of the close of
the New York Stock Exchange (normally 4:00 p.m., Eastern time) on each weekday
except days when the New York Stock Exchange is closed. The time at which NAV is
calculated may change in case of an emergency. The Fund's NAV is determined by
taking the market value of all securities owned by the Fund (plus all other
assets such as cash), subtracting liabilities, and then dividing the result (net
assets) by the number of shares outstanding. The Fund values securities for
which market quotations are readily available at current market value. If market
quotations are not readily available, the Fund values securities at fair value
pursuant to procedures adopted by the Board.
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TRANSACTIONS THROUGH THIRD PARTIES If you invest through a broker or other
financial institution, the policies and fees (other than sales charges) charged
by that institution may be different than those of the Fund. Financial
institutions may charge transaction fees and may set different minimum
investments or limitations on buying or selling shares. These institutions may
also provide you with certain shareholder services such as periodic account
statements and trade confirmations summarizing your investment activity. Consult
a representative of your financial institution for more information.
BUYING SHARES
HOW TO MAKE PAYMENTS All investments must be in U.S. dollars and checks must be
drawn on U.S. banks. The Fund and the Adviser also reserve the right to accept
in kind contributions of securities in exchange for shares of the Fund.
CHECKS For individual, sole proprietorship, joint, Uniform Gift to Minors
Act ("UGMA"), or Uniform Transfers to Minors Act ("UTMA") accounts, the
check must be made payable to "BrownIA Funds" or to one or more owners of
the account and endorsed to "BrownIA Funds." For all other accounts, the
check must be made payable on its face to "BrownIA Funds." No other method
of check payment is acceptable (for instance, you may not pay by traveler's
check).
PURCHASES BY AUTOMATED CLEARING HOUSE ("ACH") This service allows you to
purchase shares through an electronic transfer of money from a checking or
savings account. When you make a payment by telephone, the Transfer Agent
will automatically debit your pre-designated bank account for the desired
amount. Your financial institution may charge you a fee for this service.
You may call (800) 540-6807 to request an ACH transaction.
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WIRES Instruct your financial institution to make a Federal Funds wire
payment to us. Your financial institution may charge you a fee for this
service.
MINIMUM INVESTMENTS The Fund accepts investments in the following minimum
amounts:
MINIMUM INITIAL MINIMUM ADDITIONAL
INVESTMENT INVESTMENT
Standard Accounts $5,000 $100
Accounts With Systematic Investment Plans $2,000 $100
ACCOUNT REQUIREMENTS
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TYPE OF ACCOUNT REQUIREMENT
INDIVIDUAL, SOLE PROPRIETORSHIP AND JOINT ACCOUNTS o Instructions must be signed by all persons
Individual accounts are owned by one person, as are sole required to sign exactly as their names appear on
proprietorship accounts. Joint accounts have two or more the account
owners (tenants)
GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA) o Depending on state laws, you can set up a
These custodial accounts provide a way to give money to a custodial account under the UGMA or the UTMA
child and obtain tax benefits o The custodian must sign instructions in a
manner indicating custodial capacity
BUSINESS ENTITIES o Submit a Corporate/Organization Resolution
form or similar document
TRUSTS o The trust must be established before an
account can be opened
o Provide a certified trust document, or the
pages from the trust document, that identify the
trustees
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INVESTMENT PROCEDURES
HOW TO OPEN AN ACCOUNT HOW TO ADD TO YOUR ACCOUNT
BY CHECK BY CHECK
o Call or write us for an account application (and o Fill out an investment slip from a
Corporate/Organization Resolution form, if applicable) confirmation or write us a letter
o Complete the application (and resolution form) o Write your account number on your check
o Mail us your application (and resolution form) o Mail us the slip (or your letter) and the check
and a check
BY WIRE BY WIRE
o Call or write us for an account application (and o Call to notify us of your incoming wire
Corporate/Organization Resolution form, if applicable) o Instruct your bank to wire your money to us
o Complete the application (and resolution form)
o Call us to fax the completed application (and
resolution form) and we will assign you an account
number
o Mail us your original application (and resolution
form)
o Instruct your bank to wire your money to us
BY ACH PAYMENT BY SYSTEMATIC INVESTMENT
o Call or write us for an account application (and o Complete the systematic investment section of
Corporate/Organization Resolution form, if applicable) the application
o Complete the application (and resolution form) o Attach a voided check to your application
o Call us to fax the completed application (and o Mail us the completed application and voided
resolution form) and we will assign you an account check
number
o Mail us your original application (and resolution
form)
o Make an ACH payment
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SYSTEMATIC INVESTMENTS You may invest a specified amount of money in the Fund
once or twice a month on specified dates. These payments are taken from your
bank account by ACH payment. Systematic investments must be for at least $100.
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LIMITATIONS ON PURCHASES The Fund reserves the right to refuse any purchase
(including exchange) request, particularly requests that could adversely affect
the Fund or its operations. This includes those from any individual or group
who, in the Fund's view, are likely to engage in excessive trading (including
two or more substantial redemptions or exchanges out of the Fund followed by
substantial repurchases into the Fund within a calendar year).
CANCELED OR FAILED PAYMENTS The Fund accepts checks and ACH transfers at full
value subject to collection. If the Fund does not receive your payment for
shares or you pay with a check or ACH transfer that does not clear, your
purchase will be canceled. You will be responsible for any losses or expenses
incurred by the Fund or the Transfer Agent, and the Fund may redeem shares you
own in the account (or another identically registered account that you maintain
with the Transfer Agent) as reimbursement. The Fund and its agents have the
right to reject or cancel any purchase or exchange due to nonpayment.
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SELLING SHARES
The Fund processes redemption orders promptly. Under normal circumstances, the
Fund will send redemption proceeds to you within a week. If the Fund has not yet
collected payment for the shares you are selling, it may delay sending
redemption proceeds up to 15 calendar days.
HOW TO SELL SHARES FROM YOUR ACCOUNT
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The Fund name
o The dollar amount or number of shares you want to sell
o How and where to send the redemption proceeds
o Obtain a signature guarantee (if required)
o Obtain other documentation (if required)
o Mail us your request and documentation
BY WIRE
o Wire redemptions are only available if your redemption is for $5,000 or
more and you did not decline wire redemptions on your account application
o Call us with your request (unless you declined telephone redemption
privileges on your account application) (See "By Telephone") or
o Mail us your request (See "By Mail")
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which the account is registered
o Additional form of identification
o Redemption proceeds will be:
o Mailed to you or
o Wired to you (unless you declined wire redemption privileges
on your account application) (See "By Wire")
SYSTEMATICALLY
o Complete the systematic withdrawal section of the application
o Attach a voided check to your application
o Mail us the completed application
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WIRE REDEMPTION PRIVILEGES You may redeem your shares by wire unless you
declined wire redemption privileges on your account application. The minimum
amount that may be redeemed by wire is $5,000.
TELEPHONE REDEMPTION PRIVILEGES You may redeem your shares by telephone unless
you declined telephone redemption privileges on your account application. You
may be responsible for any fraudulent telephone order as long as the Transfer
Agent takes reasonable measures to verify the order.
SYSTEMATIC WITHDRAWALS You may redeem a specified amount of money from your
account once a month on a specified date. These payments are sent from your
account to a designated bank account by ACH payment. Systematic withdrawals must
be for at least $250.
SIGNATURE GUARANTEE REQUIREMENTS To protect you and the Fund against fraud,
signatures on certain requests must have a "signature guarantee." A signature
guarantee verifies the authenticity of your signature. You can obtain one from
most banking institutions or securities brokers, but not from a notary public.
For requests made in writing, a signature guarantee is required for any of the
following:
o Sales of over $50,000 worth of shares
o Changes to a shareholder's record name
o Redemptions from an account for which the address or account
registration has changed within the last 30 days
o Sending redemption proceeds to any person, address, brokerage firm, or
bank account not on record
o Sending redemption proceeds to an account with a different
registration (name or ownership) from yours
o Changes to systematic investment or withdrawals, distribution,
telephone redemption or exchange option, or any other election in
connection with your account
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SMALL ACCOUNTS If the value of your account falls below $1,000, the Fund may ask
you to increase your balance. If the account value is still below $1,000 after
60 days, the Fund may close your account and send you the proceeds. The Fund
will not close your account if it falls below this amount solely as a result of
a reduction in your account's market value.
REDEMPTIONS IN KIND The Fund reserves the right to pay redemption proceeds in
portfolio securities rather than in cash. These redemptions "in kind" usually
occur if the amount to be redeemed is large enough to affect the Fund's
operations (for example, if it represents more than 1% of the Fund's assets).
LOST ACCOUNTS The Transfer Agent will consider your account lost if
correspondence to your address of record is returned as undeliverable, unless
the Transfer Agent determines your new address. When an account is lost, all
distributions on the account will be reinvested in additional Fund shares. In
addition, the amount of any outstanding (unpaid for six months or more) checks
for distributions that have been returned to the Transfer Agent will be
reinvested and the checks will be canceled.
EXCHANGE PRIVILEGES
You may exchange your Fund shares and buy shares of other Trust series managed
by the Adviser. You may also exchange Fund shares for Investor Shares of the
Trust's money market funds. Because exchanges are a sale and purchase of shares,
they may have tax consequences.
REQUIREMENTS You may make exchanges only between identically registered accounts
(name(s), address, and taxpayer ID number).
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There is currently no limit on exchanges, but the Fund reserves the right to
limit exchanges. You may exchange your shares by mail or telephone, unless you
declined telephone redemption privileges on your account application. You may be
responsible for any fraudulent telephone order as long as the Transfer Agent
takes reasonable measures to verify the order.
HOW TO EXCHANGE
BY MAIL
o Prepare a written request including:
o Your name(s) and signature(s)
o Your account number
o The names of each fund you are exchanging
o The dollar amount or number of shares you want to sell (and exchange)
o Open a new account and complete an account application if you are
requesting different shareholder privileges
o Mail us your request and documentation
BY TELEPHONE
o Call us with your request (unless you declined telephone redemption
privileges on your account application)
o Provide the following information:
o Your account number
o Exact name(s) in which account is registered
o Additional form of identification
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OTHER INFORMATION [LOGO]
DISTRIBUTIONS
The Fund distributes its net investment income monthly and net capital gain at
least annually.
All distributions are reinvested in additional shares, unless you elect to
receive distributions in cash. For income tax purposes, distributions are
treated the same whether they are received in cash or reinvested. Shares become
entitled to receive distributions on the day after the shares are issued.
TAXES
The Fund generally intends to operate in a manner such that it will not be
liable for Federal income or excise taxes.
Generally, you are not subject to Federal income taxes on the Fund's
distributions of tax-exempt interest income. In addition, interest received by
the Fund from investments in Maryland municipal securities and U.S. Government
securities is generally exempt from Maryland State and local income taxes. The
Fund's distributions of taxable interest, other investment income, and
short-term capital gain are taxable to you as ordinary income. The Fund's
distributions of long-term capital gain are taxable to you as long-term capital
gain regardless of how long you have held your Fund shares. It is anticipated
that substantially all of the Fund's net income will be exempt from Federal and
Maryland State income taxes.
If you are a "substantial user" or a "related person" of a substantial user of
facilities financed by private activity bonds held by the Fund, you may have to
pay Federal income tax on your pro-rata share of the net income generated from
these securities.
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[LOGO]
Distributions of interest income on certain private activity bonds are an item
of tax preference for purposes of individual and corporate Federal Alternative
Minimum Tax ("AMT"). Distributions of net income from tax-exempt obligations are
included in "adjusted current earnings" of corporations for Federal AMT
purposes.
If you buy shares shortly before the Fund makes a distribution, you may pay the
full price for the shares and then receive a portion of the price back as a
distribution that may be taxable to you.
The sale or exchange of Fund shares is a taxable transaction for Federal income
tax purposes.
The Fund will send you information about the income tax status of the Fund's
distributions paid during the year shortly after December 31 of each year.
For further information about the tax effects of investing in the Fund,
including state and local tax matters, please see the SAI and consult your tax
adviser.
ORGANIZATION
The Trust is a Delaware business trust. The Fund does not expect to hold
shareholders' meetings unless required by Federal or Delaware law. Shareholders
of each series of the Trust are entitled to vote at shareholders' meetings
unless a matter relates only to specific series (such as approval of an advisory
agreement for the Fund). From time to time, large shareholders may control the
Fund or the Trust.
FINANCIAL HIGHLIGHTS
Financial highlights are not provided because the Fund had not commenced
operations prior to the date of this Prospectus.
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NOTES:
<PAGE>
[LOGO]
BROWNIA MARYLAND BOND FUND
FOR MORE INFORMATION
The following documents are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information about the Fund's investments will be
available in the Fund's annual and semi-annual reports to
shareholders. In the Fund's annual report, you will find a
discussion of the market
conditions and investment strategies that significantly affected
the Fund's performance during its last year.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI provides more detailed information about the Fund and is incorporated
by reference into this Prospectus.
CONTACTING THE FUND
You can get free copies of both reports (when
available), the SAI, request other
information, and discuss your questions about
the Fund by contacting the Fund at:
BrownIA Funds
P.O. Box 446
Portland, Maine 04112
(800) 540-6807 (toll free)
(207) 879-0001
SECURITIES AND EXCHANGE COMMISSION INFORMATION
You can also review the Fund's reports (when available)
and SAI at the Public Reference Room of the Securities
and Exchange Commission ("SEC"). The scheduled hours
of operation of the Public Reference Room may be obtained by
calling the SEC at (202) 942-8090. You can get
copies of this information, for a fee, by emailing
or by writing to:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-6009
Email address: [email protected]
Free copies of the reports and SAI are available from
the SEC's Internet Web Site at www.sec.gov.
Investment Company Act File No. 811-3023
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------------------------------------
[LOGO]
FORUM
FUNDS
December 20, 2000
INVESTMENT ADVISER: BROWNIA MARYLAND BOND FUND
Brown Advisory Incorporated
Furness House
19 South Street
Baltimore, Maryland 21202
ACCOUNT INFORMATION AND SHAREHOLDER
SERVICES:
Forum Shareholder Services, LLC
P.O. Box 446
Portland, Maine 04112
(800) 805-8258
(207) 879-0001
This Statement of Additional Information (the "SAI") supplements the Prospectus
dated December 20, 2000, as may be amended from time to time, offering shares of
BrownIA Maryland Bond Fund, a series of Forum Funds, a registered, open-end
management investment company. 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.
<PAGE>
2
TABLE OF CONTENTS
--------------------------------------------------------------------------------
GLOSSARY 2
1. INVESTMENT POLICIES AND RISKS 3
2. INFORMATION CONCERNING THE STATE OF MARYLAND 9
3. INVESTMENT LIMITATIONS 9
4. PERFORMANCE DATA AND ADVERTISING 12
5. MANAGEMENT 16
6. PORTFOLIO TRANSACTIONS 21
7. PURCHASE AND REDEMPTION INFORMATION 23
8. TAXATION 25
9. OTHER MATTERS 29
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS A-1
APPENDIX B - MISCELLANEOUS TABLES B-1
APPENDIX C - PERFORMANCE DATA C-1
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GLOSSARY
--------------------------------------------------------------------------------
As used in this SAI, the following terms have the meanings listed.
"Adviser" means Brown Advisory Inc.
"Board" means the Board of Trustees of the Trust.
"CFTC" means Commodities Future Trading Commission.
"Code" means the Internal Revenue Code of 1986, as amended.
"Custodian" means the Forum Trust, LLC, 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.
"FFS" means Forum Fund Services, LLC, the distributor of the Fund's shares.
"Fitch" means Fitch IBCA, Inc.
"FSS" means Forum Shareholder Services, LLC, the transfer agent of the
Fund.
"Fund" means BrownIA Maryland Bond Fund.
"IRS" means Internal Revenue Service.
"Moody's" means Moody's Investors Service.
"NAV" means net asset value per share.
"NRSRO" means a nationally recognized statistical rating organization.
"SAI" means Statement of Additional Information.
"SEC" means the U.S. Securities and Exchange Commission.
"S&P" means Standard & Poor's Corporation, A Division of the McGraw Hill
Companies.
"Trust" means Forum Funds.
"U.S. Government Securities" means obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
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1. INVESTMENT POLICIES AND RISKS
--------------------------------------------------------------------------------
The Fund is a non-diversified series of the Trust. This section discusses in
greater detail than the Fund's Prospectus certain investments that the Fund can
make.
A. DEBT SECURITIES
1. GENERAL
MUNICIPAL SECURITIES The Fund may invest in municipal securities. Municipal
securities are issued by the states, territories and possessions of the United
States, their political subdivisions (such as cities, counties and towns) and
various authorities (such as public housing or redevelopment authorities),
instrumentalities, public corporations and special districts (such as water,
sewer or sanitary districts) of the states, territories, and possessions of the
United States or their political subdivisions. In addition, municipal securities
include securities issued by or on behalf of public authorities to finance
various privately operated facilities, such as industrial development bonds,
that are backed only by the assets and revenues of the non-governmental user
(such as hospitals and airports). The Fund may invest up to 5% of its total
assets in municipal securities of issuers located in any one territory or
possession of the United States.
Municipal securities are issued to obtain funds for a variety of public
purposes, including general financing for state and local governments, or
financing for specific projects or public facilities. Municipal securities are
classified as general obligation or revenue bonds or notes. General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable from revenue derived from a particular facility, class of facilities, or
the proceeds of a special excise tax or other specific revenue source, but not
from the issuer's general taxing power. The Fund will not invest more than 25%
of its total assets in a single type of revenue bond. Private activity bonds and
industrial revenue bonds do not carry the pledge of the credit of the issuing
municipality, but generally are guaranteed by the corporate entity on whose
behalf they are issued.
Municipal leases are entered into by state and local governments and authorities
to acquire equipment and facilities such as fire and sanitation vehicles,
telecommunications equipment, and other assets. Municipal leases (which normally
provide for title to the leased assets to pass eventually to the government
issuer) have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt-issuance limitations of many state constitutions and
statutes are deemed to be inapplicable because of the inclusion in many leases
or contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis.
U.S. GOVERNMENT SECURITIES The Fund may invest in U.S. Government Securities.
U.S. Government Securities include securities issued by the U.S. Treasury and by
U.S. Government agencies and instrumentalities. U.S. Government Securities may
be supported by the full faith and credit of the United States (such as the
mortgage-related securities and certificates of the Government National Mortgage
Association and securities of the Small Business Administration); by the right
of the issuer to borrow from the U.S. Treasury (for example, Federal Home Loan
Bank securities); by the discretionary authority of the U.S. Treasury to lend to
the issuer (for example, Fannie Mae (formerly the Federal National Mortgage
Association) securities); or solely by the creditworthiness of the issuer (for
example, Federal Home Loan Mortgage Corporation securities).
Holders of U.S. Government Securities not backed by the full faith and credit of
the United States must look principally to the agency or instrumentality issuing
the obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment. No assurance can be given that the U.S. Government would provide
support if it were not obligated to do so by law. Neither the U.S. Government
nor any of its agencies or instrumentalities guarantees the market value of the
securities they issue.
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<PAGE>
VARIABLE AND FLOATING RATE SECURITIES The Fund may invest in variable and
floating rate securities. Debt securities that have variable or floating rates
of interest, may under certain limited circumstances, have varying principal
amounts. These securities pay interest at rates that are adjusted periodically
according to a specified formula, usually with reference to one or more interest
rate indices or market interest rates (the "underlying index"). The interest
paid on these securities is a function primarily of the underlying index upon
which the interest rate adjustments are based. These adjustments minimize
changes in the market value of the obligation. Similar to fixed rate debt
instruments, variable and floating rate instruments are subject to changes in
value based on changes in market interest rates or changes in the issuer's
creditworthiness. The rate of interest on securities may be tied to U.S.
Government Securities or indices on those securities as well as any other rate
of interest or index.
Variable and floating rate demand notes of corporations are redeemable upon a
specified period of notice. These obligations include master demand notes that
permit investment of fluctuating amounts at varying interest rates under direct
arrangements with the issuer of the instrument. The issuer of these obligations
often has the right, after a given period, to prepay the outstanding principal
amount of the obligations upon a specified number of days' notice.
Certain securities may have an initial principal amount that varies over time
based on an interest rate index, and, accordingly, the Fund might be entitled to
less than the initial principal amount of the security upon the security's
maturity. The Fund intends to purchase these securities only when the Adviser
believes the interest income from the instrument justifies any principal risks
associated with the instrument. The Adviser may attempt to limit any potential
loss of principal by purchasing similar instruments that are intended to provide
an offsetting increase in principal. There can be no assurance that the Adviser
will be able to limit the effects of principal fluctuations and, accordingly,
the Fund may incur losses on those securities even if held to maturity without
issuer default.
There may not be an active secondary market for any particular floating or
variable rate instruments, which could make it difficult for the Fund to dispose
of the instrument during periods that the Fund is not entitled to exercise any
demand rights it may have. The Fund could, for this or other reasons, suffer a
loss with respect to those instruments. The Adviser monitors the liquidity of
the Fund's investment in variable and floating rate instruments, but there can
be no guarantee that an active secondary market will exist.
2. RISKS
GENERAL The market value of the interest-bearing debt securities held by the
Fund will be affected by changes in interest rates. There is normally an inverse
relationship between the market value of securities sensitive to prevailing
interest rates and actual changes in interest rates. The longer the remaining
maturity (and duration) of a security, the more sensitive the security is to
changes in interest rates. All debt securities, including U.S. Government
Securities, can change in value when there is a change in interest rates.
Changes in the ability of an issuer to make payments of interest and principal
and in the markets' perception of an issuer's creditworthiness will also affect
the market value of that issuer's debt securities. As a result, an investment in
the Fund is subject to risk even if all debt securities in the Fund's investment
portfolio are paid in full at maturity. In addition, certain debt securities may
be subject to extension risk, which refers to the change in total return on a
security resulting from an extension or abbreviation of the security's maturity.
Yields on debt securities, including municipal securities, are dependent on a
variety of factors, including the general conditions of the debt securities
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. Under normal conditions, debt securities with longer
maturities tend to offer higher yields and are generally subject to greater
price movements than obligations with shorter maturities. A portion of the
municipal securities held by the Fund may be supported by credit and liquidity
enhancements, such as letters of credit (which are not covered by federal
deposit insurance) or puts or demand features of third party financial
institutions, generally domestic and foreign banks.
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<PAGE>
The issuers of debt securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors that
may restrict the ability of the issuer to pay, when due, the principal of and
interest on its debt securities. The possibility exists, therefore, that as a
result of bankruptcy, litigation or other conditions, the ability of an issuer
to pay, when due, the principal of and interest on its debt securities may
become impaired.
2. CREDIT RISK
The Fund's investment in debt securities is subject to the credit risk relating
to the financial condition of the issuers of the securities that the Fund holds.
To limit credit risk, the Fund may only invest in debt securities that are rated
"Baa" or higher by Moody's or "BBB" or higher by S&P at the time of purchase.
The Fund may purchase unrated debt securities if, at the time of purchase, the
Adviser believes that they are of comparable quality to rated securities that
the Fund may purchase. It is anticipated that the average credit rating of the
debt securities held by the Fund will be "Aa" as per Moody's or "AA" as per S&P.
The Fund will limit its investment in debt securities rated "Baa" by Moody's or
"BBB" by S&P to 10% of the Fund's total assets.
The Fund may retain 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, the 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 Adviser
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 organizations or their rating
systems, the Adviser will attempt to substitute comparable ratings. Credit
ratings attempt to evaluate the safety of principal and interest payments and do
not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings. An issuer's current financial
condition may be better or worse than a rating indicates.
3. SPECIAL RISKS INVOLVING PUERTO RICO MUNICIPAL SECURITIES
Fund investments in the Commonwealth of Puerto Rico and its public corporations
(as well as the U.S. territories of Guam and the Virgin Islands) require careful
assessment of certain risk factors, including reliance on substantial federal
assistance and favorable tax programs that have recently become subject to
phaseout by Congress. As of June 1, 2000, Puerto Rico's general obligations were
rated Baa1 by Moody's and A by Standard & Poor's.
B. FUTURES
1. GENERAL
The Fund may purchase futures contracts to: (1) enhance the Fund's performance;
or (2) 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 invest in futures contracts on market indices based in whole or in part
on securities in which the Fund may invest.
A futures contract is a bilateral agreement where one party agrees to accept,
and the other party agrees to make, delivery of cash or an underlying debt
security, as called for in the contract, at a specified date and at an agreed
upon price. The Fund may invest in municipal bond futures and Treasury bond and
note futures.
A municipal bond futures contract is based on the value of the Bond Buyer Index
("BBI") which is comprised of 40 actively traded general obligation and revenue
bonds. The rating of a BBI issue must be at least "A". To be considered, the
issue must have at least 19 years remaining to maturity, a first call date
between 7 and 16 years, and
5
<PAGE>
at least one call at par prior to redemption. No physical delivery of the
securities is made in connection with municipal bond futures. Rather these
contracts are usually settled in cash of they are not closed out prior to their
expiration date.
A Treasury bond futures contract is based on the value of an equivalent 20 year,
6% Treasury bond. Generally, any Treasury bond with a remaining maturity or term
to call of 15 years as of the first day of the month in which the contracts are
scheduled to be exercised will qualify as a deliverable security pursuant to a
Treasury bond futures contract. A Treasury note futures contract is based on the
value of an equivalent 10 year, 6% Treasury note. Generally, any Treasury note
with a remaining maturity or term to call of 6 1/2 years or 10 years,
respectively, as of the first day of the month in which the contracts are
scheduled to be exercised will qualify as a deliverable security pursuant to
Treasury note futures contract.
Since a number of different Treasury notes will qualify as a deliverable
security upon the exercise of the option, the price that the buyer will actually
pay for those securities will depend on which ones are actually delivered.
Normally, the exercise price of the futures contract is adjusted by a conversion
factor that takes into consideration the value of the deliverable security if it
were yielding 6% as of the first day of the month in which the contract is
scheduled to be exercised.
2. RISKS
Use of these instruments is subject to regulation by the SEC, the futures
exchanges on which futures are traded or by the CFTC. No assurance can be given
that any hedging or income strategy will achieve its intended result.
There are certain investment risks associated with futures transactions. These
risks include: (1) imperfect correlation between movements in the prices of
futures 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; (2) 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 (3) 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 limitation by the futures exchanges on the amount of
fluctuation permitted in certain futures contract prices during a single trading
day. The Fund may be forced, therefore, to liquidate or close out a futures
contract position at a disadvantageous price. The Fund may use various futures
contracts that are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary market
in those contracts will develop or continue to exist. The Fund's activities in
the futures market may result in higher portfolio turnover rates and additional
brokerage costs, which could reduce the Fund's yield.
If the Fund will be financially exposed to another party due to its investments
in futures, the Fund will maintain either: (1) an offsetting ("covered")
position in the underlying security or an offsetting futures contract; or (2)
cash, receivables and liquid debt securities with a value sufficient at all
times to cover its potential obligations. The Fund will comply with SEC
guidelines with respect to coverage of these strategies and, if the guidelines
require, will set aside cash, liquid securities and other permissible assets
("Segregated Assets") in a segregated account with the Custodian in the
prescribed amount. Segregated Assets cannot be sold or closed out while the
hedging strategy is outstanding, unless the Segregated Assets are replaced with
similar assets. As a result, there is a possibility that the use of cover or
segregation involving a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
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<PAGE>
C. REPURCHASE AGREEMENTS
1. GENERAL
The Fund may enter into repurchase agreements. Repurchase agreements are
transactions in which the Fund purchases securities from a bank or securities
dealer and simultaneously commits to resell the securities to the bank or dealer
at an agreed-upon date and at a price reflecting a market rate of interest
unrelated to the purchased security. During the term of a repurchase agreement,
the Fund's custodian maintains possession of the purchased securities and any
underlying collateral, which is maintained at not less than 100% of the
repurchase price. Repurchase agreements allow the Fund to earn income on its
uninvested cash for periods as short as overnight, while retaining the
flexibility to pursue longer-term investments.
2. RISKS
Repurchase Agreements involve credit risk. Credit risk is the risk that a
counterparty to a transaction will be unable to honor its financial obligation.
In the event that bankruptcy, insolvency or similar proceedings are commenced
against a counterparty, the Fund may have difficulties in exercising its rights
to the underlying securities or currencies, as applicable. The Fund may incur
costs and expensive time delays in disposing of the underlying securities and it
may suffer a loss. Failure by the other party to deliver a security or currency
purchased by the Fund may result in a missed opportunity to make an alternative
investment. Favorable insolvency laws that allow the Fund, among other things,
to liquidate the collateral held in the event of the bankruptcy of the
counterparty reduce counterparty insolvency risk with respect to repurchase
agreements.
D. BORROWING
1. GENERAL
The Fund may borrow money from banks for temporary or emergency purposes in an
amount up to 33 1/3% of the Fund's total assets. The purchase of securities is
prohibited if a Fund's borrowing exceeds 5% or more of the Fund's total assets.
2. RISKS
Borrowing creates the risk of magnified capital losses. If the Fund buys
securities with borrowed funds and the value of the securities declines, the
Fund may be required to provide the lender with additional funds or liquidate
its position in these securities to continue to secure or repay the loan. The
Fund may also be obligated to liquidate other portfolio positions at an
inappropriate time in order to pay off the loan or any interest payments
associated with the loan. To the extent that the interest expense involved in a
borrowing transaction approaches the net return on the Fund's investment
portfolio, the benefit of borrowing will be reduced, and, if the interest
expense is incurred as a result of borrowing were to exceed the net return to
investors, the Fund's use of borrowing would result in a lower rate of return
than if the Fund did not borrow. The size of any loss incurred by the Fund due
to borrowing will depend on the amount borrowed. The greater the percentage
borrowed, the greater potential of gain or loss to the Fund.
E. LEVERAGE TRANSACTIONS
1. GENERAL
The Fund may use leverage to increase potential returns. Leverage involves
special risks and may involve speculative investment techniques. Leverage exists
when cash made available to the Fund through an investment technique is used to
make additional Fund investments. Lending portfolio securities and entering into
purchasing securities on a when-issued, delayed delivery or forward commitment
basis are transactions that result in leverage. The Fund uses these investment
techniques only when the Adviser believes that the leveraging and the returns
available to the Fund from investing the cash will provide investors a
potentially higher return.
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<PAGE>
SECURITIES LENDING The Fund may lend portfolio securities in an amount up to 10%
of its total assets to brokers, dealers and other financial institutions.
Securities loans must be continuously collateralized and the collateral must
have market value at least equal to the value of the Fund's loaned securities,
plus accrued interest. In a portfolio securities lending transaction, 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" 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 after 15-45 days after the transaction.
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 or delayed delivery basis, the Fund will
record the transaction as a purchase and thereafter reflect the value each day
of such securities in determining its net asset value.
The Fund will not enter into a when-issued or forward commitment if, as a
result, more than 25% of the Fund's total assets would be committed to such
transactions.
2. RISKS
Leverage creates the risk of magnified capital losses. Losses incurred by the
Fund may be magnified by borrowings and other liabilities that exceed the equity
base of the Fund. Leverage may involve the creation of a liability that requires
the Fund to pay interest or the creation of a liability that does not entail any
interest costs (for instance, forward commitment costs).
The risks of leverage include a higher volatility of the net asset value of the
Fund's securities and the relatively greater effect on the net asset value of
the securities caused by favorable or adverse market movements or changes in the
cost of cash obtained by leveraging and the yield from invested cash. So long as
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 on borrowings were to
exceed the net return to investors, the Fund's use of leverage would result in a
lower rate of return than if the Fund were not leveraged. In an extreme case, if
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.
F. 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
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<PAGE>
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.
G. CORE AND GATEWAY(R)
The Fund may seek to achieve its investment objective by converting to a Core
and Gateway structure. The 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.
2. INFORMATION CONCERNING THE STATE OF MARYLAND
--------------------------------------------------------------------------------
Material in this section was compiled from several public sources, including
statements from the State of Maryland Office of the Treasurer and the 1999
Comprehensive Annual Financial Report of the State of Maryland. Although the
information is believed to be accurate, none of the information obtained has
been verified independently. While the following summarizes the most current
information available from these sources, it does not reflect economic
conditions or developments that may have occurred or trends that may have
materialized since the dates indicated.
The State of Maryland has a population of approximately 5.1 million. Services,
trade, and government are among the leading areas of employment. Maryland us
much more reliant on the service and governments ectors than the nation is as a
whole, while the manufacturing sector is much less significant than it is
nationwide. Growth, generally, slowed in 1999 from an average annual rate of
4.2% over the prior four years. Construction and services have experienced the
highest levels of growth, 3.7% and 3.8%, respectively. The telecommunications
sector remains strong with anticipated annual growth rates of approximately 2%.
Overall, non-agricultural employment rates increased 2.1% in 1999 and are
expected to slow to 1.6% in 2000 and rebound again to 2.1% in 2001. Maryland's
unemployment rate as of fiscal 1999 was 4.0%. A tight labor market and strong
wage growth contributed to a 5.7% increase in personal income in 1999. It is
anticipated that personal income levels will remain stable in 2000 and increase
again in 2001.
The State of Maryland enacts its budget annually. The budget uses a legally
mandated budgetary fund structure. Maryland also maintains accounts to conform
with generally accepted accounting principles but financial control is exercised
under the budgetary system. The largest sources of revenues are broad-based
taxes, including income, sales, motor vehicle, and property taxes.
Maryland general obligation bonds are rated Aaa by Moody's, and AAA by both S&P
and Fitch. As of June 30, 1999, Maryland had $5.1 billion in State tax-supported
debt. Authorized but unissued general obligation bonds totaled $1 billion.
3. 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.
9
<PAGE>
A fundamental policy of the Fund and the Fund's investment objective cannot be
changed without the affirmative vote of the lesser of: (1) 50% of the
outstanding shares of the Fund; or (2) 67% of the shares of the Fund present or
represented at a shareholders meeting at which the holders of more than 50% of
the outstanding shares of the Fund are present or represented. A nonfundamental
policy of the Fund may be changed by the Board without shareholder approval.
A. FUNDAMENTAL LIMITATIONS
The Fund has adopted the following investment limitations, that cannot be
changed by the Board without shareholder approval. The Fund may not:
BORROWING MONEY
Borrow money, except for temporary or emergency purposes (including the meeting
of redemption requests) and except for entering into reverse repurchase
agreements, and provided that borrowings do not exceed 33 1/3% of the Fund's
total assets (computed immediately after the borrowing).
CONCENTRATION
Purchase a security if, as a result, more than 25% of the Fund's total assets
would be invested in securities of issuers conducting their principal business
activities in the same industry. For purposes of this limitation, there is no
limit on: (1) investments in U.S. Government Securities, in repurchase
agreements covering U.S. Government Securities, in tax-exempt securities issued
by the states, territories or possessions of the United States ("municipal
securities") or in foreign government securities; or (2) investments in issuers
domiciled in a single jurisdiction. Notwithstanding anything to the contrary, to
the extent permitted by the 1940 Act, the Fund may invest in one or more
investment companies; provided that, except to the extent the Fund invests in
other investment companies pursuant to Section 12(d)(1)(A) of the 1940 Act, the
Fund treats the assets of the investment companies in which it invests as its
own for purposes of this policy.
DIVERSIFICATION
Purchase a security (other than a U.S. Government Security or security of an
investment company) if, as a result: (1) with respect to 50% of the Fund's total
assets, more than 5% of the Fund's total assets would be invested in the
securities of a single issuer; or (2) with respect to 50% of the Fund's total
assets, the Fund would own more than 10% of the outstanding voting securities of
any single issuer; or (3) more than 25% of the Fund's total assets would be
invested in the securities of any single issuer.
The District of Columbia, each state and territory, each political subdivision,
agency, instrumentality and authority thereof, and each multi-state agency of
which the District of Columbia, a state or territory is a member is deemed to be
a separate "issuer." When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from the government
creating the subdivision and the security is backed only by the assets and
revenues of the subdivision, such subdivision is treated as the issuer.
Similarly, in the case of private activity bonds, if the bond is backed only by
the assets and revenues of the nongovernmental user, then the nongovernmental
user is treated as the issuer. If in either case, however, the creating
government or some other agency guarantees a security, that guarantee is
considered a separate security and is treated as an issue of such government or
other agency.
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.
10
<PAGE>
LENDING
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 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 or futures contracts or from investing in
securities or other instruments backed by physical commodities).
ISSUANCE OF SENIOR SECURITIES
Issue senior securities to the extent permitted by the 1940 Act.
B. NON - FUNDAMENTAL LIMITATIONS
The Fund has adopted the following investment limitations that may be changed by
the Board without shareholder approval. The Fund may not:
SECURITIES OF INVESTMENT COMPANIES
Invest in the securities of any investment company except to the extent
permitted by the 1940 Act.
SHORT SALES
Sell securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short (short sales "against
the box"), and provided that transactions in futures contracts are not deemed to
constitute selling securities short.
PURCHASES ON MARGIN
Purchase securities on margin, except that the Fund may use short-term credit
for the clearance of the Fund's transactions, and provided that initial and
variation margin payments in connection with futures contracts shall not
constitute purchasing securities on margin.
LIQUIDITY
Invest more than 15% of its net assets in illiquid assets such as: (i)
securities that cannot be disposed of within seven days at their then-current
value, (ii) repurchase agreements not entitling the holder to payment of
principal within seven days and (iii) 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.
OPTIONS AND FUTURES
Invest in futures or options contracts regulated by the CFTC except for (1) bona
fide hedging purposes within the meaning of the rules of the CFTC and (2) for
other purposes if, as a result, no more than 5% of the Fund's net
11
<PAGE>
assets would be invested in initial margin and premiums (excluding amounts
"in-the-money") required to establish the contracts.
BORROWING
Purchase or otherwise acquire any security if, the total of borrowings would
exceed 5% of the value of its total assets.
EXERCISING CONTROL OF ISSUERS
Make investments for the purpose of exercising control of an issuer. Investments
by the Fund in entities created under the laws of foreign countries solely to
facilitate investment in securities in that country will not be deemed the
making of investments for the purpose of exercising control.
4. PERFORMANCE DATA AND ADVERTISING
--------------------------------------------------------------------------------
A. PERFORMANCE DATA
The Fund may quote performance in various ways. All performance information
supplied in advertising, sales literature, shareholder reports, or other
materials is historical and is not intended to indicate future returns.
The Fund may compare any of its performance information with:
o Data published by independent evaluators such as Morningstar, Inc.,
Lipper, Inc., iMoneyNet, Inc. (IBC Financial Data, Inc.),
CDA/Wiesenberger, or other companies which track the investment
performance of investment companies ("Fund Tracking Companies").
o The performance of other mutual funds.
o The performance of recognized stock, bond and other indices,
including, but not limited to, the Standard & Poor's 500(R) Index, the
Russell 2000(R) Index, the Russell MidcapTM Index, the Russell 1000(R)
Value Index, the Russell 2500(R) Index, the Morgan Stanley Capital
International - Europe, Australasia and Far East Index, the Dow Jones
Industrial Average, the Salomon Smith Barney Indices, the Lehman Bond
Indices, 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.
12
<PAGE>
B. PERFORMANCE CALCULATIONS
The Fund's performance may be quoted in terms of yield or total return. Table 1
in Appendix C includes
1. SEC YIELD
Standardized SEC yields for the Fund used in advertising are computed by
dividing the Fund's interest income (in accordance with specific standardized
rules) for a given 30 day or one month period, net of expenses, by the average
number of shares entitled to receive income distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period, and annualizing the result (assuming compounding of income in accordance
with specific standardized rules) in order to arrive at an annual percentage
rate.
Capital gains and losses generally are excluded from these calculations.
Income calculated for the purpose of determining the Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for the Fund may differ from the rate of
distribution of income from the Fund over the same period or the rate of income
reported in the Fund's financial statements.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day and that the Fund's yield for any given period is not an
indication or representation by the Fund of future yields or rates of return on
the Fund's shares. Financial intermediaries may charge their customers that
invest in the Fund fees in connection with that investment. This will have the
effect of reducing the Fund's after-fee yield to those shareholders.
The Fund may also quote tax equivalent yields, which show the taxable yields a
shareholder would have to earn to equal a fund's tax-free yield after taxes. A
tax equivalent yield is calculated by dividing a fund's tax-free yield by one
minus a stated Federal, state or combined Federal and state tax rate.
The yields of the Fund are not fixed or guaranteed, and an investment in the
Fund is not insured or guaranteed. Accordingly, yield information should not be
used to compare shares of the Fund with investment alternatives, which, like
money market instruments or bank accounts, may provide a fixed rate of interest.
Also, it may not be appropriate to compare the Fund's yield information directly
to similar information regarding investment alternatives, which are insured or
guaranteed.
Yield is calculated according to the following formula:
a - b
Yield = 2[(------ + 1)6 - 1]
cd
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
2. TOTAL RETURN CALCULATIONS
The Fund's total return shows its overall change in value, including changes in
share price, and assumes all of the Fund's distributions are reinvested.
13
<PAGE>
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.
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.
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
3. OTHER MATTERS
The Fund may also include a variety of 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
14
<PAGE>
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 NAV,
net assets, or number of shareholders of the Fund as of one or more dates; and
(10) a comparison of the Fund's operations to the operations of other funds or
similar investment products, such as a comparison of the nature and scope of
regulation of the products and the products' weighted average maturity,
liquidity, investment policies, and the manner of calculating and reporting
performance.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,188 at the end
of the second year (an increase 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 a fund, the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
SYSTEMATIC SHARE SHARES PURCHASED
PERIOD INVESTMENT PRICE
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 Invested: $600 Average Price: $15.17 Total 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.
15
<PAGE>
5. MANAGEMENT
--------------------------------------------------------------------------------
A. TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Trust, their position 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> <C>
NAME, DATE OF BIRTH AND POSITION(S) WITH PRINCIPAL OCCUPATION(S) DURING
ADDRESS THE TRUST PAST 5 YEARS
John Y. Keffer* Chairman and Member and Director, Forum Financial Group, LLC (a mutual fund
Born: July 15, 1942 President 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
Department of Economics and Business 1998-1999
University of California Trustee of Core Trust (Delaware), a registered investment
Los Angeles, CA 90024 company.
............................... ................... ..................................................................
............................... ................... ..................................................................
James C. Cheng Trustee President, Technology Marketing Associates (marketing company
Born: July 26, 1942 for small and medium size businesses in New England)
27 Temple Street Trustee of Core Trust (Delaware), a registered investment
Belmont, MA 02718 company.
............................... ................... ..................................................................
............................... ................... ..................................................................
J. Michael Parish Trustee Partner, Thelen Reid & Priest LLP (law firm)
Born: November 9, 1943 Trustee of Core Trust (Delaware), a registered investment
40 West 57th Street company.
New York, NY 10019
............................... ................... ..................................................................
............................... ................... ..................................................................
Thomas G. Sheehan Vice President Managing Director, Forum Financial Group, LLC
Born: July 15, 1954 Officer of four other investment companies for which Forum
Two Portland Square Financial Group, LLC provides services
Portland, ME 04101
............................... ................... ..................................................................
............................... ................... ..................................................................
Dale Denno Vice President General Counsel, Forum Financial Group, LLC since September
Born: May 1, 1950 2000Vice President, Marketing & Development, Unum Life Insurance
Two Portland Square Company 1995-2000
Portland, ME 04101
............................... ................... ..................................................................
............................... ................... ..................................................................
Ronald H. Hirsch Treasurer Managing Director, Forum Financial Group, LLC since 1999
Born: October 14, 1943 Member of the Board - Citibank Germany 1991 - 1998
Two Portland Square Officer of six other investment companies for which Forum
Portland, ME 04101 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)
Two Portland Square 1993 - 1998
Portland, ME 04101 Officer of one other investment company for which Forum
Financial Group, LLC provides services
</TABLE>
B. COMPENSATION OF TRUSTEES AND OFFICERS
Each Trustee of the Trust is 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.
16
<PAGE>
The following table sets forth the estimated fees to be paid to each Trustee by
the Fund and the Fund Complex, which 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, 2001.
COMPENSATION TOTAL COMPENSATION FROM
TRUSTEE FROM THE FUND THE FUND COMPLEX
John Y. Keffer $0 $0
Costas Azariadis $525.21 $18,000
James C. Cheng $525.21 $18,000
J. Michael Parish $525.21 $18,000
C. INVESTMENT ADVISER
1. SERVICES OF ADVISER
The Adviser serves as investment adviser to the Fund pursuant to an investment
advisory agreement with the Trust. Under its agreement, the Adviser furnishes,
at its own expense, all services, facilities and personnel necessary in
connection with managing the Fund's investments and effecting portfolio
transactions for the Fund.
2. OWNERSHIP OF ADVISER
The Adviser is a fully owned subsidiary of Brown Investment Advisory & Trust
Company, a trust company operating under the laws of Maryland. Brown Investment
Advisory & Trust Company is a fully owned subsidiary of Brown Capital Holdings
Incorporate, a holding company incorporated under the laws of Maryland in 1998.
3. FEES
The Adviser's fee is calculated as a percentage of the Fund's average net
assets. The fee, if not waived, 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).
4. OTHER PROVISIONS OF ADVISER'S AGREEMENT
The Adviser's agreement remains in effect for a period of two years from the
date of its effectiveness and then the agreement must be approved annually.
Subsequently, the Adviser's 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 (other than as Trustees of the Trust).
The Adviser's agreement is terminable without penalty by the Trust with respect
to the Fund on 60 days' written notice when authorized either by vote of the
Fund's shareholders or by a majority vote of the Board, or by 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.
17
<PAGE>
B. DISTRIBUTOR
1. DISTRIBUTOR; SERVICES AND COMPENSATION OF DISTRIBUTOR
FFS, the distributor (also known as principal underwriter) of the shares of the
Fund, is located at Two Portland Square, Portland, Maine 04101. FFS is a
registered broker-dealer and is a member of the National Association of
Securities Dealers, Inc.
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 efforts
basis. FFS has no obligation to sell any specific quantity of Fund shares.
FFS may enter into arrangements with various financial institutions through
which you may purchase or redeem shares. FFS may, at its own expense and from
its own resources, compensate certain persons who provide services in connection
with the sale or expected sale of shares of the Fund.
FFS may enter into agreements with selected broker-dealers, banks, or other
financial institutions for distribution of shares of the Fund. These financial
institutions may charge a fee for their services and may receive shareholder
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.
2. OTHER PROVISIONS OF THE DISTRIBUTOR'S AGREEMENT
The Distribution Agreement with respect to the Fund must be approved at least
annually by the Board or by majority vote of the shareholders of that Fund, and
in either case by a majority of the Trustees who are not parties to the
agreement or interested persons of any such party (other than as Trustees of the
Trust).
The Distribution Agreement is terminable without penalty by the Trust with
respect to the Fund on 60 days' written notice when authorized either by vote of
the Fund's shareholders, or by a majority vote of the Board, or by FFS on 60
days' written notice to the Trust.
Under the Distribution Agreement, FFS is not liable to the Trust or the Trust's
shareholders for any error of judgment or mistake of law, for any loss arising
out of any investment, or for any act or omission in the performance of its
duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties under the agreement.
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 Trust'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.
18
<PAGE>
C. OTHER FUND SERVICE PROVIDERS
1. ADMINISTRATOR
As administrator, pursuant to an administration 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 $100 million of the Fund's average daily net assets and 0.75% of
the Fund's average daily assets in excess of $100 million, subject to a minimum
fee of $40,000. The fee is accrued daily by the Fund and is paid monthly based
on average net assets for the previous month.
The Administration Agreement with respect to the Fund must be approved at least
annually by the Board or by majority vote of the shareholders of that Fund, and
in either case by a majority of the Trustees who are not parties to the
agreement or interested persons of any such party (other than as Trustees of the
Trust). The Administration Agreement is terminable without penalty by the Trust
or by FAdS with respect to the Fund on 60 days' written notice to the Trust.
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).
2. 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 of the Fund and preparing the Fund's financial
statements and tax returns.
For its services, FAcS receives a fee from the Fund at an annual rate of $36,000
plus $3,000 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.
The Accounting Agreement with respect to the Fund 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 (other than as Trustees of the Trust). 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, FAcS is deemed
not to have committed an error if the NAV it calculates is within 1/10 of 1% of
the actual NAV (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
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less than or equal to 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).
3. 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 $18,000
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 with respect to the Fund 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 (other than as Trustees of the Trust). The
Transfer Agency Agreement is terminable without penalty by the Trust or by FFS
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 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).
4. SHAREHOLDER SERVICING AGENT
Pursuant to a Shareholder Service Plan (the "Plan") between the Trust and FAdS
effective December 31, 2000, 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.
Shareholder Servicing Activities shall include one or more of the following: (1)
establishing and maintaining accounts and records for shareholders of the Fund;
(2) answering client inquiries regarding the manner in which purchases,
exchanges and redemptions of shares of the Trust may be effected and other
matters pertaining to the Trust's services; (3) providing necessary personnel
and facilities to establish and maintain client accounts and records; (4)
assisting clients in arranging for processing purchase, exchange and redemption
transactions; (5) arranging for the wiring of funds; (6) guaranteeing
shareholder signatures in connection with redemption orders and transfers and
changes in shareholder-designated accounts; (7) integrating periodic statements
with other shareholder transactions; and (8) 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, with respect to the Fund, a fee of up
to 0.25% of that Fund's 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.
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5. 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.
6. 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.
7. INDEPENDENT AUDITORS
Deloitte & Touch LLP, 200 Berkeley Street, 14th Floor, Boston, Massachusetts,
02116-5022, independent auditors, have been selected as independent auditors for
the Fund. The auditor audits the annual financial statements of the Fund and
provides the Fund with an audit opinion. The auditors also review certain
regulatory filings of the Fund and the Fund's tax returns.
6. PORTFOLIO TRANSACTIONS
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A. HOW SECURITIES ARE PURCHASED AND SOLD
Purchases and sales of portfolio securities that are fixed income securities
(for instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom the Fund
purchases or to whom the Fund sells is acting on its own behalf (and not as the
agent of some other party such as its customers). These securities normally are
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for these
securities.
Purchases and sales of portfolio securities that are equity securities (for
instance common stock and preferred stock) are generally effected: (1) if the
security is traded on an exchange, through brokers who charge commissions; and
(2) if the security is traded in the "over-the-counter" markets, in a principal
transaction directly from a market maker. In transactions on stock exchanges,
commissions are negotiated. When transactions are executed in an
over-the-counter market, the Adviser will seek to deal with the primary market
makers; but when necessary in order to obtain best execution, the Adviser will
utilize the services of others.
The price of securities purchased from underwriters includes a disclosed fixed
commission or concession paid by the issuer to the underwriter, and prices of
securities purchased 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.
B. 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).
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C. ADVISER RESPONSIBILITY FOR PURCHASES AND SALES
The Adviser places orders for the purchase and sale of securities with
broker-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.
D. CHOOSING BROKER-DEALERS
The Fund may not always pay the lowest commission or spread available. Rather,
in determining the amount of commissions (including certain dealer spreads) paid
in connection with securities transactions, the Adviser takes into account
factors such as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the research services described below)
and any risk assumed by the executing broker.
Consistent with applicable rules and the Adviser's duties, the Adviser may: (1)
consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund; and (2) 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).
E. OBTAINING RESEARCH FROM BROKERS
The Adviser may give consideration to research services furnished by brokers to
the Adviser for its use and may cause the Fund to pay these brokers a higher
amount of commission than may be charged by other brokers. This research is
designed to augment the Adviser's own internal research and investment strategy
capabilities. This research may be used by the Adviser in connection with
services to clients other than the Fund, and not all research services may be
used by the Adviser in connection with the Fund. The Adviser's fees are not
reduced by reason of the Adviser's receipt of research services.
The Adviser has full brokerage discretion. It evaluates the range and quality of
a broker's services in placing trades including securing best price,
confidentiality, clearance and settlement capabilities, promptness of execution
and the financial stability of the broker-dealer. Under certain circumstances,
the value of research provided by a broker-dealer may be a factor in the
selection of a broker. This research would include reports that are common in
the industry. Typically, the research will be used to service all of the
Adviser's accounts, although a particular client may not benefit from all the
research received on each occasion. The nature of the services obtained for
clients include industry research reports and periodicals, quotation systems,
software for portfolio management and formal data bases.
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.
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1. 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.
2. 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.
3. 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 advised
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.
4. 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 a fund were
replaced once in a period of one year. High portfolio turnover rates may result
in increased brokerage costs to the Fund and a possible increase in short-term
capital gains or losses.
5. 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.
Table 6 in Appendix B lists the regular brokers and dealers of the Funds whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the appropriate value of the Funds' holdings at those
securities as of the Funds most recent fiscal year.
7. PURCHASE AND REDEMPTION INFORMATION
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A. GENERAL INFORMATION
You may effect purchases or redemptions or request any shareholder privilege in
person at FSS's offices located at Two Portland Square, Portland, Maine 04101.
The Fund accepts orders for the purchase or redemption of shares on any weekday
except days when the New York Stock Exchange is closed.
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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.
B. ADDITIONAL PURCHASE INFORMATION
Shares of the Fund are sold on a continuous basis by the distributor at net
asset value ("NAV") without any sales charge. Accordingly, the offering price
per share is the same as the NAV.
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).
C. UGMAS/UTMAS
If the custodian's name is not in the account registration of a gift or transfer
to minor ("UGMA/UTMA") account, the custodian must provide instructions in a
manner indicating custodial capacity.
D. 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 financial 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.
E. 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) 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.
F. 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
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<PAGE>
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.
G. REDEMPTION-IN-KIND
Redemption proceeds normally are paid in cash. If deemed appropriate and
advisable by the Adviser, the Fund may satisfy a redemption request from a
shareholder by distributing portfolio securities pursuant to procedures adopted
by the Board. The Trust has filed an election with the SEC pursuant to which 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.
H. NAV DETERMINATION
In determining the Fund's NAV, securities for which market quotations are
readily available are valued at current market value using the valuation price
provided by an independent pricing service. If an independent pricing service is
unable to provide a valuation for a security held in the Fund's portfolio, the
security is reported the average of the last bid and ask price is used. If no
average price is available, the last bid price is used. If valued at fair value
as determined by the Board (or its delegate).
I. DISTRIBUTIONS
Distributions of net investment income will be reinvested at the Fund's NAV
(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 (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.
8. TAXATION
--------------------------------------------------------------------------------
The tax information set forth in the Prospectus and the information in this
section relates solely to U.S. federal and Maryland state income tax law and
assumes that the Fund qualifies as a regulated investment company (as discussed
below). This information is only a summary of certain key 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 tax treatment of the Fund or the tax 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 laws, including the Code and regulations and
judicial and administrative decisions 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 its shareholders. Any of these
changes or court decisions may have a retroactive effect.
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX PROVISIONS APPLICABLE TO THEM.
A. QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund intends, for each tax year, to qualify as a "regulated investment
company" under the Code. This qualification does not involve governmental
supervision of management or investment practices or policies of the Fund.
The tax year end of the Fund is May 31 (the same as the Fund's fiscal year end).
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B. MEANING OF QUALIFICATION
As a regulated investment company, the Fund will not be subject to federal
income tax on the portion of its investment company taxable income (that is,
taxable interest, dividends, net short-term capital gains and other taxable
ordinary income, net of expenses) and net capital gain (that is, the excess of
net long-term capital gains over net short-term capital losses) that it
distributes to shareholders. In order to qualify to be taxed as a regulated
investment company the Fund must satisfy the following requirements:
o The Fund must distribute at least 90% of its investment company
taxable income each tax year and at least 90% of its income from its
tax-exempt obligations. Certain distributions made by the Fund after
the close of its tax year are considered distributions attributable to
the previous tax year for purposes of satisfying this requirement.
o The Fund must derive at least 90% of its gross income each year from
dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities, or other
income (including gains from options and futures contracts) 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, 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, similar, or related trades or
businesses.
C. 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.
Failure to qualify as a regulated investment company would thus have a
significant 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.
D. FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its net investment income
for each tax year. Distributions of investment company taxable income
(generally, taxable net investment income and any net short-term capital gain)
are taxable to you as ordinary income. Income from tax-exempt interest
obligations is not included in investment company taxable income. If at the
close of each quarter of a taxable year of the Fund, at least 50% of the value
of the Fund's total assets consists of certain obligations the interest on which
is excludable from gross income under Section 103(a) of the Code, the Fund may
pay "exempt-interest" dividends to its shareholders. Those dividends constitute
the portion of the aggregate dividends (excluding capital gain distributions),
as designated by the fund, equal to the excess of the fund's excludable interest
over certain amounts disallowed as deductions. Exempt interest dividends paid by
the Fund are generally exempt from federal income tax; however, the amount of
such dividends must be reported on the recipient's federal income tax return.
The Fund anticipates distributing substantially all of its net capital gain (net
long-term capital gains over net short-term capital losses )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.
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Distributions by the Fund that do not constitute ordinary income dividends,
exempt interest dividends, or capital gain dividends will be treated as a return
of capital. Return of capital distributions reduce your tax basis in your 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 with an NAV at the time of purchase that 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.
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 paid by the Fund and received by you
on December 31 of that calendar year if the distribution is paid by the Fund in
January of the following year.
If you are a "substantial user" or a "related person" of a substantial user of
facilities financed by private activity bonds held by the Fund, you may have to
pay federal or Maryland state income tax on your pro rata share of the net
income generated by those securities.
Interest on indebtedness incurred to purchase or carry shares of a regulated
investment company paying exempt-interest dividends generally will not be
deductible for federal and state income tax purposes to the extent attributable
to exempt-interest dividends. In addition, exempt-interest dividends are
included in determining the portion, if any, of a person's social security and
railroad retirement benefits that are subject to federal income taxes.
The Fund will send you information annually as to the U.S. tax consequences of
distributions made (or deemed made) during the year.
E. CERTAIN TAX RULES APPLICABLE TO THE FUNDS' TRANSACTIONS
Certain 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. Application of these rules to Section
1256 contracts held by the Fund may alter the timing and character of
distributions to you. 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 futures contract or other position entered into or held by the Fund in
conjunction with any other position held by the Fund may constitute a "straddle"
for federal income tax purposes. A straddle of which at least one, but not all,
the positions are Section 1256 contracts, may constitute a "mixed straddle." In
general, straddles are subject to certain rules that may affect the character
and timing of the Fund's gains and losses with respect to straddle positions by
requiring, among other things, that: (1) the loss realized on disposition of one
position of a straddle may not be recognized to the extent that the Fund has
unrealized gains with respect to the other position in such straddle; (2) the
Fund's holding period in straddle positions be suspended while the straddle
exists (possibly resulting in gain being treated as short-term capital gain
rather than long-term capital gain); (3) the losses recognized with respect to
certain straddle positions which are part of a mixed straddle and which are
non-Section 1256 positions be treated as 60% long-term and 40% short-term
capital loss; (4) losses recognized with respect to certain straddle positions
which would otherwise constitute short-term capital losses be treated as
long-term capital losses; and (5) the deduction of interest and carrying charges
attributable to certain straddle positions may be deferred. Various elections
are available to the Fund, which may mitigate the effects of the straddle rules,
particularly with respect to mixed straddles. In general, the straddle rules
described above do not apply to any straddles held by the Fund if all of the
offsetting positions consist of Section 1256 contracts.
27
<PAGE>
F. 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; (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.
The Fund intends to make sufficient distributions of its ordinary taxable income
and capital gain net income prior to the end of each calendar year to avoid
liability for the excise tax. Investors should note, however, that the Fund
might in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.
G. SALE, EXCHANGE, OR REDEMPTION OF SHARES
In general, you will recognize gain or loss on the sale, exchange, or redemption
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale, exchange 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) Fund shares or shares that are
substantially identical to Fund shares within 30 days before or after the sale,
exchange, 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, exchange, or redemption of shares held for six months or
less, however, will be disallowed to the extent of any exempt interest dividends
received with respect to those shares, and any portion of the loss that isn ot
disallowed will be treated as a long-term capital loss to the extent of the
amount of distributions of net capital gain 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 is not counted. Capital losses in any year are deductible
only to the extent of capital gains plus, in the case of a non-corporate
taxpayer, $3,000 of ordinary income.
H. 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, to the Fund's knowledge, has furnished an
incorrect number; (3) who is otherwisesubject to backup withholding;or (4) 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.
I. FOREIGN SHAREHOLDERS
Taxation of a shareholder who, under the Code, is a nonresident alien
individual, foreign trust or estate, foreign corporation or foreign partnership
("foreign shareholder"), depends on whether the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by the foreign
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, distributions of ordinary income
(and short-term capital gains) paid to a foreign shareholder will be subject to
U.S. withholding tax at the rate of 30% (or a lower treaty rate), if applicable,
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.
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.
28
<PAGE>
In the case of a non-corporate 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 tax rules described above. These foreign
rules are not discussed herein. Foreign shareholders are urged to consult their
own tax advisors as to the consequences of foreign tax rules with respect to an
investment in the Fund.
J. STATE AND LOCAL TAXES
The tax rules of the various states of the United States and their local
jurisdictions with respect to distributions from the Fund can differ from the
U.S. federal income tax rules described above. Except for the Maryland state and
local tax rules specifically discussed herein, these state and local rules are
not discussed in this summary. Shareholders are urged to consult their tax
advisors as to the consequences of state and local tax rules with respect to an
investment in the Fund.
K. MARYLAND TAXES
Distributions attributable to interest received or capital gains recognized by
the Fund on Maryland municipal obligations and certain U.S. government
obligations are generally exempt from Maryland state and local income taxes.
Distributions attributable to the Fund's other income or gains, however, are
generally subject to these taxes. Interest on indebtedness incurred by a
shareholder to purchase or carry Fund shares generally is not deductible for
purposes of Maryland state or local income tax.
Distributions of income derived from interest on Maryland municipal obligations
may not be exempt from taxation under the laws of states other than Maryland.
L. ALTERNATIVE MINIMUM TAX
To the extent the Fund receives interest on certain private activity bonds, a
proportionate part of the exempt-interest dividends paid by the Fund may be
treated as an item of tax preference for the Federal alternative minimum tax and
Maryland's tax on tax preference items. In addition to the preference item for
interest on private activity bonds, corporate shareholders must include the full
amount of exempt-interest dividends in computing tax preference items for
purposes of the alternative minimum tax.
9. OTHER MATTERS
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A. THE TRUST AND ITS SHAREHOLDERS
1. GENERAL INFORMATION
Forum Funds was organized as a business trust under the laws of the State of
Delaware on August 29, 1995. On January 5, 1996 the Trust succeeded to the
assets and liabilities of Forum Funds, Inc.
The Trust is registered as an open-end, management investment company under the
1940 Act. The Trust offers shares of beneficial interest in its series. As of
the date hereof, the Trust consisted of the following shares of beneficial
interest:
29
<PAGE>
Austin Global Equity Fund Investors Equity Fund
BrownIA Growth Equity Fund Investors Growth Fund
BrownIA Small-Cap Growth Fund Investors High Grade Bond Fund
BrownIA Maryland Bond Fund Maine TaxSaver Bond Fund
Daily Assets Cash Fund(1) Mastrapasqua Growth Value 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 The Advocacy 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 Funds' investment adviser and the principal underwriter have
adopted codes of ethics under Rule 17j-1, as amended, of the 1940 Act. These
codes permit personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund.
The Trust and the Fund will continue indefinitely until terminated.
2. SERIES AND CLASSES OF THE TRUST
Each series or class of the Trust may have a different expense ratio and its
expenses will effect each class' performance.
3. SHAREHOLDER VOTING AND OTHER RIGHTS
Each share of each series of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each 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 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 Instrument, call meetings of the Trust (or series) for
any purpose related to the Trust (or series), including, in the case of a
meeting of the Trust, the purpose of voting on removal of one or more Trustees.
30
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4. CERTAIN REORGANIZATION TRANSACTIONS
The Trust or any series may be terminated upon the sale of its assets to, or
merger with, another open-end, management investment company or series thereof,
or upon liquidation and distribution of its assets. Generally, such terminations
must be approved by the vote of the holders of a majority of the outstanding
shares of the Trust or the Fund. The Trustees, may, without prior shareholder
approval change the form of organization of the Trust by merger, consolidation
or incorporation. Under the Trust Instrument, the Trustees may, without
shareholder vote, cause the Trust 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.
5. FUND OWNERSHIP
As of December 18, 2000, the officers and Trustees of the Trust, as a group,
owned less than 1% of the shares of the Fund.
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 December 18, 2000, and
prior to the public offering of the Fund, Forum Financial Group, LLC or its
affiliates, beneficially owned 100% of the Fund and may be deemed to control the
Fund. "Control" for this purpose is the ownership of 25% or more of the Fund's
voting securities. It is not expected that Forum Financial Group, LLC will
continue to control the Fund after its public offering.
6. 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 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 portfolio is unable to meet its obligations.
FAdS believes that, in view of the above, there is no risk of personal liability
to shareholders.
The Trust Instrument provides that the Trustees shall not be liable to any
person other than the Trust and its shareholders. In addition, the Trust
Instrument provides that the Trustees shall not be liable for any conduct
whatsoever, provided that a Trustee is not protected against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
7. CODE OF ETHICS
The Trust, the Adviser, and FFS have each adopted a code of ethics under Rule
17j-1 of the 1940 Act which are designed to eliminate conflicts of interest
between the Fund and personnel of the Trust, the Adviser and FFS. The codes
permit such personnel to invest in securities, including securities that may be
purchased or held by the Fund, subject to certain limitations.
31
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B. 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.
C. FINANCIAL STATEMENTS
Financial statements are not available because the Fund had not commenced
operations prior to the date of this SAI.
32
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APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
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 & POOR'S CORPORATION
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
NOTE Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
NOTE Plus (+) or minus (-). The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
The "r" symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
currencies, or commodities;
A-2
<PAGE>
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+ High credit quality. Protection factors are strong. Risk is modest but AA
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 afp
fected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A-3
<PAGE>
A High credit quality. `A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC
CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates
that default of some kind appears probable. `C' ratings signal imminent
default.
DDD
DD, D Default. Securities are not meeting current obligations and are
extremely speculative. `DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, `DD' indicates expected recovery of 50% - 90%
of such outstanding amounts, 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.
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.
A-4
<PAGE>
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 CORPORATION
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated AA also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated AAA.
A An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated BBB is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
A category.
BB
B,CCC Preferred stock rated BB, B, and CCC is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
preferred stock obligations. BB indicates the lowest degree of
speculation and CCC the highest. While such issues will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating CC is reserved for a preferred stock issue that is in
arrears on dividends or sinking fund payments, but that is currently
paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in
default on debt instruments.
A-5
<PAGE>
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
NOTE Plus (+) or minus (-). To provide more detailed indications of
preferred stock quality, ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
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 Issuers rated Not Prime do not fall within any of the Prime rating
PRIME categories.
STANDARD & POOR'S
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-6
<PAGE>
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
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
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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 fees received by the Adviser.
ADVISORY FEE PAYABLE ADVISORY FEE WAIVED ADVISORY FEE RETAINED
Advisory fee information is not provided because the Fund had not commenced
operations prior to the date of this SAI.
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
fees received by FAdS.
ADMINISTRATION FEE ADMINISTRATION FEE ADMINISTRATION FEE
PAYABLE WAIVED RETAINED
Administration fee information is not provided because the Fund had not
commenced operations prior to the date of this SAI.
TABLE 3 - ACCOUNTING FEES
The following table shows the dollar amount of fees paid to FAcS with respect to
the Fund, the amount of fee that was waived by FAcS, if any, and the actual fees
received by FAcS.
ACCOUNTING FEE PAYABLE ACCOUNTING FEE WAIVED ACCOUNTING FEE RETAINED
Accounting fee information is not provided because the Fund had not commenced
operations prior to the date of this SAI.
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
fees received by FSS.
TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
PAYABLE WAIVED RETAINED
Transfer agency fee information is not provided because the Fund had not
commenced operations prior to the date of this SAI.
B-1
<PAGE>
TABLE 5 - COMMISSIONS
The following table shows the brokerage commissions of the Fund. The data is for
the past three fiscal years (or shorter period if the Fund has been in operation
for a shorter period).
TOTAL BROKERAGE % OF BROKERAGE
COMMISSIONS ($) COMMISSIONS % OF
PAID TO AN PAID TO AN TRANSACTIONS
TOTAL BROKERAGE AFFILIATE OF AFFILIATE OF EXECUTED BY AN
COMMISSIONS ($) THE FUND OR THE FUND OR AFFILIATE OF THE
ADVISER ADVISER FUND OR ADVISER
Brokerage commission information is not provided because the Fund had not
commenced operations prior to the date of this SAI.
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 OR DEALER VALUE HELD
Information regarding securities positions held in the securities of regular
brokers and dealers of the Fund is not included as the Fund had not commenced
operations prior to the date of this SAI.
B-2
<PAGE>
APPENDIX C - PERFORMANCE DATA
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TABLE 1 - TOTAL RETURNS & 30 DAY YIELDS
Performance information is not provided because the Fund had not commenced
operations prior to the date of this SAI.
