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THE CRM SMALL CAP VALUE FUND
FUND INFORMATION: ACCOUNT INFORMATION AND
SHAREHOLDER SERVICES:
Two Portland Square
Portland, Maine 04101 Forum Financial Corp.
(800) 276-2883 P.O. Box 446
Portland, Maine 04112
INVESTMENT ADVISER: (207) 879-8910
CRM Advisors, LLC (800) 844-8258
707 Westchester Avenue
White Plains, New York 10005
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
The CRM Funds (the "Trust") is a registered open-end investment company.
This Statement of Additional Information supplements the Prospectus offering
shares of the CRM Small Cap Value Fund (the "Fund") and should be read only in
conjunction with the Prospectus, a copy of which may be obtained by an investor
without charge by contacting shareholder servicing at the address listed above.
TABLE OF CONTENTS
Page
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1. Investment Policies. . . . . . . . . . . . . . . . . . . . . 2
2. Investment Limitations . . . . . . . . . . . . . . . . . . . 5
3. Performance Data and Advertising . . . . . . . . . . . . . . 7
4. Management . . . . . . . . . . . . . . . . . . . . . . . . . 9
5. Determination of Net Asset Value . . . . . . . . . . . . . . 14
6. Portfolio Transactions . . . . . . . . . . . . . . . . . . . 14
7. Additional Purchase and
Redemption Information. . . . . . . . . . . . . . . . . . . 15
8. Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9. Other Matters. . . . . . . . . . . . . . . . . . . . . . . . 22
Appendix A -- Description of Securities Ratings
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND
IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
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1. INVESTMENT POLICIES
The following discussion is intended to supplement the disclosure in the
Prospectus concerning the Fund's investments, investment techniques and the
risks associated therewith.
DEFINITIONS
These terms in the SAI shall have the following meanings:
"Board" shall mean the Board of Trustees of the Trust.
"U.S. Treasury obligations" shall mean securities issued by the United
States Treasury, such as Treasury bills, notes and bonds, that are
fully guaranteed as to payment of principal and interest by the United
States.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
ILLIQUID SECURITIES
The Fund may invest up to 10% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid. The Board has delegated the function of
making day-to-day determinations of liquidity to CRM Advisers, LLC (the
"Adviser"), pursuant to guidelines approved by the Board. The Adviser takes into
account a number of factors in reaching liquidity decisions, including but not
limited to: (1) the frequency of trades and quotations for the security; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; and (4) the nature of the marketplace trades, including
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of the transfer. The Adviser monitors the liquidity of the
securities in the Fund's portfolio and reports periodically on such decisions to
the Board.
OPTIONS
The Fund may seek to hedge against a decline in the value of securities it
owns or an increase in the price of securities which it plans to purchase by
purchasing and writing (I.E., selling) covered options on an exchange or over
the counter. An option is covered if, so long as the Fund is obligated under the
option, it owns an offsetting position in the underlying security or maintains
cash, U.S. Government Securities or other liquid, high-grade debt securities in
a segregated account with a value at all times sufficient to cover the Fund's
obligation under the option.
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The use of options subjects the Fund to certain investment risks and
transaction costs to which it might not otherwise be subject. These risks
include: (1) dependence on the Adviser's ability to predict movements in the
prices of individual securities and fluctuations in the general securities
markets; (2) imperfect correlation between movements in the prices of options
and movements in the price of the securities hedged or used for cover; (3) the
fact that skills and techniques needed to trade these instruments are different
from those needed to select the other securities in which the Fund invests; (4)
lack of assurance that a liquid secondary market will exist for any particular
option at any particular time; and (5) the possible need to defer closing out of
certain options to avoid adverse tax consequences. Other risks include the
inability of the Fund, as the writer of covered call options, to benefit from
the appreciation of the underlying securities above the exercise price and the
possible loss of the entire premium paid for options purchased by the Fund.
The Fund will not hedge more than 30% of its total assets by buying put
options and writing call options.
CORPORATE DEBT SECURITIES AND COMMERCIAL PAPER
The Fund may invest in corporate debt securities including corporate bonds and
notes and short-term investments such as commercial paper and variable rate
demand notes. Commercial paper (short-term promissory notes) is issued by
companies to finance their or their affiliates' current obligations. Variable
and floating rate demand notes are unsecured obligations redeemable upon not
more than 30 days' notice. These obligations include master demand notes that
permit investment of fluctuating amounts at varying rates of interest pursuant
to direct arrangement with the issuer of the instrument. The issuer of these
obligations often has the right, after a given period, to prepay the outstanding
principal amount of the obligations upon a specified number of days' notice.
These obligations generally are not traded, nor generally is there an
established secondary market for these obligations. To the extent a demand note
does not have a 7 day or shorter demand feature and there is no readily
available market for the obligation, it is treated as an illiquid security.
CONVERTIBLE SECURITIES
The Fund may also invest in convertible securities. A convertible security
is a bond, debenture, note, preferred stock or other security that may be
converted into or exchanged for a prescribed amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Although no securities investment is without some risk, investment
in convertible securities generally entails less risk than in the issuer's
common stock. However, the extent to which such risk is reduced
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depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security. Convertible securities have unique
investment characteristics in that they generally (1) have higher yields than
common stocks, but lower yields than comparable non-convertible securities, (2)
are less subject to fluctuation in value than the underlying stocks since they
have fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party.
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P") 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 corporate bonds, including convertible
securities by Moody's and S&P is included in Appendix A to this Statement of
Additional Information. The Fund may use these ratings in determining whether to
purchase, sell or hold a security. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
securities with the same maturity, interest rate and rating may have different
market prices. Subsequent to its purchase by the Fund, an issue of securities
may cease to be rated or its rating may be reduced. The Adviser will consider
such an event in determining whether the Fund should continue to hold the
obligation. Credit ratings attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than the rating indicates.
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2. INVESTMENT LIMITATIONS
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund has adopted the following fundamental investment limitations that
cannot be changed without the affirmative vote of the lesser of (i) more than
50% of the outstanding shares of the Fund or (ii) 67% of the shares of the Fund
present or represented at a shareholders meeting at which the holders of more
than 50% of the outstanding shares of the Fund are present or represented. The
Fund may not:
(1) Purchase the securities of issuers (other than U.S. Government
Securities) conducting their business activity in the same industry if,
immediately after such purchase, the value of the Fund's investments in
such industry would comprise 25% or more of the value of its total assets.
(2) Purchase a security if, as a result (a) more than 5% of the Fund's
total assets would be invested in the securities of a single issuer, or (b)
the Fund would own more than 10% of the outstanding voting securities of a
single issuer. This limitation applies only with respect to 75% of the
Fund's total assets and does not apply to U.S. Government Securities.
(3) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities,
the Fund may be deemed to be an underwriter for purpose of the Securities
Act of 1933.
(4) Purchase or sell real estate or any interest therein, except that the
Fund may invest in securities issued or guaranteed by corporate or
governmental entities secured by real estate or interests therein, such as
mortgage pass-throughs and collateralized mortgage obligations, or issued
by companies that invest in real estate or interests therein.
(5) Purchase or sell physical commodities or contracts, options or options
on contracts to purchase or sell physical commodities.
(6) Make loans to other persons except for the purchase of debt securities
that are otherwise permitted investments or loans of portfolio securities
through the use of repurchase agreements.
(7) Issue senior securities except pursuant to Section 18 of the Investment
Company Act and except that the Fund may borrow money subject to its
investment limitation on borrowing.
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OTHER INVESTMENT LIMITATIONS.
The Fund has adopted the following nonfundamental investment limitations
that may be changed by the Board without shareholder approval. The Fund may not:
(a) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted to be incurred by the Fund. The deposit in escrow of
securities in connection with the writing of put and call options,
collateralized loans of securities and collateral arrangements with respect
to margin for futures contracts are not deemed to be pledges or
hypothecations for this purpose.
(b) Make short sales of securities except short sales against the box.
(c) Purchase securities on margin except for the use of short-term credit
necessary for the clearance of purchases and sales of portfolio securities,
but the Fund may make margin deposits in connection with permitted
transactions in options.
(d) Purchase a security if, as a result, more than 10% of its net assets
would be invested in illiquid securities.
(e) Purchase portfolio securities if its outstanding borrowings exceed 5%
of the value of its total assets or borrow for purposes other than meeting
redemptions in an amount exceeding 5% of the value of its total assets at
the time the borrowing is made.
(f) Invest more than 5% of its net assets in securities (other than fully-
collateralized debt obligations) issued by companies that have conducted
continuous operations for less than three years, including the operations
of predecessors, unless guaranteed as to principal and interest by an
issuer in whose securities the Fund could invest.
(g) Invest in or hold securities of any issuer if officers and Trustees of
the Trust or the Adviser, individually owning beneficially more than 1/2 of
1% of the securities of the issuer, in the aggregate own more than 5% of
the issuer's securities.
(h) Invest in interests in oil or gas or interests in other mineral
exploration or development programs.
If a percentage restriction contained in an investment policy set forth
above 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
redemptions of Fund shares will not be considered a violation of the limitation.
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3. PERFORMANCE DATA AND ADVERTISING
PERFORMANCE DATA
The Fund may quote performance in various ways. All performance information
supplied by the Fund in advertising is historical and is not intended to
indicate future returns. The Fund's net asset value, yield and total return will
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
In performance advertising the Fund may compare any of its performance
information with data published by independent evaluators such as Morningstar,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDA/Wiesenberger or other
companies which track the investment performance of investment companies ("Fund
Tracking Companies"). The Fund may also compare any of its performance
information with the performance of recognized stock, bond and other indices,
including but not limited to the Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average, the Salomon Brothers Bond Index, the
Shearson Lehman Bond Index, U.S. Treasury bonds, bills or notes and changes in
the Consumer Price Index as published by the U.S. Department of Commerce. The
Fund may refer to general market performances over past time periods such as
those published by Ibbotson Associates. In addition, the Fund may refer in such
materials to mutual fund performance rankings and other data published by Fund
Tracking Companies. Performance advertising may also refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
TOTAL RETURN CALCULATIONS
The Fund may advertise total return. Total returns quoted in advertising
reflect all aspects of the Fund's return, including the effect of reinvesting
dividends and capital gain distributions, and any change in the Fund's net asset
value per share over the period. Average annual returns are calculated by
determining the growth or decline in value of a hypothetical historical
investment in the Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline in value had been constant over the period. For example, a
cumulative return of 100% over ten years would produce an average annual return
of 7.18%, which is the steady annual rate that would equal 100% growth on a
compounded basis in ten years. While average annual returns are a convenient
means of comparing investment alternatives, investors should realize that the
performance is not constant over time but changes from year to year, and that
average annual returns represent averaged figures as opposed to the actual year-
to-year performance of the Fund.
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Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
n
P(1+T) = ERV; where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value (ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 payment made at the
beginning of the applicable period).
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration.
Period total return is calculated according to the following formula:
PT = (ERV/P-1); where:
PT = period total return;
The other definitions are the same as in average annual total return
above.
OTHER INFORMATION
The Fund may include other information in its advertisements including, but
not limited to, (i) 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; (ii) 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; (iii) descriptions of
the Fund's portfolio managers and the portfolio management staff of the Adviser
or summaries of the views of the portfolio managers with respect to the
financial markets; (iv) information regarding the background, experience or
areas of expertise of the Fund's trustees; (v) the results of a hypothetical
investment in a Fund over a given number of years, including the amount that the
investment would be at the end of the period; and, (vi) the net asset value, net
assets or number of shareholders of a Fund as of one or more dates. The Fund may
also compare the Fund's operations to the operations of other funds or similar
investment products. Such comparisons may refer to such aspects of operations as
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.
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In connection with its advertisements the Fund may provide "shareholders'
letters" to provide shareholders or investors an introduction to the Fund's, the
Trust's or any of the Trust's service provider's policies or business practices.
The Fund may also include in sales materials information regarding the Adviser
including the nature of its management techniques.
4. MANAGEMENT
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Trustees deemed to be
"interested persons" of the Trust as defined in the 1940 Act are marked with an
asterisk.
*Fred M. Filoon, Chairman and President.
Senior Vice President, Cramer Rosenthal McGlynn, Inc., New York, New York
since June 1991. From June 1989 to June 1991, Mr. Filoon was Vice-President
and Senior Portfolio Manager with Morgan Stanley Asset Management, New
York, New York. He is 53 year old. His address is 520 Madison Avenue, New
York, New York 10022.
John E. Appelt, Trustee.
Certified Financial Planner, The Equitable from 1993 to the Present;
Equitable From 1990 to 1993, Mr. Appelt was a District Manager with The
Equitable. He is 49 years old. His address is 1221 Avenue of the Americas,
32nd Floor, New York, New York 10020-1088.
Louis Klein Jr., Trustee.
From 1991 to the Present, Mr. Klein has been self-employed as a financial
and professional services consultant. He has also held the following
positions during that period: Trustee, Manville Personal Injury Settlement
Trust; Director, Riverwood International Corporation; Director, Manville
Corporation. From 1989 to 1991, Mr. Klein was Chairman and CEO of Stendig
Inc., a New York based importer and marketer of office, institutional and
residential furniture and textiles. He is 60 years old. His address is 114
West 27th Street, New York, New York 10001.
Clement C. Moore, II, Trustee.
President, Mariemont Corporation, a commercial real estate holding and
management company, from 1980 to present. He is 51 years old. His address
is 717 Fifth Avenue, Suite 2300, New York, New York.
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*Eugene A. Trainor, III, Trustee, Secretary and Treasurer.
Vice-President and CFO, Cramer Rosenthal McGlynn, Inc., New York, New York
since August 1994. From July 1990 to August 1994, he was CFO, Grotech
Capital Group, Timonium, Maryland. He is 31 years old. His address is 707
Westchester Avenue, White Plains, NY 10604.
Max Berueffy, Assistant Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since May 1994. Prior to that, Mr. Berueffy was a member of the staff of
the U.S. Securities and Exchange Commission. Mr. Berueffy is also an
officer of various registered investment companies for which Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. He is 43 years old. His address is Two Portland Square,
Portland, Maine 04101.
David I. Goldstein, Assistant Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior to that, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein also serves as an officer of
various registered investment companies for which Forum Financial Services,
Inc. serves as manager, administrator and/or distributor. He is years old.
His address is Two Portland Square, Portland, Maine 04101.
Michael D. Martins, Assistant Treasurer.
Director of Operations, Forum Financial Corp. Prior to that, Mr. Martins
was a Manager of Deloitte & Touche, LLP. Mr. Martins is also an officer of
various registered investment companies for which Forum Financial Corp.
serves as fund accountant and /or transfer agent. He is 29 years old. His
address is Two Portland Square, Portland, Maine 04101.
Michael J. McKeen, Assistant Treasurer.
Fund Accounting Manager, Forum Financial Corp., with which he has been
associated since June 1993. Prior to that, Mr. McKeen was attending the
University of Maine, from which he obtained a B.S. degree in Finance in May
of 1993. Mr. McKeen also serves as an officer for various registered
investment companies for which Forum Financial Corp. serves as fund
accountant and /or transfer agent. He is 24 years old. His address is Two
Portland Square, Portland, Maine 04101.
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The following table sets forth an estimate of the fees that will be paid to each
Trustee of the Trust for the period from October 1, 1995 to September 30, 1996.
<TABLE>
<CAPTION>
Name of Person Aggregate Pension or Estimated Total
Compensation Retirement Annual Compensation
from Trust Benefits Benefits upon from Trust
Accrued as Retirement and Fund
Part of Fund Complex to
Expenses Trustees
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<S> <C> <C> <C> <C>
Fred M. Filoon $0.00 $0.00 $0.00 $0.00
John E. Appelt $5000.00 $0.00 $0.00 $5000.00
Louis Klein, Jr. $5000.00 $0.00 $0.00 $5000.00
Clement C. Moore $5000.00 $0.00 $0.00 $5000.00
Eugene A. Trainor $0.00 $0.00 $0.00 $0.00
</TABLE>
THE INVESTMENT ADVISER
The Fund's investment adviser, CRM Advisors, LLC (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. The Advisory Agreement will remain in effect for a
period of twelve months from the date of its effectiveness and will continue in
effect thereafter only if its continuance is specifically approved at least
annually by the Board of Trustees or by vote of the shareholders, and in either
case by a majority of the Trustees who are not parties to the Advisory Agreement
or interested persons of any such party, at a meeting called for the purpose of
voting on the Advisory Agreement.
The Advisory Agreement is terminable without penalty by the Trust with
respect to the Fund on 60 days' written notice when authorized either by vote of
its shareholders or by a vote of a majority of the Board of Trustees, or by the
Adviser on 60 days' written notice to the Trust, and will automatically
terminate in the event of its assignment. The Advisory Agreement also provides
that, with respect to the Fund, the Adviser shall not be liable for any error of
judgment or mistake of law or for any act or omission in the performance of its
duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties under the Advisory Agreement.
The Advisory Agreement provides that the Adviser may render services to
others. In addition to receiving its advisory fee from the Fund, CRM and the
Adviser may also act and be compensated as investment manager for its clients
with respect to assets which are invested in the Fund. If an investor in the
Fund also has a separately managed account with CRM, CRM will credit an amount
equal to all or a portion of the fees received by the Adviser against any
investment management fee received from a client.
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ADMINISTRATOR
Forum Financial Services, Inc. ("Forum") acts as administrator to the Trust
pursuant to an Administration Agreement with the Trust. As administrator, Forum
provides management and administrative services necessary to the operation of
the Trust (which include, among other responsibilities, negotiation of contracts
and fees with, and monitoring of performance and billing of, the transfer agent
and custodian and arranging for maintenance of books and records of the Trust),
and provides the Trust with general office facilities. The Administration
Agreement will remain in effect for a period of twelve months with respect to
the Fund and thereafter is automatically renewed each year for an additional
term of one year.
The Administration Agreement terminates automatically if it is assigned and
may be terminated without penalty with respect to the Fund by vote of the Fund's
shareholders or by either party on not more than 60 days' written notice. The
Administration Agreement also provides that Forum shall not be liable for any
error of judgment or mistake of law or for any act or omission in the
administration or management of the Trust, except for willful misfeasance, bad
faith or gross negligence in the performance of Forum's duties or by reason of
reckless disregard of its obligations and duties under the Administration
Agreement.
At the request of the Board, Forum provides persons satisfactory to the Board to
serve as officers of the Trust. Those officers, as well as certain other
employees and Trustees of the Trust, may be directors, officers or employees of
Forum, the Adviser, the subadviser or their affiliates.
DISTRIBUTOR
Forum is also the Trust's distributor and acts as the agent of the Trust in
connection with the offering of shares of the Fund pursuant to a Distribution
Agreement. The Distribution Agreement will continue in effect for twelve months
and will continue in effect thereafter only if its continuance is specifically
approved at least annually by the Board or by vote of the shareholders entitled
to vote thereon, and in either case, by a majority of the Trustees who (i) are
not parties to the Distribution Agreement, (ii) are not interested persons of
any such party or of the Trust and (iii) with respect to any class for which the
Trust has adopted a distribution plan, have no direct or indirect financial
interest in the operation of that distribution plan or in the Distribution
Agreement, at a meeting called for the purpose of voting on the Distribution
Agreement. All subscriptions for shares obtained by Forum are directed to the
Trust for acceptance and are not binding on the Trust until accepted by it.
Forum receives no compensation or reimbursement of expenses for the distribution
services provided pursuant to the Distribution Agreement and is under no
obligation to sell any specific amount of Fund shares.
The Distribution Agreement provides that Forum shall not be liable for any
error of judgment or mistake of law or in any event whatsoever, except for
willful misfeasance, bad faith or gross negligence in the performance of Forum's
duties or by reason of reckless disregard of its obligations and duties under
the Distribution Agreement.
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The Distribution Agreement is terminable with respect to the Fund without
penalty by the Trust on 60 days' written notice when authorized either by vote
of the Fund's shareholders or by a vote of a majority of the Board, or by Forum
on 60 days' written notice. The Distribution Agreement will automatically
terminate in the event of its assignment.
Forum may enter into agreements with selected broker-dealers, banks, or
other financial institutions for distribution of shares of the Fund. These
financial institutions may charge a fee for their services and may receive
shareholders service fees even though shares of the Fund are sold without sales
charges or distribution fees. These financial institutions may otherwise act as
processing agents, and will be responsible for promptly transmitting purchase,
redemption and other requests to the Fund.
Investors who purchase shares in this manner will be subject to the
procedures of the institution through whom they purchase shares, which may
include charges, investment minimums, cutoff times and other restrictions in
addition to, or different from, those listed herein. Information concerning any
charges or services will be provided to customers by the financial institution.
Investors purchasing shares of the Fund in this manner should acquaint
themselves with their institution's procedures and should read this Prospectus
in conjunction with any materials and information provided by their institution.
The financial institution and not its customers will be the shareholder of
record, although customers may have the right to vote shares depending upon
their arrangement with the institution.
TRANSFER AGENT
Forum Financial Corp. (the "Transfer Agent") acts as transfer agent and
dividend disbursing agent of the Trust pursuant to a Transfer Agency Agreement.
For its services, the Transfer Agent receives with respect to the Fund an annual
fee of $12,000 plus $25 per shareholder account. Pursuant to a Fund Accounting
Agreement, the Transfer Agent also provides the Fund with portfolio accounting,
including the calculation of the Fund's net asset value. For these services, the
Transfer Agent receives with respect to the Fund an annual fee ranging from
$36,000 to $60,000 depending upon the amount and type of the Fund's portfolio
transactions and positions.
Both the Transfer Agency Agreement and Fund Accounting Agreement were
approved by the Board of Trustees, including a majority of the Trustees who are
not parties to the respective agreements or interested persons of any such
party, at a meeting called for the purpose of voting on the respective
agreements. Each of these agreements will remain in effect for a period of one
year and will continue in effect thereafter only if its continuance is
specifically approved at least annually by the Board of Trustees or by a vote of
the shareholders and in either case by a majority of the Trustees who are not
parties to the respective agreement or interested persons of any such party, at
a meeting called for the purpose of voting on the respective agreements.
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<PAGE>
EXPENSES
Under the Advisory Agreement, the Trust has confirmed its obligation to pay
all its expenses subject to the obligation of the Adviser to reimburse the Trust
for its excess expenses as described in the Prospectus. The Trust believes that
currently the most restrictive expense ratio limitation imposed by any state is
2-1/2% of the first $30 million of the Fund's average net assets, 2% of the next
$70 million of its average net assets and 1-1/2% of its average net assets in
excess of $100 million.
The Trust's expenses include: interest charges, taxes, brokerage fees and
commissions; certain insurance premiums; fees, interest charges and expenses of
the Trust's custodian and transfer agent; fees of pricing, interest, dividend,
credit and other reporting services; costs of membership in trade associations;
telecommunications expenses; funds transmission expenses; auditing, legal and
compliance expenses; costs of forming the Trust and maintaining corporate
existence; costs of preparing and printing the Trust's prospectuses, statements
of additional information and shareholder reports and delivering them to
existing shareholders; costs of maintaining books and accounts; costs of
reproduction, stationery and supplies; compensation of the Trust's Trustees;
compensation of the Trust's officers and employees who are not employees of the
Adviser, Forum or their respective affiliates and costs of other personnel
performing services for the Trust; costs of corporate meetings; Securities and
Exchange Commission registration fees and related expenses; state securities
laws registration fees and related expenses; the fees payable under the Advisory
Agreement, and the Administration and Distribution Agreement.
5. DETERMINATION OF NET ASSET VALUE
The Trust determines the net asset value per share of the Fund as of 4:00
P.M., Eastern time, on Fund Business Days (as defined in the Prospectus), by
dividing the value of the Fund's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) by
the number of shares outstanding at the time the determination is made. The
Trust does not determine net asset value on the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Veterans' Day, Thanksgiving and Christmas.
6. PORTFOLIO TRANSACTIONS
The Fund generally will effect purchases and sales through brokers who
charge commissions. Allocations of transactions to brokers and dealers and the
frequency of transactions are determined by the Adviser in its best judgment and
in a manner deemed to be in the best interest of shareholders of the Fund rather
than by any formula. The primary consideration is prompt execution of orders in
an effective manner and at the most favorable price available to the Fund.
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<PAGE>
The Fund may not always pay the lowest commission or spread available.
Rather, in determining the amount of commission, including certain dealer
spreads, paid in connection with Fund transactions, the Adviser takes into
account such factors as size of the order, difficulty of execution, efficiency
of the executing broker's facilities (including the services described below)
and any risk assumed by the executing broker. The Adviser may also take into
account payments made by brokers effecting transactions for the Fund (i) to the
Fund or (ii) to other persons on behalf of the Fund for services provided to it
for which it would be obligated to pay. The Adviser may also take into account
sales of Fund shares when allocating brokerage.
In addition, 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. Such research and analysis may be used by the Adviser in connection
with services to clients other than the Fund, and the Adviser's fee is not
reduced by reason of the Adviser's receipt of the research services.
Investment decisions for the Fund will be made independently from those for
any other account or investment company that is or may in the future become
managed by the Adviser or its affiliates. If, however, the Fund and other
investment companies or accounts managed by the Adviser are contemporaneously
engaged in the purchase or sale of the same security, the transactions may be
averaged as to price and allocated equitably to each account. In some cases,
this policy might adversely affect the price paid or received by the Fund or the
size of the position obtainable for the Fund. In addition, when purchases or
sales of the same security for the Fund and for other investment companies and
accounts managed by the Adviser occur contemporaneously, the purchase or sale
orders may be aggregated in order to obtain any price advantages available to
large denomination purchases or sales.
The Fund contemplates that, consistent with the policy of obtaining best
net results, brokerage transactions may be conducted through the Adviser's
affiliates, affiliates of those persons or Forum. The Advisory Agreement
authorizes the Adviser to so execute trades. The Board of Trustees has adopted
procedures in conformity with applicable rules under the Investment Company Act
to ensure that all brokerage commissions paid to these persons are reasonable
and fair.
7. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by the distributor at net
asset value without any sales charge. Shareholders may effect purchases or
redemptions or request any shareholder privilege in person at FFC's offices
located at Two Portland Square, Portland, Maine 04101.
The Trust accepts orders for the purchase or redemption of shares Monday
through Friday on all Fund Business Days (as defined in the prospectus) between
the hours of 9:00 a.m. and 6:00 p.m. (Eastern Time). The Trust does not
determine net asset value, and does not accept orders, on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
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<PAGE>
Thanksgiving and Christmas. The Trust also reserves the right to cease accepting
purchase and redemption orders for same day credit when the Public Securities
Association (PSA) recommends that the securities market close early. On days
that the Trust closes early, purchase and redemption orders received after the
PSA recommended closing time will be credited for the next Business Day. In
addition, the Trust reserves the right to advance the time by which purchase and
redemption orders must be received for same Business Day credit as permitted by
the SEC.
ADDITIONAL REDEMPTION MATTERS
The Trust may redeem shares involuntarily to reimburse the Fund for any
loss sustained by reason of the failure of a shareholder to make full payment
for shares purchased by the shareholder or to collect any charge relating to
transactions effected for the benefit of a shareholder which is applicable to
the Fund's shares as provided in the Prospectus from time to time.
Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partly in portfolio securities if the Board of Trustees
determines economic conditions exist which would make payment in cash
detrimental to the best interests of the Fund. If payment for shares redeemed is
made wholly or partly in portfolio securities, brokerage costs may be incurred
by the shareholder in converting the securities to cash. The Trust has filed an
election with the Securities and Exchange Commission 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.
In addition to the situations described in the Prospectus under "Purchases
and Redemptions of Shares," the Trust may redeem shares involuntarily to
reimburse the Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to transactions effected for the benefit of a
shareholder which is applicable to the Fund's shares as provided in the
Prospectus from time to time.
Shareholders' rights of redemption may not be suspended, except (i) for any
period during which the New York Stock Exchange, Inc. is closed (other than
customary weekend and holiday closings) or during which the Securities and
Exchange Commission determines that trading thereon is restricted, (ii) for any
period during which an emergency (as determined by the Securities and Exchange
Commission) exists as a result of which disposal by the Fund of its securities
is not reasonably practicable or as a result of which it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(iii) for such other period as the Securities and Exchange Commission may by
order permit for the protection of the shareholders of the Fund.
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 (i) are not restricted as to
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<PAGE>
transfer either by law or liquidity of market and (ii) have a value which is
readily ascertainable (and not established only by valuation procedures).
8. TAXATION
The Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Such qualification does not involve
governmental supervision of management or investment practices or policies of
the Fund. The information set forth in the Prospectus and the following
discussion relates solely to Federal income taxes on dividends and distributions
by the Fund and assumes that the Fund qualifies as a regulated investment
company. Investors should consult their own counsel as to the consequences to
them of Federal, state and local tax laws.
As a regulated investment company, the Fund will not be subject to Federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of
investment company taxable income (i.e., net investment income and capital loss)
for the taxable year (the "Distribution Requirement"), and satisfies certain
other requirements of the Code that are described below. Distributions by the
Fund made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year, will be considered
distributions of income and gains of the taxable year and can therefore satisfy
the Distribution Requirement.
In addition to satisfying the distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gain from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement"); and (2) derive less than
30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gains if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, the Fund may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent the Fund from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
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<PAGE>
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. For purposes of determining whether
capital gain or loss recognized by the Fund on the disposition of an asset is
long-term or short-term, the holding period of the asset may be affected if (1)
the asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another asset
so used, or (2) the asset is otherwise held by the Fund as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the Fund
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto). However, for purposes of Short-Short
Gain Test, the holding period of the asset disposed of may be reduced only in
the case of clause (1) above. In addition, the Fund may be required to defer the
recognition of a loss on the disposition of an asset held as part of a straddle
to the extent of any unrecognized gain on the offsetting position.
FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
for shareholders as ordinary income and treated as dividends for federal income
tax purposes, and may qualify for the 70% dividends-received deduction for
corporate shareholders.
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. Net capital gain that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the Fund prior to the date on which the shareholder acquired
his shares.
Distributions by the Fund that do no constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares 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. In addition, if the net asset value at
the time a shareholder purchases shares of the Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Shareholders purchasing shares of the Fund just prior to the ex-dividend
date will be taxed on the entire amount of the dividend received, even though
the net asset value per share on the date of such purchase reflected the amount
of such dividend.
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<PAGE>
Ordinarily, shareholders are required to take distributions by the Fund
into account in the year in which they are made. However, dividends declared in
October, November or December of any year and payable to shareholders of record
on a specified date in such a month will be deemed to have been received by the
shareholders (and made by the Fund) on December 31 of such calendar year if such
dividends are actually paid in January of the following year. Shareholders will
be advised annually as to the U.S. federal income tax consequences of
distributions made (or deemed made) to them during the year.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemptions of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the IRS for failure to report the
receipt of interest or dividend income properly, or (3) who has failed to
certify to the Fund that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."
For Federal income tax purposes, when put and call options purchased by the
Fund expire unexercised, the premiums paid by the Fund give rise to short- or
long-term capital losses at the time of expiration (depending on the length of
the respective exercise periods for the options). When put and call options
written by the Fund expire unexercised, the premiums received by the Fund give
rise to short-term capital gains at the time of expiration. When the Fund
exercises a call, the purchase price of the underlying security is increased by
the amount of the premium paid by the Fund. When the Fund exercises a put, the
proceeds from the sale of the underlying security are decreased by the premium
paid. When a put or call written by the Fund is exercised, the purchase price
(selling price in the case of a call) of the underlying security is decreased
(increased in the case of a call) for tax purposes by the premium received.
There may be short- or long-term gains and losses associated with closing
purchase or sale transactions. For purposes of the Short-Short Gain Test, the
holding period of an option written by the Fund will commence on the date it is
written and end on the date it lapses or the date a closing transaction is
entered into. Accordingly, the Fund may be limited in its ability to write
options which expire within three months and to enter into closing transactions
at a gain within three months of the writing of options.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested
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<PAGE>
more than 5% of the value of the Fund's total assets in securities of such
issuer and as to which the Fund does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the fund controls and which are
engaged in the same or similar trades or businesses.
If for any taxable 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
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
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 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30, or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed 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. However, investors
should note that the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after
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<PAGE>
the sale or redemption. In general, any gain or loss arising from (or treated as
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. However, any capital loss arising from the
sale or redemption of shares held for six months or less will be treated as a
long-term capital loss to the extent of the amount of capital gain dividends
received on such shares. For this purpose, the special holding period rules of
Code Section 246(c) (3) and (4) generally will apply in determining the holding
period of shares. Long-term capital gains of noncorporate taxpayers are
currently taxed at a maximum rate 11.6% lower than the maximum rate applicable
to ordinary income. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, 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 such
shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) upon the gross amount of the dividend.
Such a foreign shareholder would generally be exempt from U.S. Federal income
tax on gains realized on the sale of shares of the Fund, capital gain dividends
and amounts retained by the Fund that are designated as undistributed capital
gains.
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 dividends,
capital gain dividends, and any gains 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 domestic corporations.
In the case of a noncorporate foreign shareholder, the Fund may be required
to withhold U.S. Federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding (or taxable at a reduced treaty rate), unless
the shareholder furnishes the Fund with proper notification of its foreign
status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund,
including the applicability of foreign taxes.
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<PAGE>
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. Federal income tax consequences is
based on the code and Treasury Regulations issued thereunder as in effect on the
date of this Statement. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect.
Rules of state and local taxation of ordinary income dividends and capital
gain dividends from regulated investment companies often differ from the rules
for U.S. Federal income taxation described above. Shareholders are urged to
consult their tax advisers as to the consequences of Federal, state and local
tax rules with respect to an investment in the Fund.
9. OTHER MATTERS
CUSTODIAN
Pursuant to an agreement (the "Custodian Agreement"), The First National
Bank of Boston (the "Custodian"), P.O. Box 1959, Boston, Massachusetts 02105,
acts as the custodian of the Funds' assets. The Custodian's responsibilities
include safeguarding and controlling the Fund's cash and securities, determining
income and collecting interest on Fund investments. The Custodian may employ
foreign subcustodians to provide custody of the Fund's foreign assets in
accordance with applicable regulations. The Custodian is paid a fee at an annual
rate of 0.02% of the first $100 million of the average daily net assets of the
Fund, 0.015% of the next $100 million of the average daily net assets of the
Fund and 0.001% of the average daily net assets of the Fund over $200 million,
and certain transaction fees.
COUNSEL
Legal matters in connection with the issuance of shares of stock of the
Trust are passed upon by Kramer, Levin, Naftalis & Frankel, 919 Third Avenue,
New York, New York 10022. Kramer, Levin, Naftalis & Frankel has relied upon the
opinion of Morris, Nichols, Arsht & Tunnell, 1201 N. Market Street, Wilmington,
Delaware, for matters relating to Delaware law.
AUDITORS
Ernst & Young LLP, independent auditors, have been selected as auditors for
the Trust .
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<PAGE>
THE TRUST AND ITS SHAREHOLDERS
The Trust was organized as a Delaware business trust on April 24, 1995.
Delaware law provides that shareholders shall be entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. The securities regulators of some states, however, have
indicated that they and the courts in their state may decline to apply Delaware
law on this point. The Trust Instrument contains an express disclaimer of
shareholder liability for the debts, liabilities, obligations, and expenses of
the Trust and requires that a disclaimer be given in each contract entered into
or executed by the Trust or the Trustees. The Trust Instrument provides for
indemnification out of each series' property of any shareholder or former
shareholder held personally liable for the obligations of the series. 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.
Forum believes that, in view of the above, there is no risk of personal
liability to shareholders.
The Trust Instrument further provides that the Trustees shall not be liable
to any person other than the Trust or its shareholders; moreover, 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.
Fund capital consists of shares of beneficial interest. Shares are fully
paid and nonassessable, except as set forth above with respect to Trustee and
shareholder liability. Shareholders representing 10% or more of the Trust or a
series may, as set forth in the Trust Instrument, call meetings of the Trust or
series for any purpose related to the Trust or series, as the case may be,
including, in the case of a meeting of the entire Trust, the purpose of voting
on removal of one or more Trustees. 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 series;
however, the Trustees may, without prior shareholder approval, change the form
of organization of the Trust by merger, consolidation or incorporation. If not
so terminated or reorganized, the Trust and its series will continue
indefinitely. Under the Trust Instrument, the Trustees may, without shareholder
vote, cause the Trust to merge or consolidate into one or more trusts,
partnerships or corporations or cause the Trust to be incorporated under
Delaware law, so long as the surviving entity is an open-end management
investment company that will succeed to or assume the Trust's registration
statement.
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<PAGE>
OWNERSHIP OF SHARES OF THE FUND
As of March 25, 1996, the amount of shares owned by all officers and directors
of the Fund, as a group, was less than 1.00% of the Fund's outstanding shares.
Set forth below is certain information as to persons who owned 5% or more of the
Fund's outstanding common stock as of March 25, 1996:
Nature
Name and Address % of Shares of Ownership
- ---------------- ----------- ------------
Robert Pergament 5.37% Beneficial
621 NW 53rd Street
Boca Raton, FL 33487
Gerald Cramer 5.04% Beneficial
1330 Journeys End Road
Croton-On-Hudson, NY 10520
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<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
CORPORATE BONDS (INCLUDING CONVERTIBLE DEBT)
(A) MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or maintenance of
other terms of the contract over any long period of time may be small.
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<PAGE>
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
(B) STANDARD & POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as
follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas, they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated 'BB' have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Bonds rated 'B' have a greater vulnerability to default but currently have
the capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
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Bonds rated 'CCC' have currently identifiable vulnerability to default, and
are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
The 'C' rating may be used to cover a situation where a bankruptcy petition
has been filed, but debt service payments are continued. The rating 'Cl' is
reserved for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has
filed for bankruptcy. Bonds rated 'D' are in payment default. The 'D' rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will made during such grace period. The 'D' rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Note: The ratings from AA to CCC may be modified by the addition of a plus
(+) or minus (-) sign to show the relative standing within the rating category.
PREFERRED STOCK
(A) MOODY'S
Moody's rates preferred stock issues as follows:
An issue which is rated aaa is a top-quality preferred stock. This rating
indicates good asset protection and the least risk of dividend impairment among
preferred stock issues.
An issue which is rated "aa" is a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rated "a" is an upper-medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa classification,
earnings and asset protection are, nevertheless, expected to be maintained at
adequate levels.
An issue which is rated "baa" is a medium-grade preferred stock, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
An issue which is rated "ba" has speculative elements and its future cannot
be considered well assured. Earnings and asset protection may be very moderate
and not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
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An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
An issue which is rated "c" can be regarded as having extremely poor
prospects of ever attaining any real investment standing. This is the lowest
rated class of preferred or preference stock.
(B) STANDARD & POOR'S
Standard & Poor's rates preferred stock issues as follows:
"AAA" is the highest rating that is assigned by S&P to a preferred stock
issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. While it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the "A" category.
Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
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A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
To provide more detailed indications of preferred stock quality, the
ratings from "AA" to "B" may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories.
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