THE CRM FUNDS
SMALL CAP VALUE FUND
MID CAP VALUE FUND
LARGE CAP VALUE FUND
VALUE FUND
SUPPLEMENT DATED MAY 27, 1999 TO
PROSPECTUS DATED MARCH 1, 1999
1. Institutional Shares of Large Cap Value Fund and Value Fund are currently not
offered for sale.
2. The fiscal year end of the Funds has changed from September 30 to June 30.
<PAGE>
THE CRM FUNDS
SMALL CAP VALUE FUND
MID CAP VALUE FUND
LARGE CAP VALUE FUND
VALUE FUND
SUPPLEMENT DATED MAY 27, 1999 TO
PROSPECTUS DATED MARCH 1, 1999
1. Investor Shares of Mid Cap Value Fund are currently not offered for sale.
2. Value Fund is currently not offering its shares for sale and will cease
operations on June 30, 1999.
3. The fiscal year end of the Funds has changed from September 30 to June 30.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1999
AS AMENDED MAY 27, 1999
THE CRM FUNDS
SMALL CAP VALUE FUND
MID CAP VALUE FUND
LARGE CAP VALUE FUND
VALUE FUND
FUND INFORMATION:
The CRM Funds
Two Portland Square
Portland, Maine 04101
(800) CRM-2883
http://www.CRMfunds.com
INVESTMENT ADVISER:
Cramer Rosenthal McGlynn, LLC
707 Westchester Avenue
New York, New York 10604
ACCOUNT INFORMATION AND SHAREHOLDER SERVICES:
Forum Shareholder Services, LLC
P.O Box 446
Portland, Maine 04112
(207) 822-6614
(800) 844-8258
This Statement of Additional Information or SAI supplements the Prospectuses
dated March 1, 1999, as may be amended from time to time, offering Investor
Shares and Institutional Shares of Small Cap Value Fund, Mid Cap Value Fund,
Large Cap Value Fund and Value Fund (the "Funds"). This SAI is not a prospectus
and should only be read in conjunction with a prospectus. The Prospectuses may
be obtained without charge by contacting shareholder services at the address or
telephone number listed above.
The financial statements for the Funds for the year ended September 30, 1998,
included in the Annual Report to shareholders, are incorporated into this SAI by
reference.
<PAGE>
TABLE OF CONTENTS
Glossary ......................................................... 1
1. Investment Policies and Risks..................................... 2
A. Security Ratings Information............................. 2
B. Temporary Defensive Position............................. 2
C. Hedging and Option Income Strategies..................... 3
D. Convertible Securities................................... 4
E. Illiquid and Restricted Securities....................... 5
2. Investment Limitations............................................ 5
A. Fundamental Limitations.................................. 6
B. Nonfundamental Limitations............................... 6
3. Performance Data and Advertising.................................. 7
A. Performance Data......................................... 7
B. Performance Calculations................................. 8
C. Multiclass Performance................................... 10
D. Other Matters............................................ 10
4. Management........................................................ 11
A. Trustees and Officers.................................... 11
B. Compensation of Trustees and Officers.................... 13
C. Investment Adviser....................................... 13
D. Distributor.............................................. 14
E. Other Fund Service Providers............................. 15
5. Portfolio Transactions............................................ 17
A. How Securities are Purchased and Sold.................... 17
B. Commissions Paid......................................... 18
C. Adviser Responsibility for Purchases and Sales........... 18
D. Securities of Regular Broker-Dealers..................... 20
6. Additional Purchase and Redemption Information.................... 20
A. General Information...................................... 20
B. Additional Purchase Information.......................... 20
C. Additional Redemption Information........................ 21
D. NAV Determination........................................ 21
E. Distributions............................................ 22
7. Taxation ......................................................... 22
A. Qualification as a Regulated Investment Company.......... 22
B. Fund Distributions....................................... 23
C. Certain Tax Rules Applicable to the Funds Transactions... 24
D. Federal Excise Tax ...................................... 24
E. Sale or Redemption of Shares............................. 25
F. Withholding Tax.......................................... 25
G. Foreign Shareholders..................................... 25
H. State and Local Taxes.................................... 26
8. Other Matters..................................................... 26
A. The Trust and its Shareholders........................... 26
B. Fund Ownership........................................... 27
C. Limitations on Shareholders' and Trustees' Liability..... 28
D. Registration Statement................................... 28
E. Financial Statements..................................... 28
Appendix A - Description of Securities Ratings............................. A-1
Appendix B - Miscellaneous Tables.......................................... B-1
Appendix C - Performance Data.............................................. C-1
<PAGE>
GLOSSARY
As used in this SAI, the following terms have the meanings listed.
"Adviser" means Cramer Rosenthal McGlynn, LLC.
"Board" means the Board of Trustees of the Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Custodian" means the custodian of each Fund's assets.
"FAdS" means Forum Administrative Services, LLC, the administrator of each Fund.
"Fitch" means Fitch IBCA, Inc.
"FAcS" means Forum Accounting Services, LLC, the fund accountant of each Fund.
"FFS" means Forum Fund Services, LLC, distributor of each Fund's shares.
"Fund" means each of the separate series of the Trust to which this SAI relates
as identified on the cover page.
"Moody's" means Moody's Investors Service.
"NRSRO" means a nationally recognized statistical rating organization.
"NAV" means net asset value.
"SEC" means the U.S. Securities and Exchange Commission.
"S&P" means Standard & Poor's.
"Transfer Agent" means Forum Shareholder Services, LLC, the transfer agent and
distribution disbursing agent of each Fund.
"Trust" means The CRM Funds.
"U.S. Government Securities" means obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
1
<PAGE>
1. INVESTMENT POLICIES AND RISKS
The following discussion supplements the disclosure in the prospectuses about
each Fund's investment techniques, strategies and risks. Certain Funds are
designed for investment of that portion of an investor's funds which can
appropriately bear the special risks associated with certain types of
investments (e.g., investments in smaller capitalization companies).
A. SECURITY RATINGS INFORMATION
The Funds' investments in fixed income securities are subject to credit risk
relating to the financial condition of the issuers of the securities that each
Fund holds. To limit credit risk, each Fund invests its assets in debt
securities that are considered investment grade. Investment grade means rated in
the top four long-term rating categories or top two short-term rating categories
by an NRSRO, or unrated and determined by the Adviser to be of comparable
quality.
The lowest long-term ratings that are investment grade for corporate bonds,
including convertible bonds, are "Baa" in the case of Moody's and "BBB" in the
case of S&P and Fitch; for preferred stock are "Baa" in the case of Moody's and
"BBB" in the case of S&P and Fitch; and for short-term debt, including
commercial paper, are "Prime-2" (P-2) in the case of Moody's, "A-2" in the case
of S&P and "F-2" in the case of Fitch.
Unrated securities may not be as actively traded as rated securities. A Fund may
retain securities whose rating has been lowered below the lowest permissible
rating category (or that are unrated and determined by the Adviser to be of
comparable quality to securities whose rating has been lowered below the lowest
permissible rating category) if the Adviser determines that retaining such
security is in the best interests of the Fund. Because a downgrade often results
in a reduction in the market price of the security, sale of a downgraded
security may result in a loss.
Moody's, S&P and other NRSROs are private services that provide ratings of the
credit quality of debt obligations, including convertible securities. A
description of the range of ratings assigned to various types of bonds and other
securities by several NRSROs is included in Appendix A to this SAI. The Funds
may use these ratings to determine whether to purchase, sell or hold a security.
Ratings are general and are not absolute standards of quality. Securities with
the same maturity, interest rate and rating may have different market prices. If
an issue of securities ceases to be rated or if its rating is reduced after it
is purchased by a Fund, the Adviser will determine whether the Fund should
continue to hold the obligation. To the extent that the ratings given by 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.
B. TEMPORARY DEFENSIVE POSITION
A Fund may assume a temporary defensive position and may invest without limit in
commercial paper and other money market instruments that are of prime quality.
Prime quality instruments are those instruments that are rated in one of the two
highest short-term rating categories by an NRSRO or, if not rated, determined by
the Adviser to be of comparable quality.
Money market instruments usually have maturities of one year or less and fixed
rates of return. The money market instruments in which a fund may invest include
U.S. Government Securities, time deposits, bankers acceptances and certificates
of deposit of depository institutions (such as banks), corporate notes and
short-term bonds and money market mutual funds. The Funds may only invest in
money market mutual funds to the extent permitted by the 1940 Act.
The money market instruments in which a fund may invest may have variable or
floating rates of interest. These obligations include master demand notes that
permit investment of fluctuating amounts at varying rates of interest pursuant
to direct arrangement with the issuer of the instrument. The issuer of these
obligations often has the right,
2
<PAGE>
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.
C. HEDGING AND OPTION INCOME STRATEGIES
A 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 securities in which it has
invested and on any securities index based in whole or in part on securities in
which that fund may invest. The Funds' options may be traded on an exchange or
in an over-the-counter market.
A Fund will not hedge more than 30% of the value of its total assets by buying
put options and writing call options.
These instruments are often referred to as "derivatives," which may be defined
as financial instruments whose performance is derived, at least in part, from
the performance of another asset (such as a security, currency or an index of
securities).
An option is covered if, as long as a 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 with a value
at all times sufficient to cover the Fund's obligation under the option.
1. IN GENERAL
A call option is a contract pursuant to which the purchaser of the call option,
in return for a premium paid, has the right to buy the security (or index)
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation upon exercise of the option to deliver the underlying security (or a
cash amount equal to the value of the index) against payment of the exercise
price during the option period.
A put option gives its purchaser, in return for a premium, the right to sell the
underlying security (or index) at a specified price during the term of the
option. The writer of the put option, who receives the premium, has the
obligation to buy the underlying security (or receive a cash amount equal to the
value of the index), upon exercise at the exercise price during the option
period.
The amount of premium received or paid for an option is based upon certain
factors, including the market price of the underlying security or index, the
relationship of the exercise price to the market price, the historical price
volatility of the underlying security or index, the option period and interest
rates.
There are a limited number of options contracts on securities indices and option
contracts may not be available on all securities that a Fund may own or seek to
own.
2. RISKS
The Fund's 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 correlations between movements in the prices of options
and movements in the price of the securities (or indices) hedged or used for
cover which may cause a given hedge not to achieve its objective; (3) the fact
that the skills and techniques needed to trade these instruments are different
from those needed to select the securities in which the Funds invest; and (4)
lack of assurance that a liquid secondary market will exist for any particular
instrument at any particular time, which, among other things, may hinder a
Fund's ability to limit exposures by closing its positions.
3
<PAGE>
Other risks include the inability of the Fund, as the writer of covered call
options, to benefit from any appreciation of the underlying securities above the
exercise price, and the possible loss of the entire premium paid for options
purchased by the Fund.
D. CONVERTIBLE SECURITIES
The Funds may only invest in convertible securities that are investment grade.
1. IN GENERAL
Convertible securities, which include convertible debt, convertible preferred
stock and other securities exchangeable under certain circumstances for shares
of common stock, are fixed income securities or preferred stock which generally
may be converted at a stated price within a specific amount of time into a
specified number of shares of common stock. 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 or preferred equity in
that they ordinarily provide a stream of income with generally higher yields
than do those of common stocks of the same or similar issuers. These securities
are usually senior to common stock in a company's capital structure, but usually
are subordinated to non-convertible debt securities.
Convertible securities have unique investment characteristics in that they
generally: (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities; (2) are less subject to fluctuation in
value than the underlying stocks since they have fixed income characteristics;
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by the 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.
2. RISKS
Investment in convertible securities generally entails less risk than investment
in the issuer's common stock. The extent to which such risk is reduced, however,
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
3. VALUE OF CONVERTIBLE SECURITIES
The value of a convertible security is a function of its "investment value"
(determined by a comparison of its yield 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.
4
<PAGE>
E. ILLIQUID AND RESTRICTED SECURITIES
No Fund may acquire securities or invest in repurchase agreements if, as a
result, more than 10% of the Fund's net assets (taken at current value) would be
invested in illiquid securities.
1. IN GENERAL
The term "illiquid securities" means securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which a Fund has valued the securities. Illiquid securities include: (1)
repurchase agreements not entitling the holder to payment of principal within
seven days (2) purchased over-the-counter options; (3) securities which are not
readily marketable; and (4) except as otherwise determined by the Adviser,
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act ("restricted securities").
2. RISKS
Certain risks are associated with holding illiquid and restricted securities.
For instance, limitations on resale may have an adverse effect on the
marketability of a security and a Fund might also have to register a restricted
security in order to dispose of it, resulting in expense and delay. A Fund might
not be able to dispose of restricted or illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions. There can be no assurance that a liquid market will exist for any
security at any particular time. Any security, including securities determined
by the Adviser to be liquid, can become illiquid.
3. DETERMINATION OF LIQUIDITY
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid and has delegated the function of making
determinations of liquidity to the Adviser, pursuant to guidelines approved by
the Board. The Adviser determines and monitors the liquidity of the portfolio
securities and reports periodically on its decisions to the Board. The Adviser
takes into account a number of factors in reaching liquidity decisions,
including but not limited to: (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer.
An institutional market has developed for certain restricted securities.
Accordingly, contractual or legal restrictions on the resale of a security may
not be indicative of the liquidity of the security. If such securities are
eligible for purchase by institutional buyers in accordance with Rule 144A under
the 1933 Act or other exemptions, the Adviser may determine that the securities
are not illiquid.
2. INVESTMENT LIMITATIONS
For purposes of all investment policies of the Funds: (1) the term 1940 Act
includes the rules thereunder, SEC interpretations and any exemptive order upon
which the Fund may rely; and (2) the term Code includes the rules thereunder,
IRS interpretations and any private letter ruling or similar authority upon
which the Fund may rely.
Except as required by the 1940 Act or the Code, if any percentage restriction on
investment or utilization of assets is adhered to at the time an investment is
made, a later change in percentage resulting from a change in the market values
of a Fund's assets or purchases and redemptions of shares will not be considered
a violation of the limitation.
A fundamental policy of a Fund cannot be changed without the affirmative vote of
the lesser of: (1) 50% of the outstanding shares of the Fund; or (2) 67% of the
shares of the Fund present or represented at a shareholders meeting at which the
holders of more than 50% of the outstanding shares of the Fund are present or
represented. A nonfundamental policy of a Fund may be changed by the Board
without shareholder approval.
5
<PAGE>
A. FUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations, which are
fundamental policies of the Fund.
1. ISSUANCE OF SENIOR SECURITIES
No Fund may issue senior securities except pursuant to Section 18 of the 1940
Act and except that a Fund may borrow money subject to its investment limitation
on borrowing.
2. UNDERWRITING ACTIVITIES
No Fund may act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities, a Fund
may be deemed to be an underwriter for purpose of the 1933 Act.
3. CONCENTRATION
No Fund may 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 a Fund's investments in such
industry would comprise 25% or more of the value of its total assets.
4. PURCHASES AND SALES OF REAL ESTATE
No Fund may purchase or sell real estate or any interest therein, except that a
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. PURCHASES AND SALES OF COMMODITIES
No Fund may purchase or sell physical commodities or contracts, options or
options on contracts to purchase or sell physical commodities.
6. MAKING LOANS
No Fund may 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. DIVERSIFICATION
Each Fund is "diversified" as that term is defined in the 1940 Act. Accordingly,
no Fund may purchase a security if, as a result: (1) more than 5% of a Fund's
total assets would be invested in the securities of a single issuer; or (2) a
Fund would own more than 10% of the outstanding voting securities of a single
issuer. This limitation applies only with respect to 75% of a Fund's total
assets and does not apply to U.S. Government Securities.
B. NONFUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations, which are not
fundamental policies of the Fund. Each Fund may not:
1. PLEDGE, MORTGAGE & HYPOTHECATE
Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted to be incurred by a Fund. The deposit
in escrow of securities in connection with the writing of put
6
<PAGE>
and call options, collateralized loans of securities and
collateral arrangements with respect to margin for futures
contracts are not deemed to be pledges or hypothecations for
this purpose.
2. SHORT SALES
Make short sales of securities except short sales against the
box.
3. PURCHASES ON MARGIN
Purchase securities on margin except for the use of short-term
credit necessary for the clearance of purchases and sales of
portfolio securities, but a Fund may make margin deposits in
connection with permitted transactions in options.
4. ILLIQUID SECURITIES
Purchase a security if, as a result, more than 10% of its net
assets would be invested in illiquid securities. If the 10%
limit on illiquid securities is exceeded by virtue of other
than a change in market values, the condition will be reported
by the Adviser to the Board.
5. BORROWING
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.
6. HISTORY OF ISSUER
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 a Fund could invest.
7. OFFICERS' AND TRUSTEES' HOLDINGS
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.
8. OIL, GAS & MINERAL EXPLORATION
Invest in interests in oil or gas or interests in other
mineral exploration or development programs.
3. PERFORMANCE DATA AND ADVERTISING
A. PERFORMANCE DATA
A Fund may quote performance in various ways. All performance information
supplied in advertising, sales literature, shareholder reports or other
materials is historical and is not intended to indicate future returns.
Performance information is reported on a class basis.
A Fund may compare any of its performance information with:
o Data published by independent evaluators such as Morningstar, Inc.,
Lipper Analytical Services, Inc., IBC/Donoghue, Inc., CDA/Wiesenberger
or other companies which track the investment performance of investment
companies ("Fund Tracking Companies").
o The performance of other mutual funds.
7
<PAGE>
o The performance of recognized stock, bond and other indices, including
but not limited to the Standard & Poor's 500(R) Index, the Russell
2000(R) Index, the Russell MidcapTM Index, the Russell 1000(R) Value
Index, the Russell 2500(R) Index, the Morgan Stanley - Europe,
Australian and Far East Index, the Dow Jones Industrial Average, the
Salomon Brothers Bond Index, the Shearson Lehman Bond Index, U.S.
Treasury bonds, bills or notes and changes in the Consumer Price Index
as published by the U.S. Department of Commerce.
Performance information may be presented numerically or in a table, graph, or
similar illustration.
Indices are not used in the management of a Fund but rather are standards by
which the Fund's Adviser and shareholders may compare the performance of the
Fund to an unmanaged composite of securities with similar, but not identical,
characteristics as the Fund.
A Fund may refer to: (1) general market performances over past time periods such
as those published by Ibbotson Associates (for instance, its "Stocks, Bonds,
Bills and Inflation Yearbook"); (2) mutual fund performance rankings and other
data published by Fund Tracking Companies; and (3) material and comparative
mutual fund data and ratings reported in independent periodicals, such as
newspapers and financial magazines.
A Fund's performance will fluctuate in response to market conditions and other
factors.
A listing of certain performance data as of December 31, 1998 is contained in
Appendix C -- Performance Data.
B. PERFORMANCE CALCULATIONS
A Fund's performance may be quoted in terms of yield or total return.
1. SEC YIELD
Standardized SEC yields for a Fund used in advertising are computed by dividing
the Fund's interest income (in accordance with specific standardized rules) for
a given 30 day or one month period, net of expenses, by the average number of
shares entitled to receive income distributions during the period, dividing this
figure by the Fund's net asset value per share at the end of the period and
annualizing the result (assuming compounding of income in accordance with
specific standardized rules) in order to arrive at an annual percentage rate.
Capital gains and losses generally are excluded from these calculations.
Income calculated for the purpose of determining a Fund's yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding assumed in yield
calculations, the yield quoted for a Fund may differ from the rate of
distribution of income from the Fund over the same period or the rate of income
reported in the Fund's financial statements.
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that a Fund's yield fluctuates
from day to day and that the Fund's yield for any given period is not an
indication or representation by the Fund of future yields or rates of return on
the Fund's shares. Financial intermediaries may charge their customers that
invest in a Fund fees in connection with that investment. This will have the
effect of reducing the Fund's after-fee yield to those shareholders.
The yields of a Fund are not fixed or guaranteed, and an investment in a Fund is
not insured or guaranteed. Accordingly, yield information should not be used to
compare shares of a Fund with investment alternatives, which, like money market
instruments or bank accounts, may provide a fixed rate of interest. Also, it may
not be appropriate to compare a Fund's yield information directly to similar
information regarding investment alternatives which are insured or guaranteed.
8
<PAGE>
Yield quotations are based on amounts invested in a Fund net of any applicable
sales charges that may be paid by an investor. A computation of yield that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
The Funds charge no sales charges.
Yield is calculated according to the following formula:
a - b
Yield = 2[(------ + 1)6 - 1]
cd
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
2. TOTAL RETURN CALCULATIONS
A Fund's total return shows its overall change in value, including changes in
share price and assuming all of the Fund's distributions are reinvested.
Total return figures may be based on amounts invested in a Fund net of sales
charges that may be paid by an investor. A computation of total return that does
not take into account sales charges paid by an investor would be higher than a
similar computation that takes into account payment of sales charges.
The Funds charge no sales charges.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is calculated using a
formula prescribed by the SEC. To calculate standard average annual total
returns a Fund: (1) determines the growth or decline in value of a hypothetical
historical investment in a Fund over a stated period; and (2) calculates the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. For
example, a cumulative return of 100% over ten years would produce an average
annual total return of 7.18%. While average annual returns are a convenient
means of comparing investment alternatives, investors should realize that
performance is not constant over time but changes from year to year, and that
average annual returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.
Average annual total return is calculated according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 payment made at the beginning of the
applicable period
Because average annual returns tend to smooth out variations in the Fund's
returns, shareholders should recognize that they are not the same as actual
year-by-year results.
OTHER MEASURES OF TOTAL RETURN. Standardized total return quotes may be
accompanied by non-standardized total return figures calculated by alternative
methods.
A Fund may quote unaveraged or cumulative total returns which reflect a
Fund's performance over a stated period of time.
9
<PAGE>
Total returns may be stated in their components of income and capital
(including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to
total return.
Any total return may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over any time period. Total returns may be quoted with or without
taking into consideration a Fund's front-end sales charge or contingent deferred
sales charge (if applicable).
Period total return is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return
The other definitions are the same as in average annual total
return above
C. MULTICLASS PERFORMANCE
When a Fund has more than one class of shares, performance calculations for the
classes of shares that are created after the initial class may be stated so as
to include the performance of the initial class or classes of the Fund.
Generally, performance of the initial class is not restated to reflect the
expenses or expense ratio of the subsequent class.
Currently, the Funds use the actual date a class of shares commenced operations
as the beginning of that class' performance.
D. OTHER MATTERS
A Fund may also include various information in its advertising, sales
literature, shareholder reports or other materials including, but not limited
to: (1) portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer or by maturity; (2) statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
by an investor to meet specific financial goals, such as funding retirement,
paying for children's education and financially supporting aging parents; (3)
information (including charts and illustrations) showing the effects of
compounding interest (compounding is the process of earning interest on
principal plus interest that was earned earlier; interest can be compounded at
different intervals, such as annually, quarterly or daily); (4) information
relating to inflation and its effects on the dollar; (for example, after ten
years the purchasing power of $25,000 would shrink to $16,621, $14,968, $13,465
and $12,100, respectively, if the annual rates of inflation were 4%, 5%, 6% and
7%, respectively); (5) information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar-cost
averaging; (6) biographical descriptions of the Fund's portfolio managers and
the portfolio management staff of the Fund's investment adviser, summaries of
the views of the portfolio managers with respect to the financial markets, or
descriptions of the nature of the Adviser's and its staff's management
techniques; (7) the results of a hypothetical investment in the Fund over a
given number of years, including the amount that the investment would be at the
end of the period; (8) the effects of earning Federally and, if applicable,
state tax-exempt income from the Fund or investing in a tax-deferred account,
such as an individual retirement account or Section 401(k) pension plan; (9) the
net asset value, net assets or number of shareholders of the Fund as of one or
more dates; and (10) a comparison of the Fund's operations to the operations of
other funds or similar investment products, such as a comparison of the nature
and scope of regulation of the products and the products' weighted average
maturity, liquidity, investment policies, and the manner of calculating and
reporting performance.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,118 at the end
of the second year (an increase in $98). The extra $8 that was earned on the $90
interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of
10
<PAGE>
compounding are as follows: at 7% and 12% annually, $1,000 will grow to $1,967
and $3,106, respectively, at the end of ten years and $3,870 and $9,646,
respectively, at the end of twenty years. These examples are for illustrative
purposes only and are not indicative of a Fund's performance.
A Fund may advertise information regarding the effects of automatic investment
and systematic withdrawal plans, including the principal of dollar cost
averaging. In a dollar-cost averaging program, an investor invests a fixed
dollar amount in a Fund at period intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not insure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in a Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
<TABLE>
<S> <C> <C> <C>
SYSTEMATIC SHARE SHARES
PERIOD INVESTMENT PRICE PURCHASED
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
TOTAL AVERAGE TOTAL
INVESTED $600 PRICE $15.17 SHARES 41.81
</TABLE>
In connection with its advertisements, a Fund may provide "shareholder's
letters" which serve to provide shareholders or investors an introduction into
the Fund's, the Trust's or any of the Trust's service provider's policies or
business practices. For instance, advertisements may provide for a message from
the Adviser that it has for more than twenty-five years been committed to
quality products and outstanding service to assist its customers in meeting
their financial goals and setting forth the reasons that the Adviser believes
that it has been successful as a portfolio manager.
4. MANAGEMENT
A. TRUSTEES AND OFFICERS
The names of the Trustees and officers of the Trust, their positions with the
Trust, address, date of birth and principal occupations during the past five
years are set forth below. Each Trustee who is an "interested person" (as
defined by the 1940 Act) of the Trust is indicated by an asterisk.
11
<PAGE>
<TABLE>
<S> <C>
NAME, POSITION WITH TRUST, DATE OF BIRTH, ADDRESS PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
Fred M. Filoon*, Chairman and President Senior Vice President, Cramer Rosenthal McGlynn, Inc. since
Born: March 1942 June 1991.
707 Westchester Avenue
White Plains, NY 10604
John E. Appelt, Trustee Certified Financial Planner, The Equitable (an insurance
Born: September 1945 company) since 1985.
1001 Franklin Ave., Ste. 315
Garden City, NY 11530
Louis Klein Jr., Trustee Self-employed as a financial and professional service
Born: May 1935 consultant since 1991. He has also held the following
80 Butternut Lane positions during that period: Trustee, Manville Personal
Stamford, CT 06093 Injury Settlement Trust; Director, Riverwood International
Corporation (a paperboard and packaging company); Director,
Manville Corporation (a building products company)
Clement C. Moore, II, Trustee Managing Partner, Mariemont Holdings, LLC (a commercial real
Born: September 1944 estate holding and development company) since 1980.
10 Rockefeller Plaza, #1120
New York, NY
Eugene A. Trainor, III, Secretary Executive Vice President and Chief Operating Officer, Cramer
Born: December 1963 Rosenthal McGlynn, Inc., since December 1998. Senior
707 Westchester Avenue Vice-President and CFO, Cramer Rosenthal McGlynn, Inc. from
White Plains, NY 10604 August 1994 to December 1998. From July 1990 to August 1994,
CFO of Grotech Capital Group (a venture capital company).
Sara M. Morris, Assistant Treasurer Treasurer and CFO, Forum Financial Group LLC since 1994.
Born: September 1963
Two Portland Square
Portland, Maine 04101
Dawn L. Taylor, Assistant Treasurer 10/97 - Present. Tax Manager, Forum Financial Group, LLC
Born: May, 1964 1/97 - 10/97. Senior Tax Accountant, Purdy, Bingham &
Two Portland Square Burrell, LLC
Portland, Maine 04101 9/94 - 10/97. Senior Fund Accountant, Forum Financial Group,
LLC
6/86 - 9/94. Tax Consultant, New England Financial Services
Stephen J. Barrett, Vice President and Assistant 9/96 - Present. Manager of Client Services, Forum Financial
Secretary Group, LLC
Born: November 1968 1994 - 8/96. Senior Product Manager, Fidelity Investments
Two Portland Square
Portland, Maine 04101
12
<PAGE>
D. Blaine Riggle, Assistant Secretary 1/98 - Present. Assistant Counsel, Forum Financial Group, LLC
Born: November 1966 3/97 - 1/98. Associate Counsel, Wright Express Corporation
Two Portland Square (a fleet credit card company)
Portland, Maine 04101 1994 - 3/97. Associate at the law firm of Friedman, Babcock
& Gaythwaite
Marcella Cote, Assistant Secretary 5/98 - Present. Fund Administrator, Forum Financial Group,
Born: January 1947 LLC
Two Portland Square 2/97 - 5/98. Budget Analyst, State of Maine Department of
Portland, Maine 04101 Human Services
1994 - 2/97. Project Assistant, Muskie School of Public
Service
</TABLE>
B. COMPENSATION OF TRUSTEES AND OFFICERS
Each Trustee receives annual fees of $10,000.
Trustees are also reimbursed for travel and related expenses incurred in
attending meetings of the Board.
Trustees that are affiliated with the Adviser receive no compensation for their
services or reimbursement for their associated expenses. No officer of the Trust
is compensated by the Trust.
The following table sets forth the fees paid to each Trustee by the Trust for
the period October 1, 1997 to September 30, 1998.
<TABLE>
<S> <C> <C> <C> <C>
Pension or
Retirement
Aggregate Benefits Accrued Estimated Annual Total
Compensation from as Part of Fund Benefits upon Compensation from
Name, Position Trust Expenses Retirement Trust
- ------------------------------------- ------------------- ------------------- -------------------- -------------------
Fred M. Filoon $0 $0 $0 $0
Chairman and President
John E. Appelt
Trustee $6,250 $0 $0 $6,250
Louis Klein, Jr.
Trustee $6,250 $0 $0 $6,250
Clement C. Moore, II
Trustee $6,250 $0 $0 $6,250
</TABLE>
C. INVESTMENT ADVISER
1. SERVICES OF ADVISER
The Adviser serves as investment adviser to each Fund pursuant to an investment
advisory agreement with the Trust. Under that agreement, the Adviser furnishes
at its own expense all services, facilities and personnel necessary in
connection with managing a Fund's investments and effecting portfolio
transactions for a Fund.
13
<PAGE>
2. OWNERSHIP OF ADVISER/AFFILIATIONS
The Adviser is 76% owned (and therefore controlled) by Cramer, Rosenthal,
McGlynn, Inc. ("CRM") and its shareholders. CRM is registered as an investment
adviser with the SEC under the 1940 Act, as amended.
The trustees or officers of the Trust that are employed by the Adviser (or
affiliates of the Adviser) are Fred M. Filoon and Eugene A. Trainor, III.
3. FEES
The Adviser's fee is calculated as a percentage of the applicable Fund's average
net assets. The fee is accrued daily by the Funds and is paid monthly based on
average net assets for the previous month. The fee is allocated among the
classes of shares of a Fund based on the average net assets of each class during
the same period.
In addition to receiving its advisory fee from each Fund, the Adviser may also
act and be compensated as investment manager for its clients with respect to
assets which are invested in a Fund. If an investor in a Fund also has a
separately managed account with CRM with assets invested in the Fund, 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.
Table 1 in Appendix B shows the dollar amount of the fees payable by the Trust
to the Adviser, the amount of the fee waived by the Adviser and the actual fee
received by the Adviser. The data is for the past three fiscal years or shorter
period if a Fund has been in operation for a shorter period.
4. OTHER PROVISIONS OF ADVISER'S AGREEMENT
The Adviser's agreement must be approved at least annually by the Board or by
vote of the shareholders, and in either case by a majority of the Trustees who
are not parties to the agreement or interested persons of any such party.
The Adviser's agreement is terminable without penalty by the Trust with respect
to a Fund on 60 days' written notice when authorized either by vote of the
Fund's shareholders or by a vote of a majority of the Board, or by the Adviser
on 60 days' written notice to the Trust.
Under its agreement, the Adviser is not liable for any error of judgment,
mistake of law, or for any act or omission in the performance of its duties to a
Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of its obligations
and duties under the agreement.
5. EXPENSE LIMITATIONS
The Adviser has voluntarily undertaken to assume certain expenses of the Funds
(or waive its fees). This undertaking is designed to place a maximum limit on
expenses (including all fees to be paid to the Adviser but excluding taxes,
interest, brokerage commissions and other portfolio transaction expenses and
extraordinary expenses) of: (1) 1.15% of the average daily net assets of the
Institutional Class of each Fund; and (2) 1.50% of the average daily net assets
of the Investor Class of each Fund.
D. DISTRIBUTOR
1. DISTRIBUTOR; SERVICES AND COMPENSATION OF DISTRIBUTOR
FFS, the distributor (also known as principal underwriter) of the shares of each
Fund, is located at Two Portland Square, Portland, Maine 04101. FFS is a
registered broker-dealer and is a member of the National Association of
Securities Dealers, Inc.
14
<PAGE>
FFS, FAdS, FAcS and the Transfer Agent are each controlled indirectly by Forum
Financial Group, LLC. Forum Financial Group, LLC is controlled by John Y.
Keffer.
Under its agreement with the Trust FFS acts as the agent of the Trust in
connection with the offering of shares of the Funds. FFS continually distributes
shares of the Funds on a best efforts basis. FFS has no obligation to sell any
specific quantity of Fund shares.
FFS receives no compensation for its distribution services. Shares are sold with
no sales commission; accordingly, FFS receives no sales commissions. FFS may
enter into arrangements with various financial institutions through which
investors may purchase or redeem shares. FFS may, at its own expense and from
its own resources, compensate certain persons who provide services in connection
with the sale or expected sale of shares of the Funds.
2. OTHER PROVISIONS OF DISTRIBUTOR'S AGREEMENT
FFS's distribution agreement must be approved at least annually by the Board or
by 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.
FFS's agreement is terminable without penalty by the Trust with respect to a
Fund on 60 days' written notice when authorized either by vote of the Fund's
shareholders or by a vote of a majority of the Board, or by FFS on 60 days'
written notice to the Trust.
Under its agreement, FFS is not liable for any error of judgment or mistake of
law or for any act or omission in the performance of its duties to a Fund,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties or by reason of reckless disregard of its obligations and duties
under the agreement.
Under its agreement, FFS and certain related parties (such as FFS's officers and
persons that control FFS) are indemnified by the Trust against any and all
claims and expenses in any way related to FFS's actions (or failures to act)
that are consistent with FFS's contractual standard of care. This means that as
long as FFS satisfies its contractual duties, the Trust is responsible for the
costs of: (1) defending FFS against claims that FFS breached a duty it owed to
the Trust; and (2) paying judgments against FFS. The Trust is not required to
indemnify FFS if the Trust does not receive written notice of and reasonable
opportunity to defend against a claim against FFS in the Trust's own name or in
the name of FFS.
E. OTHER FUND SERVICE PROVIDERS
1. ADMINISTRATOR
As administrator, pursuant to an agreement with the Trust, FAdS is responsible
for the supervision of the overall management of the Trust, providing the Trust
with general office facilities and providing persons satisfactory to the Board
to serve as officers of the Trust.
For its services, FAdS receives a fee from each Fund at an annual rate as
follows: (1) 0.15% of the average daily net assets of the Fund for the first $50
million in Fund assets; (2) 0.10% of the average daily net assets of the Fund
for the next $50 million in Fund assets; and (3) 0.05% of the average daily net
assets of the Fund for remaining Fund assets. The fee is accrued daily by the
Funds and is paid monthly based on average net assets for the previous month.
Prior to December 17, 1997, Forum Financial Services, Inc., an affiliate of
FAdS, provided administrative services to the Trust pursuant to an agreement,
the material terms of which were the same as the current agreement.
15
<PAGE>
Table 2 in Appendix B shows the dollar amount of the fees payable by the Trust
to FAdS, the amount of the fee waived by FAdS and the actual fee received by
FAdS. The data is for the past three fiscal years or shorter period if a Fund
has been in operation for a shorter period.
FAdS's agreement is terminable without penalty by the Trust or by FAdS with
respect to a Fund on 60 days' written notice. Under the agreement, FAdS is not
liable for any error of judgment or mistake of law or for any act or omission in
the performance of its duties to a Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the agreement.
2. FUND ACCOUNTANT
As fund accountant, pursuant to an agreement with the Trust, FAcS provides fund
accounting services to each Fund. These services include calculating the NAV per
share of each Fund (and class) and preparing the Funds' financial statements and
tax returns.
For its services, FAcS receives a fee from each Fund at an annual rate of
$36,000 plus $12,000 for each class of shares above one and certain surcharges
based upon the amount and type of a Fund's portfolio transactions and positions.
The fee is accrued daily by the Funds and is paid monthly based on the
transactions and positions for the previous month.
Table 3 in Appendix B shows the dollar amount of the fees payable by the Trust
to FAcS, the amount of the fee waived by FAcS and the actual fee received by
FAcS. The data are for the past three fiscal years or shorter period if a Fund
has been in operation for a shorter period.
FAcS's agreement is terminable without penalty by the Trust or by FAcS with
respect to a Fund on 60 days' written notice. Under the agreement, FAcS is not
liable for any error of judgment or mistake of law or for any act or omission in
the performance of its duties to a Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the agreement. Under the
agreement, in calculating a Fund's NAV per share, FAcS is deemed not to have
committed an error if the NAV per share it calculates is within 1/10 of 1% of
the actual NAV per share (after recalculation). In addition, in calculating NAV
per share FAcS is not liable for the errors of others, including the companies
that supply securities prices to FAcS and the Funds.
3. TRANSFER AGENT
As transfer agent and distribution paying agent, pursuant to an agreement with
the Trust, the Transfer Agent maintains an account for each shareholder of
record of a Fund and is responsible for processing purchase and redemption
requests and paying distributions to shareholders of record. The Transfer Agent
is located at Two Portland Square, Portland, Maine 04101 and is registered as a
transfer agent with the SEC.
For its services, the Transfer Agent receives a fee from each Fund at an annual
rate of $24,000 plus $12,000 for each class of shares above one and $30.00 per
Investor Class shareholder account and $120.00 per Institutional Class
shareholder account. The fee is accrued daily by the Funds and is paid monthly.
Table 4 in Appendix B shows the dollar amount of the fees payable by the Trust
to the Transfer Agent, the amount of the fee waived by the Transfer Agent and
the actual fee received by the Transfer Agent. The data are for the past three
fiscal years or shorter period if a Fund has been in operation for a shorter
period.
The Transfer Agent's agreement is terminable without penalty by the Trust or by
the Transfer Agent with respect to a Fund on 60 days' written notice. Under the
agreement, the Transfer Agent is not liable for any error of judgment or mistake
of law or for any act or omission in the performance of its duties to a Fund,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties or by reason of reckless disregard of its obligations and duties
under the agreement.
16
<PAGE>
4. CUSTODIAN
As custodian, pursuant to an agreement with the Trust, Forum Trust, LLC
safeguards and controls the Fund's cash and securities, determines income and
collects interest on Fund investments. The Custodian is located at Two Portland
Square, Portland, Maine 04101. The Custodian may employ subcustodians. The
Custodian has hired Bankers Trust Company, 130 Liberty Street, New York, New
York, 10006, to serve as subcustodian for the Funds.
For its services, the Custodian receives a fee from the Funds at an annual rate
as follows: (1) 0.01% for the first $1 billion in the Funds' assets ; (2)
0.0075% for the Funds' assets between $1-$2 billion; (3) 0.005% for the Funds'
assets between $2-$6 billion; and (4) .0025% for the Funds' assets greater than
$6 billion. The Custodian receives account maintenance fees of $2,400 per
account per year. The Custodian is also paid certain transaction fees. These
fees are accrued daily by the Funds and are paid monthly based on average net
assets and transactions for the previous month.
5. LEGAL COUNSEL
Legal matters in connection with the issuance of shares of the Trust are passed
upon by Kramer Levin Naftalis & Frankel, LLP, 919 Third Avenue, New York, New
York 10022. Kramer Levin Naftalis & Frankel, LLP has relied upon the opinion of
Morris, Nichols, Arsht & Tunnell, 1201 N. Market Street, Wilmington, Delaware,
for matters relating to Delaware law.
6. INDEPENDENT AUDITORS
Ernst & Young, LLP, One North Broadway, White Plains, New York 10601,
independent auditors, have been selected as auditors for each Fund. The auditors
audit the annual financial statements of the Funds and provide the Funds with an
audit opinion. The auditors also review certain regulatory filings of the Funds
and the Funds' tax returns.
5. PORTFOLIO TRANSACTIONS
A. HOW SECURITIES ARE PURCHASED AND SOLD
Purchases and sales of portfolio securities that are fixed income securities
(for instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom the Fund
purchases or to whom the Fund sells is acting on its own behalf (and not as the
agent of some other party such as its customers). These securities normally are
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for these
securities.
Purchases and sales of portfolio securities that are equity securities (for
instance common stock and preferred stock) are generally effected; (1) if the
security is traded on an exchange, through brokers who charge commissions; and
(2) if the security is traded in the "over-the-counter" markets, in a principal
transaction directly from a market maker. In transactions on stock exchanges,
commissions are negotiated. When transactions are executed in an
over-the-counter market, the Adviser will seek to deal with the primary market
makers; but when necessary in order to obtain best execution, the Adviser will
utilize the services of others.
Purchases of securities from underwriters of the securities include a disclosed
fixed commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers include the spread between the
bid and asked price.
In the case of fixed income and equity securities traded in the over-the-counter
markets, there is generally no stated commission, but the price usually includes
an undisclosed commission or markup.
17
<PAGE>
B. COMMISSIONS PAID
Table 5 in Appendix B shows the aggregate brokerage commissions with respect to
each Fund. The data presented are for the past three fiscal years or a shorter
period if the Fund has been in operation for a shorter period, except as
otherwise noted. The table also indicates the reason for any material change in
the last two years in the amount of brokerage commissions paid by a Fund.
C. ADVISER RESPONSIBILITY FOR PURCHASES AND SALES
The Adviser places orders for the purchase and sale of securities with brokers
and dealers selected by and in the discretion of the Adviser. No Fund has any
obligation to deal with any specific broker or dealer in the execution of
portfolio transactions. Allocations of transactions to brokers and dealers and
the frequency of transactions are determined by the Adviser in its best judgment
and in a manner deemed to be in the best interest of each Fund rather than by
any formula.
The Adviser seeks "best execution" for all portfolio transactions. This means
that the Adviser seeks the most favorable price and execution available. The
Adviser's primary consideration in executing transactions for a Fund is prompt
execution of orders in an effective manner and at the most favorable price
available.
1. CHOOSING BROKER-DEALERS
The Funds may not always pay the lowest commission or spread available. Rather,
in determining the amount of commissions (including certain dealer spreads) paid
in connection with securities transactions, the Adviser takes into account
factors such as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the research services described below)
and any risk assumed by the executing broker.
Consistent with applicable rules and the Adviser's duties, the Adviser may: (1)
consider sales of shares of the Funds as a factor in the selection of
broker-dealers to execute portfolio transactions for a Fund; and (2) take into
account payments made by brokers effecting transactions for a Fund (these
payments may be made to the Fund or to other persons on behalf of the Fund for
services provided to the Fund for which those other persons would be obligated
to pay.
2. OBTAINING RESEARCH FROM BROKERS
The Adviser may give consideration to research services furnished by brokers to
the Adviser for its use and may cause a Fund to pay these brokers a higher
amount of commission than may be charged by other brokers. This research is
designed to augment the Adviser's own internal research and investment strategy
capabilities. This research may be used by the Adviser in connection with
services to clients other than the Funds, and not all research services may be
used by the Adviser in connection with the Funds. The Adviser's fees are not
reduced by reason of the Adviser's receipt of research services.
The Adviser has full brokerage discretion. It evaluates the range of quality of
a broker's services in placing trades including securing best price,
confidentiality, clearance and settlement capabilities, promptness of execution
and the financial stability of the broker-dealer. Under certain circumstances,
the value of research provided by a broker-dealer may be a factor in the
selection of a broker. This research would include reports that are common in
the industry. Typically, the research will be used to service all of the
Adviser's accounts although a particular client may not benefit from all the
research received on each occasion. The nature of the services purchased for
clients include industry research reports and periodicals, quotation systems,
software for portfolio management and formal data bases.
Occasionally, the Adviser may do a transaction with a broker and pay a slightly
higher commission than another might charge. If this is done it will be 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
18
<PAGE>
execution. Since most of the Adviser's brokerage commissions for research are
for economic research on specific companies or industries, and since the Adviser
is involved with a limited number of securities, most of the commission dollars
spent for industry and stock research directly benefit the clients.
There are occasions on which portfolio transactions may be executed as part of
concurrent authorizations to purchase or sell the same securities for more than
one account served by the Adviser, some of which accounts may have similar
investment objectives. Although such concurrent authorizations potentially could
be either advantageous or disadvantageous to any one or more particular
accounts, they will be effected only when the Adviser believes that to do so
will be in the best interest of the affected accounts. When such concurrent
authorizations occur, the objective will be to allocate the execution in a
manner, which is deemed equitable to the accounts involved. Clients are
typically allocated securities with prices averaged on a per-share or per-bond
basis.
In some cases, the client may direct the Adviser to use a broker or dealer of
the client's choice. If the client directs the Adviser to use a particular
broker, the Adviser may not be authorized to negotiate commissions and may be
unable to obtain volume discounts or best execution. In these cases, there could
be some disparity in commission charges among these clients.
3. COUNTERPARTY RISK
The Adviser monitors the creditworthiness of counterparties to each Fund's
transactions and intends to enter into a transaction only when it believes that
the counterparty presents minimal and appropriate credit risks.
4. TRANSACTIONS THROUGH AFFILIATES
The Adviser may not effect brokerage transactions through affiliates of the
Adviser (or affiliates of those persons). The Board has not adopted respective
procedures.
5. OTHER ACCOUNTS OF THE ADVISER
Investment decisions for the Funds are made independently from those for any
other account or investment company that is or may in the future become managed
by the Adviser or its affiliates. Investment decisions are the product of many
factors, including basic suitability for the particular client involved. Thus, a
particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens that two or
more clients 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
respective Adviser's opinion, is equitable to each and in accordance with the
amount being purchased or sold by each. There may be circumstances when
purchases or sales of a portfolio security for one client could have an adverse
effect on another client that has a position in that security. In addition, when
purchases or sales of the same security for a Fund and other client accounts
managed by the Adviser occurs contemporaneously, the purchase or sale orders may
be aggregated in order to obtain any price advantages available to large
denomination purchases or sales.
6. PORTFOLIO TURNOVER
The frequency of portfolio transactions of a Fund (the portfolio turnover rate)
will vary from year to year depending on many factors. Portfolio turnover rate
is reported in the Prospectus. From time to time a Fund may engage in active
short-term trading to take advantage of price movements affecting individual
issues, groups of issues or markets. An annual portfolio turnover rate of 100%
would occur if all of the securities in a Fund were replaced once in a period of
one year. Higher portfolio turnover rates may result in increased brokerage
costs to a Fund and a possible increase in short-term capital gains or losses.
19
<PAGE>
D. SECURITIES OF REGULAR BROKER-DEALERS
From time to time a Fund may acquire and hold securities issued by its "regular
brokers and dealers" or the parents of those brokers and dealers. For this
purpose, regular brokers and dealers 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.
Following is a list of the regular brokers and dealers of each Fund whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of the Funds' most recent fiscal year.
<TABLE>
<S> <C>
REGULAR BROKER OR DEALER VALUE OF SECURITIES HELD ($)(000'S OMITTED)
SMALL CAP VALUE FUND
Merrill Lynch & Co., Inc. $1490
VALUE FUND
Merrill Lynch & Co., Inc. $100
</TABLE>
6. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A. GENERAL INFORMATION
Shareholders may effect purchases or redemptions or request any shareholder
privilege in person at the Transfer Agent's offices located at Two Portland
Square, Portland, Maine 04101.
The Funds accept orders for the purchase or redemption of shares on any weekday
except days when the New York Stock Exchange is closed.
B. ADDITIONAL PURCHASE INFORMATION
Shares of each Fund are sold on a continuous basis by the distributor at net
asset value ("NAV") per share without any sales charge. Accordingly, the
offering price per share is the same as the NAV per share. That information is
contained in the Funds' financial statements (specifically in the statements of
assets and liabilities).
The Funds reserve the right to refuse any purchase request in excess of 1% of a
Fund's total assets.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, a Fund may accept portfolio securities that meet the investment
objective and policies of a Fund as payment for Fund shares. A Fund will only
accept securities that: (1) are not restricted as to transfer by law and are not
illiquid; and (2) have a value which is readily ascertainable (and not
established only by valuation procedures).
1. IRAS
All contributions into an IRA through the automatic investing service are
treated as IRA contributions made during the year the investment is received.
2. UGMAS/UTMAS
If the trustee's name is not in the account registration of a gift or transfer
to minor ("UGMA/UTMA") account, the investor must provide a copy of the trust
document.
20
<PAGE>
3. PURCHASES THROUGH FINANCIAL INSTITUTIONS
You may purchase and redeem shares through certain broker-dealers, banks and
other financial institutions. Financial institutions may charge their customers
a fee for their services and are responsible for promptly transmitting purchase,
redemption and other requests to the Funds.
If you purchase shares through a financial institution, you will be subject to
the institution's procedures, which may include charges, limitations, investment
minimums, cutoff times and restrictions in addition to, or different from, those
applicable when you invest in a Fund directly. When you purchase a Fund's shares
through a financial institution, you may or may not be the shareholder of record
and, subject to your institution's procedures, you may have Fund shares
transferred into your name. There is typically a three-day settlement period for
purchases and redemptions through broker-dealers. Certain financial institutions
may also enter purchase orders with payment to follow.
You may not be eligible for certain shareholder services when you purchase
shares through a financial institution. Contact your institution for further
information. If you hold shares through a financial institution, the Funds may
confirm purchases and redemptions to the financial institution, which will
provide you with confirmations and periodic statements. The Funds are not
responsible for the failure of any financial institution to carry out its
obligations.
Investors purchasing shares of the Funds through a financial institution should
read any materials and information provided by the financial institution to
acquaint themselves with its procedures and any fees that the institution may
charge.
C. ADDITIONAL REDEMPTION INFORMATION
A Fund may redeem shares involuntarily to reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to
transactions effected for the benefit of a shareholder which is applicable to a
Fund's shares as provided in the Prospectus.
1. SUSPENSION OF RIGHT OF REDEMPTION
The right of redemption may not be suspended, except for any period during
which: (1) the New York Stock Exchange, Inc. is closed (other than customary
weekend and holiday closings) or during which the Securities and Exchange
Commission determines that trading thereon is restricted; (2) an emergency (as
determined by the SEC) exists as a result of which disposal by a Fund of its
securities is not reasonably practicable or as a result of which it is not
reasonably practicable for a Fund fairly to determine the value of its net
assets; or (3) the SEC may by order permit for the protection of the
shareholders of a Fund.
2. REDEMPTION-IN-KIND
Redemption proceeds normally are paid in cash. Payments may be made wholly or
partly in portfolio securities, however, if the Board determines conditions
exist which would make payment in cash detrimental to the best interests of a
Fund. If redemption proceeds are paid wholly or partly in portfolio securities,
brokerage costs may be incurred by the shareholder in converting the securities
to cash. The Trust has filed an election with the SEC pursuant to which a Fund
may only effect a redemption in portfolio securities if the particular
shareholder is redeeming more than $250,000 or 1% of the Fund's total net
assets, whichever is less, during any 90-day period.
D. NAV DETERMINATION
In determining a Fund's NAV per share, securities for which market quotations
are readily available are valued at current market value using the last reported
sales price. If no sale price is reported, the average of the last bid and ask
price is used. If no average price is available, the last bid price is used. If
market quotations are not readily available, then securities are valued at fair
value as determined by the Board (or its delegate).
21
<PAGE>
E. DISTRIBUTIONS
Distributions of net investment income will be reinvested at a Fund's NAV per
share as of the last day of the period with respect to which the distribution is
paid. Distributions of capital gain will be reinvested at the NAV per share of a
Fund on the payment date for the distribution. Cash payments may be made more
than seven days following the date on which distributions would otherwise be
reinvested.
7. TAXATION
The tax information set forth in the Prospectus and the information in this
section relates solely to U.S. federal income tax law and assumes that each Fund
qualifies as a regulated investment company (as discussed below). Such
information is only a summary of certain key federal income tax considerations
affecting each Fund and its shareholders that are not described in the
prospectus. No attempt has been made to present a complete explanation of the
federal tax treatment of the Funds or the implications to shareholders. The
discussions here and in the prospectus are not intended as substitutes for
careful tax planning.
This "Taxation" section is based on the Code and applicable regulations in
effect on the date hereof. Future legislative or administrative changes or court
decisions may significantly change the tax rules applicable to the Funds and
their shareholders. Any of these changes or court decisions may have a
retroactive effect.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX PROVISIONS APPLICABLE TO THEM.
A. QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund intends for each tax year to qualify as a "regulated investment
company" under the Code. This qualification does not involve governmental
supervision of management or investment practices or policies of a Fund.
The tax year end of each Fund is September 30 (the same as the Fund's fiscal
year end).
1. MEANING OF QUALIFICATION
As a regulated investment company, a Fund will not be subject to federal income
tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of long-term capital gains over long-term capital
losses) that it distributes to shareholders. In order to qualify as a regulated
investment company a Fund must satisfy the following requirements:
o The Fund must distribute at least 90% of its investment company
taxable income (i.e., net investment income and capital gain net
income) for the tax year. (Certain distributions made by a Fund after
the close of its tax year are considered distributions attributable to
the previous tax year for purposes of satisfying this requirement.)
o The Fund must derive at least 90% of its gross income from certain
types of income derived with respect to its business of investing.
o The Fund must satisfy the following asset diversification test at the
close of each quarter of the Fund's tax year: (1) at least 50% of the
value of the Fund's assets must consist of cash and cash items, U.S.
government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in
securities of the issuer and as to which the Fund does not hold more
than 10% of the outstanding voting securities of the issuer); and (2)
22
<PAGE>
no more than 25% of the value of the Fund's total assets may be
invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses.
2. FAILURE TO QUALIFY
If for any tax year a Fund does not qualify as a regulated investment company,
all of its taxable income (including its net capital gain) will be subject to
tax at regular corporate rates without any deduction for dividends to
shareholders, and the dividends will be taxable to the shareholders as ordinary
income to the extent of a Fund's current and accumulated earnings and profits. A
portion of these distributions generally may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Failure to qualify as a regulated investment company would thus have a negative
impact on a Fund's income and performance. It is possible that a Fund will not
qualify as a regulated investment company in any given tax year.
B. FUND DISTRIBUTIONS
Each Fund anticipates distributing substantially all of its net investment
income for each tax year. These distributions are taxable to shareholders as
ordinary income. These distributions may qualify for the 70% dividends-received
deduction for corporate shareholders.
Each Fund anticiptaes distributing substantially all of its net capital gain for
each tax year. These distributions generally are made only once a year, usually
in November or December, but the Funds may make additional distributions of net
capital gain at any time during the year. These distributions are taxable to
shareholders as long-term capital gain, regardless of how long a shareholder has
held shares.
Each Fund may have capital loss carryovers (unutilized capital losses from prior
years). These capital loss carryovers (which can be used for up to eight years)
may be used to offset any current capital gain (whether short- or long-term).
All capital loss carryovers are listed in the Funds' financial statements. Any
such losses may not be carried back.
Distributions by a Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital. Return of capital
distributions reduce the shareholder's tax basis in the shares and are treated
as gain from the sale of the shares to the extent the shareholder's basis would
be reduced below zero.
All distributions by a Fund will be treated in the manner described above
regardless of whether the distribution is paid in cash or reinvested in
additional shares of the Fund (or of another Fund). 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.
A shareholder may purchase shares whose net asset value at the time reflects
undistributed net investment income or recognized capital gain, or unrealized
appreciation in the value of the assets of a Fund. Distributions of these
amounts are taxable to the shareholder in the manner described above, although
the distribution economically constitutes a return of capital to the
shareholder.
Shareholders purchasing shares of a Fund just prior to the ex-dividend date of a
distribution will be taxed on the entire amount of the distribution received,
even though the net asset value per share on the date of the purchase reflected
the amount of the distribution.
If a shareholder holds shares for six months or less and redeems shares at a
loss after receiving a capital gain distribution, the loss will be treated as a
long-term capital loss to the extent of the distribution.
23
<PAGE>
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which they are made. A distribution declared in October,
November or December of any year and payable to shareholders of record on a
specified date in those months, however, is deemed to be received by the
shareholders (and made by the Fund) on December 31 of that calendar year if the
distribution is 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.
C. CERTAIN TAX RULES APPLICABLE TO THE FUNDS TRANSACTIONS
For federal income tax purposes, when put and call options purchased by a Fund
expire unexercised, the premiums paid by a Fund give rise to short- or long-term
capital losses at the time of expiration (depending on the length of the
respective exercise periods for the options). When put and call options written
by a Fund expire unexercised, the premiums received by the Fund give rise to
short-term capital gains at the time of expiration. When a Fund exercises a
call, the purchase price of the underlying security is increased by the amount
of the premium paid by a Fund. When a Fund exercises a put, the proceeds from
the sale of the underlying security are decreased by the premium paid. When a
put or call written by a Fund is exercised, the purchase price (selling price in
the case of a call) of the underlying security is decreased (increased in the
case of a call) for tax purposes by the premium received.
Certain listed options, regulated futures contracts and forward currency
contracts are considered "Section 1256 contracts" for federal income tax
purposes. Section 1256 contracts held by a Fund at the end of each tax year are
"marked to market" and treated for federal income tax purposes as though sold
for fair market value on the last business day of the tax year. Gains or losses
realized by a Fund on Section 1256 contracts generally is considered 60%
long-term and 40% short-term capital gains or losses. Each Fund can elect to
exempt its Section 1256 contracts which are part of a "mixed straddle" (as
described below) from the application of Section 1256.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by the Fund may constitute a
"straddle" for federal income tax purposes. A straddle of which at least one,
but not all, the positions are Section 1256 contracts, may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that: (1) the loss realized on
disposition of one position of a straddle may not be recognized to the extent
that the Fund has unrealized gains with respect to the other position in such
straddle; (2) the Fund's holding period in straddle positions be suspended while
the straddle exists (possibly resulting in gain being treated as short-term
capital gain rather than long-term capital gain); (3) the losses recognized with
respect to certain straddle positions which are part of a mixed straddle and
which are non-Section 1256 positions be treated as 60% long-term and 40%
short-term capital loss; (4) losses recognized with respect to certain straddle
positions which would otherwise constitute short-term capital losses be treated
as long-term capital losses; and (5) the deduction of interest and carrying
charges attributable to certain straddle positions may be deferred. Various
elections are available to a Fund which may mitigate the effects of the straddle
rules, particularly with respect to mixed straddles. In general, the straddle
rules described above do not apply to any straddles held by a Fund all of the
offsetting positions of which consist of Section 1256 contracts.
D. FEDERAL EXCISE TAX
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to: (1) 98% of
ordinary its taxable income for the calendar year; and (2) 98% of its capital
gain net income for the one-year period ended on October 31 of the calendar
year. If the Fund changes its tax year end to November 30 or December 31, it may
elect to use that date instead of the October 31 date in making this
calculation. The balance of the Fund's income must be distributed during the
next calendar year. A Fund will be treated as having distributed any amount on
which it is subject to income tax for any tax year ending in a calendar year.
24
<PAGE>
For purposes of calculating the excise tax, each Fund: (1) reduces its capital
gain net income (but not below its net capital gain) by the amount of any net
ordinary loss for the calendar year and (2) excludes foreign currency gains and
losses incurred after October 31 of any year (or November 30 or December 31 if
it has made the election described above) in determining the amount of ordinary
taxable income for the current calendar year. The Fund will include foreign
currency gains and losses incurred after October 31 in determining ordinary
taxable income for the succeeding calendar year.
Each Fund intends to make sufficient distributions of its ordinary taxable
income and capital gain net income prior to the end of each calendar year to
avoid liability for the excise tax. Investors should note, however, that a Fund
may in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.
E. SALE OR REDEMPTION OF SHARES
In general, a shareholder will recognize gain or loss on the sale or redemption
of shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption (a so called "wash sale"). In general, any gain or loss arising from
the sale or redemption of shares of a Fund will be considered capital gain or
loss and will be long-term capital gain or loss if the shares were held for
longer than one year. Any capital loss arising from the sale or redemption of
shares held for six months or less, however, is treated as a long-term capital
loss to the extent of the amount of capital gain distributions received on such
shares. For this purpose, the special holding period rules of Code Section
246(c) (3) and (4) generally will apply in determining the holding period of
shares. Capital losses in any year are deductible only to the extent of capital
gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
F. WITHHOLDING TAX
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of distributions, and the proceeds of redemptions of shares, paid
to any shareholder: (1) who has failed to provide correct tax payer
identification number; (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly; or (3)
who has failed to certify to a Fund that it is not subject to backup withholding
or that it is a corporation or other "exempt recipient."
G. FOREIGN SHAREHOLDERS
Taxation of a shareholder who under the Code is a nonresident alien individual,
foreign trust or estate, foreign corporation, or foreign partnership ("foreign
shareholder"), depends on whether the income from a Fund is "effectively
connected" with a U.S. trade or business carried on by the foreign shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income distributions paid
to a foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) upon the gross amount of the distribution.
The foreign shareholder generally would be exempt from U.S. federal income tax
on gain realized on the sale of shares of a Fund, capital gain distributions
from a Fund and amounts retained by a Fund that are designated as undistributed
capital gain.
If the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then ordinary income distributions, capital
gain distributions, and any gain realized upon the sale of shares of a Fund will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
or U.S. corporations.
In the case of a noncorporate foreign shareholder, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding (or taxable at a reduced treaty rate), unless
the shareholder furnishes the Fund with proper notification of its foreign
status.
25
<PAGE>
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 a Fund can
differ from the rules for U.S. federal income taxation described above. These
foreign rules are not discussed herein. Foreign shareholders are urged to
consult their own tax advisers as to the consequences of foreign tax rules with
respect to an investment in a Fund, distributions from a Fund, the applicability
of foreign taxes and related matters.
H. STATE AND LOCAL TAXES
The tax rules of the various states of the U.S. and their local jurisdictions
with respect to distributions from a Fund can differ from the rules for U.S.
federal income taxation described above. These state and local rules are not
discussed herein. Shareholders are urged to consult their tax advisers as to the
consequences of state and local tax rules with respect to an investment in a
Fund, distributions from a Fund, the applicability of state and local taxes and
related matters.
8. OTHER MATTERS
A. THE TRUST AND ITS SHAREHOLDERS
1. GENERAL INFORMATION
The CRM Funds was organized as a business trust under the laws of the State of
Delaware on April 24, 1995. The Trust has operated under that name and as an
investment company since that date.
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 (the
Funds) and in classes of shares of those series. As of the date hereof, the
Trust consisted of the following shares of beneficial interest:
o Institutional Shares of each of Small Cap Value Fund, Mid Cap Value
Fund, Large Cap Value Fund and Value Fund.
o Investor Shares of each of Small Cap Value Fund, Mid Cap Value Fund,
Large Cap Value Fund and Value Fund.
The Trust has an unlimited number of authorized shares of beneficial interest.
The Board may, without shareholder approval, divide the authorized shares into
an unlimited number of separate series and may divide series into classes of
shares; the costs of doing so will be borne by the Trust.
The Trust and each Fund will continue indefinitely until terminated.
2. CLASSES OF SHARES
Each class of a Fund may have a different expense ratio and each class'
performance will be affected by its expenses. For more information on any other
class of shares of the Fund, investors may contact the Transfer Agent.
3. SHAREHOLDER VOTING AND OTHER RIGHTS
Each share of each series of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency, shareholder service and administration expenses) are borne
solely by those shares and each class votes separately with respect to the
provisions of any Rule 12b-1 plan which pertains to the class and other matters
for which separate class voting is
26
<PAGE>
appropriate under applicable law. Generally, shares will be voted in the
aggregate without reference to a particular series or class, except if the
matter affects only one series or class or voting by series or class is required
by law, in which case shares will be voted separately by series or class, as
appropriate. 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 Fund's) outstanding
shares may, as set forth in the Trust Instrument, call meetings of the Trust (or
Fund) for any purpose related to the Trust (or Fund), including, in the case of
a meeting of the Trust, the purpose of voting on removal of one or more
Trustees.
4. CERTAIN REORGANIZATION TRANSACTIONS
The Trust or any Fund may be terminated upon the sale of its assets to, or
merger with, another open-end, management investment company or series thereof,
or upon liquidation and distribution of its assets. Generally such terminations
must be approved by the vote of the holders of a majority of the outstanding
shares of the Trust or the Fund. The Trustees may, without prior shareholder
approval, change the form of organization of the Trust by merger, consolidation
or incorporation. Under the Trust Instrument, the Trustees may, without
shareholder vote, cause the Trust to merge or consolidate into one or more
trusts, partnerships or corporations or cause the Trust to be incorporated under
Delaware law, so long as the surviving entity is an open-end, management
investment company that will succeed to or assume the Trust's registration
statement.
B. FUND OWNERSHIP
As of February 1, 1999, the percentage of shares owned by all officers and
trustees of the Trust as a group was as follows. To the extent officers and
trustees own less than 1% of the shares of each class of shares of a Fund (or of
the Trust), the table reflects "N/A" for not applicable.
PERCENTAGE OF SHARES
FUND (OR TRUST) OWNED
The Trust 4.55%
Small Cap Value Fund N/A
Mid Cap Value Fund 4.84%
Large Cap Value Fund 5.75%
Value Fund 4.19%
Also as of that date, certain shareholders of record owned 5% or more of a class
of shares of a Fund. These shareholders and any shareholder known by a Fund to
own beneficially 5% or more of a class of shares of a Fund are listed in Table 6
in Appendix B.
From time to time, certain shareholders may own a large percentage of the shares
of a Fund. Accordingly, those shareholders may be able to greatly affect (if not
determine) the outcome of a shareholder vote. As of February 1, 1999, the
following persons beneficially owned 25% or more of the shares of a Fund (or of
the Trust) and may be deemed to control the Fund (or the Trust). For each person
listed that is a company, the jurisdiction under the laws of which the company
is organized (if applicable) and the company's parents are listed.
27
<PAGE>
<TABLE>
<CAPTION>
CONTROLLING PERSON INFORMATION
<S> <C> <C>
PERCENTAGE OF
SHARES OWNED
SHAREHOLDER FUND (OR TRUST)
Pell Rudman Trust Co (organized in Maine) Mid Cap Value Fund 59.81%
100 Federal Street 37th Floor
Boston, MA 02110
</TABLE>
C. LIMITATIONS ON SHAREHOLDERS' AND TRUSTEES' LIABILITY
Delaware law provides that Fund shareholders are entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. In the past, the Trust believes that the securities
regulators of some states, however, have indicated that they and the courts in
their state may decline to apply Delaware law on this point. The 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's Trust Instrument (the document that governs the
operation of the Trust) 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 or its shareholders. In addition, the Trust
Instrument provides that the Trustees shall not be liable for any conduct
whatsoever, provided that a Trustee is not protected against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
D. REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby. The registration statement, including
the exhibits filed therewith, may be examined at the office of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents are not necessarily complete, and, in each instance,
are qualified by, reference is made to the copy of such contract or other
documents filed as exhibits to the registration statement.
E. FINANCIAL STATEMENTS
The financial statements of the Funds for the year ended September 30, 1998
included in the Annual Report to shareholders of the Trust are incorporated
herein by reference. These financial statements only include the schedules of
investments, statements of assets and liabilities, statements of operations,
statements of changes in net assets, financial highlights, notes and independent
auditors' report.
28
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
A. CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
1. MOODY'S INVESTORS SERVICE
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
BA Bonds, which are rated Ba, are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest. Ca Bonds which are rated Ca represent
obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
A-1
<PAGE>
2. STANDARD AND POOR'S CORPORATION
AAA An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
NOTE Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
NOTE Plus (+) or minus (-). The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
The "r" symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
currencies, or commodities; obligations exposed to severe prepayment
risk-such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse
floaters.
A-2
<PAGE>
3. DUFF & PHELPS CREDIT RATING CO.
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+
AA High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+
A, A- Protection factors are average but adequate. However, risk factors are
more variable in periods of greater economic stress.
BBB+
BBB
BBB- Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
BB+
BB
BB- Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according
to industry conditions. Overall quality may move up or down frequently
within this category.
B+
B, B- Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
4. FITCH IBCA, INC.
INVESTMENT GRADE
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A 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.
A-3
<PAGE>
BBB Good credit quality. `BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC
CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates
that default of some kind appears probable. `C' ratings signal imminent
default.
DDD
DD, D Default. Securities are not meeting current obligations and are
extremely speculative. `DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, `DD' indicates expected recovery of 50% - 90%
of such outstandings, and `D' the lowest recovery potential, i.e. below
50%.
B. PREFERRED STOCK
1. MOODY'S INVESTORS SERVICE
AAA An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated "aa" is considered a high- grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
A An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in
the "aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be questionable
over any great length of time.
BA An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
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.
A-4
<PAGE>
CA An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
C This is the lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor prospects of
ever attaining any real investment standing.
NOTE Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking and the modifier 3 indicates that the issue ranks in
the lower end of its generic rating category.
2. STANDARD & POOR'S
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated AA also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated AAA.
A An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated BBB is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
A category.
BB
B, CCC Preferred stock rated BB, B, and CCC is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
preferred stock obligations. BB indicates the lowest degree of
speculation and CCC the highest. While such issues will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating CC is reserved for a preferred stock issue that is in
arrears on dividends or sinking fund payments, but that is currently
paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in
default on debt instruments.
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
NOTE Plus (+) or minus (-). To provide more detailed indications of
preferred stock quality, ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
C. SHORT TERM RATINGS
1. MOODY'S INVESTORS SERVICE
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
A-5
<PAGE>
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
NOT
PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.
2. STANDARD AND POOR'S
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-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.
A-6
<PAGE>
3. FITCH IBCA, INC.
F1 Obligations assigned this rating have the highest capacity for timely
repayment under Fitch IBCA's national rating scale for that country,
relative to other obligations in the same country. This rating is
automatically assigned to all obligations issued or guaranteed by the
sovereign state. Where issues possess a particularly strong credit
feature, a "+" is added to the assigned rating.
F2 Obligations supported by a strong capacity for timely repayment
relative to other obligors in the same country. However, the relative
degree of risk is slightly higher than for issues classified as `A1'
and capacity for timely repayment may be susceptible to adverse change
sin business, economic, or financial conditions.
F3 Obligations supported by an adequate capacity for timely repayment
relative to other obligors in the same country. Such capacity is more
susceptible to adverse changes in business, economic, or financial
conditions than for obligations in higher categories.
B Obligations for which the capacity for timely repayment is uncertain
relative to other obligors in the same country. The capacity for timely
repayment is susceptible to adverse changes in business, economic, or
financial conditions.
C Obligations for which there is a high risk of default to other obligors
in the same country or which are in default.
A-7
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
The following Table shows the dollar amount of fees payable to the Adviser with
respect to each Fund, the amount of fee that was waived by the Adviser, if any,
and the actual fee received by the Adviser.
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
SMALL CAP VALUE FUND PAYABLE WAIVED RETAINED
Year Ended September 30, 1998 $1,434,005 $0 $1,434,005
Year Ended September 30, 1997 $635,864 $0 $635,864
Year Ended September 30, 1996 $173,105 $39,802 $132,303
ADVISORY FEE ADVISORY FEE ADVISORY FEE
MID CAP VALUE FUND PAYABLE WAIVED RETAINED
Period Ended September 30, 1998 $25,934 $25,934 $0
ADVISORY FEE ADVISORY FEE ADVISORY FEE
LARGE CAP VALUE FUND PAYABLE WAIVED RETAINED
Period Ended September 30, 1998 $6,174 $6,174 $0
ADVISORY FEE ADVISORY FEE ADVISORY FEE
VALUE FUND PAYABLE WAIVED RETAINED
Period Ended September 30, 1998 $39,465 $39,465 $0
</TABLE>
B-1
<PAGE>
TABLE 2 - ADMINISTRATION FEES
The following Table shows the dollar amount of fees payable to FAdS with respect
to each Fund, the amount of fee that was waived by FAdS, if any, and the actual
fee received by FAdS.
<TABLE>
<S> <C> <C> <C>
ADMINISTRATION FEE ADMINISTRATION FEE ADMINISTRATION FEE
SMALL CAP VALUE FUND PAYABLE WAIVED RETAINED
Year Ended September 30, 1998 $190,232 $17,897 $172,335
Year Ended September 30, 1997 $127,123 $0 $127,123
Year Ended September 30, 1996 $40,000 $15,579 $24,421
ADMINISTRATION FEE ADMINISTRATION FEE ADMINISTRATION FEE
MID CAP VALUE FUND PAYABLE WAIVED RETAINED
Period Ended September 30, 1998 $18,414 $0 $18,414
ADMINISTRATION FEE ADMINISTRATION FEE ADMINISTRATION FEE
LARGE CAP VALUE FUND PAYABLE WAIVED RETAINED
Period Ended September 30, 1998 $2,554 $0 $2,554
ADMINISTRATION FEE ADMINISTRATION FEE ADMINISTRATION FEE
VALUE FUND PAYABLE WAIVED RETAINED
Period Ended September 30, 1998 $18,414 $0 $18,414
</TABLE>
B-2
<PAGE>
TABLE 3 - ACCOUNTING FEES
The following table shows the dollar amount of fees payable to FAcS with respect
to each Fund.
ACCOUNTING FEE PAYABLE
SMALL CAP VALUE FUND
Investor Shares
Year Ended September 30, 1998 $44,832
Year Ended September 30, 1997 $41,500
Year Ended September 30, 1996 $39,000
Institutional Shares
Period Ended September 30, 1998 $6,168
ACCOUNTING FEE PAYABLE
MID CAP VALUE FUND
Period Ended September 30, 1998 $28,516
ACCOUNTING FEE PAYABLE
LARGE CAP VALUE FUND
Period Ended September 30, 1998 $5,677
ACCOUNTING FEE PAYABLE
VALUE FUND
Period Ended September 30, 1998 $30,516
B-3
<PAGE>
TABLE 4 - TRANSFER AGENCY FEES
The following table shows the dollar amount of shareholder service fees payable
to the Transfer Agent with respect to Shares of each Fund.
<TABLE>
<S> <C> <C> <C>
SMALL CAP VALUE FUND TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
PAYABLE WAIVED RETAINED
Investor Shares
Year Ended September 30, 1998 $188,352 $0 $188,352
Year Ended September 30, 1997 $39,437 $0 $39,437
Year Ended September 30, 1996 $20,413 $0 $20,413
Institutional Shares
Period Ended September 30, 1998 $14,611 $0 $14,611
MID CAP VALUE FUND TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
PAYABLE WAIVED RETAINED
Period Ended September 30, 1998 $20,075 $0 $20,075
LARGE CAP VALUE FUND TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
PAYABLE WAIVED RETAINED
Period Ended September 30, 1998 $3,487 $823 $2,664
VALUE FUND TRANSFER AGENCY FEE TRANSFER AGENCY FEE TRANSFER AGENCY FEE
PAYABLE WAIVED RETAINED
Period Ended September 30, 1998 $24,969 $5,262 $19,707
</TABLE>
B-4
<PAGE>
TABLE 5 - COMMISSIONS
The following table shows the aggregate brokerage commissions with respect to
each Fund that incurred brokerage costs. The data is for the past three fiscal
years or shorter period if the Fund has been in operation for a shorter period.
AGGREGATE COMMISSION
SMALL CAP VALUE FUND PAID
Year Ended September 30, 1998 $77,501
Year Ended September 30, 1997 $416,402
Year Ended September 30, 1996 $494,129
AGGREGATE COMMISSION
MID CAP VALUE FUND PAID
Period Ended September 30, 1998 $22,976
AGGREGATE COMMISSION
LARGE CAP VALUE FUND PAID
Period Ended September 30, 1998 $8,634
AGGREGATE COMMISSION
VALUE FUND PAID
Period Ended September 30, 1998 $38,772
B-5
<PAGE>
TABLE 6 - 5% SHAREHOLDERS
The following table lists (1) the persons who owned of record 5% or more of the
outstanding shares of a class of shares of a Fund and (2) any person known by a
Fund to own beneficially 5% or more of a class of shares of a Fund, as of
February 1, 1999.
<TABLE>
<S> <C> <C> <C> <C>
% OF % OF FUND
FUND/CLASS OF SHARES NAME AND ADDRESS SHARES CLASS
Small Cap Value Fund
Investor Shares Donaldson, Lufkin & Jenrette 499,586.629 6.27% 3.63%
Mutual Funds Dept
PO Box 2052
Jersey City, NJ 07303
American Express Trust Company 472,365.574 5.93% 3.44%
Services Plans
PO Box 534
Minneapolis, MN 55440
Institutional Shares Church Farm School, Inc. 438,878.653 7.59% 3.19%
PO Box 2000
Paoli, PA 19301
Abilene Christian University 355,786.788 6.16% 2.59%
ACU Box 29120
Abilene, TX 79699
Donaldson, Lufkin & Jenrette 354,850.190 6.14% 2.58%
Mutual Funds Dept
PO Box 2052
Jersey City, NJ 07303
Mid Cap Value Fund
Institutional Shares Pell Rudman Trust Co 426,895.575 59.81% 59.81%
100 Federal St 37th Floor
Boston, MA 02110
Gerald B. Cramer 50,437.664 7.07% 7.07%
1330 Journeys End Rd.
Croton-on-Hudson, NY 10520
Ronald H. McGlynn 50,437.664 7.07% 7.07%
120 Whitehall Blvd.
Garden City, NY 11530
White Memorial Foundation 47,891.354 6.71% 6.71%
PO Box 368
71 Whitehall Road
Litchfield, CT 06259
B-6
<PAGE>
Large Cap Value Fund
Investor Shares L.A.D. Equity Partners L.P. 229,316.137 11.05% 11.05%
Mr. Arthur Pergament
Robert Pergament Enterprises
7107 Ayshire Lane
Boca Raton, FL 33496
Wilmington Trust Co. TTEE 109,442.060 5.27% 5.27%
FBO Henry I. Seigel Co. Pen Fund
Rodney Square North
1100 North Market St.
Wilmington, DE 19890-0001
Value Fund
Investor Shares Gerald B. Cramer 50,152.471 6.51% 6.51%
1330 Journeys End Rd.
Croton-on-Hudson, NY 10520
Ronald H. McGlynn 50,152.471 6.51% 6.51%
120 Whitehall Blvd.
Garden City, NJ 11530
Syracuse University 44,847.455 5.82% 5.82%
Treasurer's Office, Skytop Office
Bldg.
Syracuse, NY 13244
</TABLE>
B-7
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - TOTAL RETURNS
The average annual total return of each class of shares of each Fund for the
period ended December 31, 1998, was as follows.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALENDAR
ONE THREE YEAR TO ONE YEAR THREE FIVE TEN SINCE
SMALL CAP VALUE FUND MONTH MONTHS DATE YEARS YEARS YEARS INCEPTION
Investor Shares 2.85% 4.36% -12.21% -12.21% 14.08% N/A N/A 15.40%
Institutional Shares 2.90% 4.40% N/A N/A N/A N/A N/A -8.41%
CALENDAR
ONE THREE YEAR TO ONE YEAR THREE FIVE TEN SINCE
MID CAP VALUE FUND MONTH MONTHS DATE YEARS YEARS YEARS INCEPTION
Institutional Shares 1.55% 10.37% N/A N/A N/A N/A N/A 6.73%
CALENDAR
ONE THREE YEAR TO ONE YEAR THREE FIVE TEN SINCE
LARGE CAP VALUE FUND MONTH MONTHS DATE YEARS YEARS YEARS INCEPTION
Investor Shares 3.33% 15.08% N/A N/A N/A N/A N/A 15.31%
CALENDAR
ONE THREE YEAR TO ONE YEAR THREE FIVE TEN SINCE
VALUE FUND MONTH MONTHS DATE YEARS YEARS YEARS INCEPTION
Investor Shares 2.55% 17.39% N/A N/A N/A N/A N/A 9.52%
</TABLE>
