N-30D 1 taabf-se.txt THE AVATAR ADVANTAGE BALANCED FUND Semi-Annual Report For the Six Months Ended June 30, 2002 TABLE OF CONTENTS THE AVATAR ADVANTAGE BALANCED FUND Management's Discussion and Analysis Letter 3 Investment Portfolio 6 Statement of Assets and Liabilities 9 Statement of Operations 10 Statements of Changes in Net Assets 11 Financial Highlights 12 Notes to Financial Statements 13 August 2002 Dear Shareholder, We wish to report on the results of the AVATAR ADVANTAGE BALANCED FUND for the six months ended June 30. For this third straight challenging period, Avatar's asset allocation philosophy- participating in market gains during market upswings while protecting those gains against loss during market downturns- was again tested. Losses in the Fund amounted to (4.1%) (excluding the sales charge) while the S&P 500 Index was down (13.2%) for the period and the NASDAQ Index declined (24.9%).* The Lehman Brothers Government/Credit Bond Index advanced 3.3% for the period. During the first half of the year, the Fund's allocation to equity positions fluctuated in the range of 47% to 62%, while its allocation to bonds ranged from 31% to 39% with the remainder in cash. 2002 - THE FIRST SIX MONTHS IN REVIEW ------------------------------------- The first half of 2002 began with hopes for a steady and strong recovery beginning in the latter part of the first quarter and continuing to build throughout the year. We felt that the last quarter of 2001 had identified and expunged all of the bad news for the markets and the rebuilding process could proceed apace. It is now apparent this scenario has been delayed. The first quarter ended with the beginning of bad news and market distrust that has sent markets to pre-September 11th lows and below. We entered the second quarter with a modestly bullish allocation in stocks as our indicators continued to suggest that a very meaningful bottom had been put in place post the 9/11 tragedy. However, in April, our economic liquidity and momentum measures deteriorated. Steadily rising interest rates and widening credit spreads reflected poor liquidity conditions. Hence, our equity allocation was lowered to a neutral level. Allocations to equities held steady until early June, when our momentum model declined, reflecting the growing weakness in the broad market. Dollar weakness and credit concerns had a further negative impact on our economic liquidity model. As June wore on and momentum continued to falter, equity exposure was reduced further to well below benchmark levels. The decline in both monetary and momentum measures far outweighed improvement in our sentiment measures, which themselves reflected modestly rising levels of pessimism. As for our stock selection process, we over-weighted the basic material sector- as the housing market and consumer spending remained positive aspects in a troubled economy. Avatar was also over-weighted in energy and specialty chemical stocks and held a market weight in consumer staples. We were able to avoid many controversial stocks that underwent negative valuation adjustments. We ended the quarter underweight in financial stocks and healthcare issues. Our bond holdings emphasized credit quality as ratings agencies continued to be in panic mode. Investor confidence in corporate management and integrity has fallen to levels not seen in our 32 year history. We remained positioned primarily in Government and Agency securities with portfolio duration below benchmark. 2002 - SECOND HALF MARKET OUTLOOK --------------------------------- Although there is extensive market history to suggest that equities do well in the early days of an economic recovery, the plain fact is that this time around, stocks have been far weaker than in any previous recovery. Two things come to mind regarding this. First, the economic recovery may be much weaker than on previous occasions. The latest data showed that GDP growth for the last 3 quarters of 2001 was negative and growth for the first quarter of 2002 was revised sharply downward. Second quarter GDP growth was anemic. Inventories remain lean and capital spending is still lackluster. Investor confidence is shot and there has been a multi-trillion dollar market value loss in companies once considered gems. While housing has remained firm, the question is whether that can be sustainable until the rest of the economy recovers. Government spending on defense and homeland security may provide a needed lift. Second, will consumers reduce spending as it becomes obvious that the economy is not picking up? Added to this has been the mess in corporate governance and accounting that may have the potential to turn investors off for a long time to come. One outcome of this sour environment is that the market may require a much bigger buildup of bearishness to exhaust the sellers. We fear that a turn in this bearish cycle may well require a complete capitulation by a broad range of investors, to trigger a sustainable reversal to higher prices for stocks. Such an event would confirm the very unusual status of the current cycle. Having moved to a neutral position in the first quarter, we recognized some of the growing risk by moving below benchmarks early in the second quarter. We believe this position is appropriate given the increased volatility of the markets. Hopefully, this extra caution, which helped trim losses in the second quarter, will prove unwarranted. Should monetary policy become even more supportive of economic growth, that would go a long way toward putting a floor under the markets. We also look for a broadening of the markets, something we have been searching for over the past 2-1/2 years. Recent weakness in that regard has only heightened our concerns. For the bond market, the surplus has disappeared for at least the next three years, which will severely curtail the practice of repurchasing long-dated Treasury obligations. Long-term yields have not declined to the extent that short-term yields have and this remains a source of concern for long-term growth prospects. Bond prices have appreciated as investors seek a safe haven alternative to stocks. If the Fed keeps interest rates at today's low levels, fixed income investors should continue to enjoy returns in excess of inflation. We continue to follow our investment discipline that has navigated us through all types of market conditions for over thirty-two years. The Fund's diversified mix of stocks, focus on long-term fundamental values, and a balanced portfolio should serve our long-term investors well. Sincerely, /s/Charles White Charles White Portfolio Manager Vice-Chairman - Avatar Investors Associates Corp. Footnotes: * The Fund's average annual total return for the period from inception on January 13, 1998 through June 30, 2002 was 2.88%. The Fund's total return for the one-year ended December 31, 2001 was -13.13%. If the maximum sales charge (4.50%) was reflected, the Fund's returns for the same periods would have been 1.83% and -17.04%, respectively. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. Please see the prospectus for fees and expenses that apply to a continued investment in the Fund. The S&P 500, NASDAQ and Lehman Brothers Government/Credit Bond Indices are unmanaged indices commonly used to measure performance of U.S. stocks. You cannot invest directly in an index. SCHEDULE OF INVESTMENTS at June 30, 2002 (Unaudited) SHARES MARKET VALUE ------ ------------ COMMON STOCKS: 47.16% AUTOMOTIVE - PARTS & EQUIPMENT: 0.72% 400 Lear Corp.* $ 18,500 ---------- BANKS: 2.94% 500 Bank One Corp. 19,240 700 Washington Mutual, Inc 25,977 600 Wells Fargo & Co. 30,036 ---------- 75,253 ---------- BEVERAGES - ALCOHOLIC: 0.78% 400 Anheuser-Busch Companies, Inc. 20,000 ---------- CAPITAL GOODS: 0.83% 200 General Dynamics Corp. 21,270 ---------- CHEMICALS: 1.58% 400 Air Products and Chemicals, Inc. 20,188 500 Rohm and Haas Co. 20,245 ---------- 40,433 ---------- CHEMICALS - SPECIALTY: 0.97% 400 PPG Industries, Inc. 24,760 ---------- COMPUTERS - MEMORY DEVICES: 0.24% 500 Network Appliance, Inc.* 6,220 ---------- COMPUTER SERVICES: 0.37% 200 Affiliated Computer Services, Inc.* 9,496 ---------- COMPUTER SOFTWARE: 1.49% 700 Microsoft Corp.* 38,290 ---------- CONSUMER CYCLICAL: 1.63% 300 Best Buy Co., Inc.* 10,890 400 Clear Channel Communications, Inc.* 12,808 400 Lowe's Companies, Inc. 18,160 ---------- 41,858 ---------- CONSUMER FINANCE: 0.58% 300 Household International, Inc. 14,910 ---------- CONSUMER STAPLES: 3.21% 300 Colgate-Palmolive Co. 15,015 200 Kimberly-Clark Corp. 12,400 400 PepsiCo., Inc. 19,280 400 The Procter & Gamble Co. 35,720 ---------- 82,415 ---------- DIVERSIFIED FINANCIAL SERVICES: 0.40% 266 Citigroup, Inc. 10,308 ---------- DIVERSIFIED MANUFACTURING: 3.81% 1,000 General Electric Co. 29,050 400 Ingersoll-Rand Co. - Class A # 18,264 500 Masco Corp. 13,555 300 3M Co. 36,900 ---------- 97,769 ---------- DRUGS & PHARMACEUTICALS: 2.37% 500 Johnson & Johnson 26,130 550 Pfizer, Inc. 19,250 300 Wyeth 15,360 ---------- 60,740 ---------- ELECTRIC - INTEGRATED: 0.77% 300 Dominion Resources, Inc. 19,860 ---------- ELECTRIC POWER: 0.70% 500 Cinergy Corp. 17,995 ---------- ELECTRIC UTILITIES: 1.21% 600 TXU Corp. 30,930 ---------- ELECTRONIC COMPONENTS - SEMICONDUCTORS: 0.36% 500 Intel Corp. 9,135 ---------- ENERGY: 1.23% 500 EOG Resources, Inc. 19,850 200 Phillips Petroleum Co. 11,776 ---------- 31,626 ---------- FINANCE - INVESTMENTS BANKERS/BROKERS: 0.96% 400 The Bear Stearns Companies, Inc. 24,480 ---------- FINANCE - MORTGAGE LOANS: 1.15% 400 Fannie Mae 29,500 ---------- FINANCIAL GUARANTEE INSURANCE: 0.60% 400 The PMI Group, Inc. 15,280 ---------- FOOD - MISC./DIVERSIFIED: 0.66% 600 ConAgra Foods, Inc. 16,590 8 The J.M. Smucker Co. 273 ---------- 16,863 ---------- HEALTHCARE: 3.26% 300 Amgen, Inc.* 12,564 400 Anthem, Inc.* 26,992 600 Pharmacia Corp. 22,470 300 Tenet Healthcare Corp.* 21,465 ---------- 83,491 ---------- INSURANCE - BROKERS: 0.38% 100 Marsh & McLennan Companies, Inc. 9,660 ---------- INSURANCE - MULTILINE: 0.58% 219 American International Group, Inc. 14,942 ---------- LODGING: 0.90% 700 Starwood Hotels & Resorts Worldwide, Inc. 23,023 ---------- MEDIA: 0.68% 400 Tribune Co. 17,400 ---------- MEDICAL INSTRUMENTS: 0.33% 200 Medtronic, Inc. 8,570 ---------- MOVIES & ENTERTAINMENT: 0.52% 300 Viacom Inc., - Class B* 13,311 ---------- OIL - EXPLORATION & PRODUCTION: 0.58% 400 Unocal Corp. 14,776 ---------- OIL & GAS - DRILLING: 0.69 % 500 Nabors Industries, Ltd.* 17,650 ---------- OIL & GAS - MACHINERY & EQUIPMENT: 0.53% 200 Smith International, Inc.* 13,638 ---------- PAPER & PAPER PRODUCTS: 0.68% 300 Temple-Inland, Inc. 17,358 ---------- PETROLEUM PRODUCTS: 1.44% 900 Exxon Mobil Corp. 36,828 ---------- RETAIL: 1.37% 200 Target Corp. 7,620 500 Wal-Mart Stores, Inc. 27,505 ---------- 35,125 ---------- SEMICONDUCTOR EQUIPMENT: 0.99% 800 Applied Materials, Inc.* 15,216 300 Novellus Systems, Inc.* 10,200 ---------- 25,416 ---------- SPECIALTY STORES: 0.88% 600 Bed Bath & Beyond, Inc.* 22,644 ---------- TECHNOLOGY: 2.53% 700 Dell Computer Corp.* 18,298 200 First Data Corp. 7,440 200 International Business Machines Corp. 14,400 300 Microchip Technology, Inc.* 8,229 700 Texas Instruments, Inc. 16,590 ---------- 64,957 ---------- TELEPHONE: 0.37% 300 BellSouth Corp. 9,450 ---------- TRANSPORTATION - FREIGHT: 0.89% 600 CNF, Inc. 22,788 ---------- TOTAL COMMON STOCKS (Cost $1,256,221) 1,208,918 ---------- PRINCIPAL AMOUNT --------- CORPORATE BONDS: 5.03% $ 75,000 Bank of New York, 5.20%, 07/01/2007 76,549 50,000 Wells Fargo & Company, 6.45%, 02/01/2011 52,345 ---------- TOTAL CORPORATE BONDS (Cost $125,069) 128,894 ---------- U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS: 33.64% 120,000 Federal National Mortgage Associations, 6.00%, 05/15/2008 128,026 180,000 Federal National Mortgage Associations, 6.00%, 05/15/2011 188,969 390,000 U.S. Treasury Bonds, 12.00%, 08/15/13 545,406 ---------- TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $ 851,191) 862,401 ---------- PRINCIPAL AMOUNT/ SHARES ------ SHORT-TERM INVESTMENTS: 11.91% MONEY MARKET INSTRUMENTS: 4.11% 105,328 Federated Cash Trust Treasury Money Market Fund (Cost $105,328) 105,328 ---------- U.S. TREASURY OBLIGATIONS: 7.80% $200,000 U.S. Treasury Bill, 07/18/2002 (Cost $199,841) 199,841 ---------- TOTAL SHORT-TERM INVESTMENTS (Cost $305,169) 305,169 ---------- Total Investments in Securities (Cost $2,537,650): 97.74% 2,505,382 Other Assets in Excess of Liabilities: 2.26% 57,936 ---------- Net Assets: 100.00% $2,563,318 ---------- ---------- * Non-income producing security. # U.S. security of foreign issuer. See accompanying Notes to Financial Statements. STATEMENT OF ASSETS AND LIABILITIES at June 30, 2002 (Unaudited) ASSETS Investments in securities, at value (cost $2,537,650) $2,505,382 Cash 6,075 Receivables: Investment securities sold 40,490 Dividends and interest 22,715 Due from advisor 14,250 Deferred organization expense 1,335 Prepaid expenses 2,353 ---------- Total assets 2,592,600 ---------- LIABILITIES Payables: Administration fees 2,466 Accrued expenses 26,816 ---------- Total liabilities 29,282 ---------- NET ASSETS $2,563,318 ---------- ---------- NET ASSET VALUE AND REDEMPTION* PRICE PER SHARE [$2,563,318 /271,488 shares outstanding; unlimited number of shares (par value $.01) authorized] $9.44 ----- ----- OFFERING PRICE PER SHARE ($9.44 / .9550) $9.88 ----- ----- COMPONENTS OF NET ASSETS Paid-in capital $2,764,890 Accumulated net investment income 16,140 Accumulated net realized loss on investments (185,444) Net unrealized depreciation on investments (32,268) ---------- Net assets $2,563,318 ---------- ---------- * Redemption of shares held less than 1 year are subject to a 1% redemption fee payable to the Fund. See accompanying Notes to Financial Statements. STATEMENT OF OPERATIONS For the Six Months Ended June 30, 2002 (Unaudited) INVESTMENT INCOME Income Interest $ 22,376 Dividends 6,963 --------- Total income 29,339 --------- Expenses Administration fees (Note 3) 14,876 Professional fees 10,911 Advisory fees (Note 3) 7,071 Fund accounting fees 5,951 Transfer agent fees 5,703 Trustee fees 2,429 Reports to shareholders 1,240 Deferred organization expense 1,240 Custody fees 1,159 Insurance expense 465 Miscellaneous 386 Registration expense 153 --------- Total expenses 51,584 Less: advisory fee waiver (Note 3) (38,385) --------- Net expenses 13,199 --------- NET INVESTMENT INCOME 16,140 --------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss on investments (42,105) Net change in unrealized depreciation on investments (79,271) --------- Net realized and unrealized loss on investments (121,376) --------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(105,236) --------- --------- See accompanying Notes to Financial Statements. STATEMENTS OF CHANGES IN NET ASSETS Six Months Ended June 30,2002 Year Ended (Unaudited) December 31, 2001 ---------------- ----------------- NET INCREASE/(DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income $ 16,140 $ 28,793 Net realized loss on investments (42,105) (128,815) Net unrealized depreciation on investments (79,271) (124,394) ---------- ---------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS (105,236) (224,416) ---------- ---------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- (32,162) Net realized gain on security transactions -- -- ---------- ---------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS -- (32,162) ---------- ---------- TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST Total increase in net assets derived from net change in outstanding shares (a) 1,185,402 32,363 ---------- ---------- TOTAL INCREASE/(DECREASE) IN NET ASSETS 1,080,166 (224,215) ---------- ---------- NET ASSETS Beginning of period 1,483,152 1,707,367 ---------- ---------- END OF PERIOD $2,563,318 $1,483,152 ---------- ---------- ---------- ----------
(a) A summary of share transactions is as follows: Six Months Ended June 30, 2002 Year Ended (Unaudited) December 31, 2001 ------------------ ------------------ Shares Value Shares Value ------ ----- ------ ----- Shares sold 120,713 $1,185,402 20 $ 200 Shares issued in reinvestment of distributions -- -- 3,292 32,163 Shares redeemed -- -- -- -- ------- ---------- ----- ------- Net increase 120,713 $1,185,402 3,312 $32,363 ------- ---------- ----- ------- ------- ---------- ----- ------- See accompanying Notes to Financial Statements. FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Six Months Ended Year Ended December 31, Jan. 13, 1998* June 30, 2002 ---------------------------------- through (Unaudited) 2001 2000 1999 Dec. 31, 1998 ------------- ---- ---- ---- ------------- Net asset value, beginning of period $9.84 $11.58 $12.41 $11.95 $10.00 ----- ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.06 0.20 0.22 0.21 0.19 Net realized and unrealized (loss) / gain on investments (0.46) (1.72) (0.34) 1.17 2.11 ----- ------ ------ ------ ------ Total from investment operations (0.40) (1.52) (0.12) 1.38 2.30 ----- ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income -- (0.22) (0.20) (0.21) (0.19) From net realized gain -- -- (0.51) (0.67) (0.16) In excess of net realized gain -- -- -- (0.04) -- ----- ------ ------ ------ ------ Total distributions -- (0.22) (0.71) (0.92) (0.35) ----- ------ ------ ------ ------ Net asset value, end of period $9.44 $ 9.84 $11.58 $12.41 $11.95 ----- ------ ------ ------ ------ ----- ------ ------ ------ ------ Total return (4.07%)+ (13.13%) (1.04%) 11.82% 23.11%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $2,563 $1,483 $1,707 $1,725 $1,543 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before expense reimbursement 5.46%** 6.98% 6.47% 7.28% 8.59%** After expense reimbursement 1.40%** 1.40% 1.40% 1.40% 1.40%** RATIO OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS: After expense reimbursement 1.71%** 1.90% 1.72% 1.73% 1.89%** Portfolio turnover rate 30.60%+ 73.19% 48.53% 101.53% 95.00%
* Commencement of operations. ** Annualized. + Not annualized. See accompanying Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS at June 30, 2002 (Unaudited) NOTE 1 - ORGANIZATION The Avatar Advantage Balanced Fund (the "Fund") is a series of shares of beneficial interest of Advisors Series Trust (the "Trust"), which is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund's primary investment objective is to seek long-term capital appreciation and to preserve profits during market downturns by investing in a mix of stocks, bonds, and money market instruments. The Fund began operations on January 13, 1998. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund. These policies are in conformity with accounting principles generally accepted in the United States of America. A. Security Valuation: The Fund's investments are carried at fair value. Securities that are primarily traded on a national securities exchange shall be valued at the last sale price on the exchange on which they are primarily traded on the day of valuation or, if there has been no sale on such day, at the mean between the bid and asked prices. Securities primarily traded in the NASDAQ National Market System for which market quotations are readily available shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices. Over-the-counter ("OTC") securities which are not traded in the NASDAQ National Market System shall be valued at the most recent trade price. Securities for which market quotations are not readily available, if any, are valued following procedures approved by the Board of Trustees. Short-term investments are valued at amortized cost, which approximates market value. B. Federal Income Taxes: It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. C. Security Transactions, Dividends and Distributions: Security transactions are accounted for on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost. Dividend income and distributions to shareholders are recorded on the ex-dividend date. The amount of dividends and distributions to shareholders from net investment income and net realized capital gains is determined in accordance with Federal income tax regulations which differs from accounting principles generally accepted in the United States of America. To the extent these book/tax differences are permanent such amounts are reclassified within the capital accounts based on their Federal tax treatment. D. Deferred Organization Costs: The Avatar Advantage Balanced Fund has incurred expenses of $12,500 in connection with the organization of the Fund. These costs have been deferred and are being amortized on a straight-line basis over a period of sixty months from the date of the Fund's commenced investment operation. E. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets during the reporting period. Actual results could differ from those estimates. NOTE 3 - INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES For the six months ended June 30, 2002, Avatar Investors Associates Corp. (the "Advisor") provided the Fund with investment management services under an Investment Advisory Agreement. The Advisor furnished all investment advice, office space, facilities, and provides most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee at the annual rate of 0.75% based upon the average daily net assets of the Fund. For the six months ended June 30, 2002, the Fund incurred $7,071 in Advisory Fees. The Fund is responsible for its own operating expenses. The Advisor has agreed to reduce fees payable to it by the Fund and to pay Fund operating expenses to the extent necessary to limit the Fund's aggregate annual operating expenses to 1.40% of average net assets (the "expense cap"). Any such reduction made by the Advisor in its fees or payment of expenses which are the Fund's obligation are subject to reimbursement by the Fund to the Advisor, if so requested by the Advisor, in subsequent fiscal years if the aggregate amount actually paid by the Fund toward the operating expenses for such fiscal year (taking into account the reimbursement) does not exceed the applicable limitation on Fund expenses. The Advisor is permitted to be reimbursed only for fee reductions and expense payments made in the previous three fiscal years, but is permitted to look back five years and four years, respectively, during the initial six years and seventh year of the Fund's operations. Any such reimbursement is also contingent upon Board of Trustees review and approval at the time the reimbursement is made. Such reimbursement may not be paid prior to the Fund's payment of current ordinary operating expenses. For the six months ended June 30, 2002, the Advisor reduced its fees and absorbed Fund expenses in the amount of $38,385; no amounts were reimbursed to the Advisor. Cumulative expenses subject to recapture pursuant to the aforementioned conditions amounted to $396,297 at June 30, 2002. Cumulative expenses subject to recapture expire as follows: Year Amount ---- ------ 2003 $ 91,300 2004 182,245 2005 122,752 -------- $396,297 -------- -------- U.S. Bancorp Fund Services, LLC, (the "Administrator") acts as the Fund's Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Fund's custodian, transfer agent and accountants; coordinates the preparation and payment of the Fund's expenses and reviews the Fund's expense accruals. For its services, the Administrator receives a monthly fee at the following annual rate: Fund asset level Fee rate ---------------- -------- Less than $15 million $30,000 $15 million to less than $50 million 0.20% of average daily net assets $50 million to less than $100 million 0.15% of average daily net assets $100 million to less than $150 million 0.10% of average daily net assets More than $150 million 0.05% of average daily net assets Quasar Distributors, LLC (the "Distributor") acts as the Fund's principal underwriter in a continuous public offering of the Fund's shares. The Distributor is an affiliate of the Administrator. Certain officers of the Fund are also officers of the Administrator. NOTE 4 - PURCHASES AND SALES OF SECURITIES For the six months ended June 30, 2002, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, were $1,426,196 and $549,224 respectively. NOTE 5 - INCOME TAXES As of June 30, 2002, the components of net assets on a tax basis were as follows: Cost of investments for tax purposes $2,537,650 ---------- ---------- Gross tax unrealized appreciation $ 79,743 Gross tax unrealized depreciation (112,011) ---------- Net tax unrealized depreciation on investments $ (32,268) ---------- ---------- ADVISOR Avatar Investors Associates Corp. 900 Third Avenue New York, New York 10022 www.avatar-associates.com DISTRIBUTOR Quasar Distributors, LLC 615 E. Michigan Street Milwaukee, Wisconsin 53202 CUSTODIAN U.S. Bank, N.A. 425 Walnut Street Cincinnati, Ohio 45202 TRANSFER AGENT U.S. Bancorp Fund Services, LLC 615 E. Michigan Street Milwaukee, Wisconsin 53202 LEGAL COUNSEL Paul, Hastings, Janofsky & Walker, LLP 555 South Flower Street Los Angeles, California 90071 INDEPENDENT PUBLIC ACCOUNTANTS PricewaterhouseCoopers, LLP 1177 Avenue of the Americas New York, New York 90071 This report is intended for shareholders of the Fund and may not be used as sales literature unless preceded or accompanied by a current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Share price and returns will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are dated and are subject to change.