N-30D 1 taaeaf-se.txt THE AVATAR ADVANTAGE EQUITY ALLOCATION FUND Semi-Annual Report For the Six Months Ended June 30, 2002 TABLE OF CONTENTS THE AVATAR ADVANTAGE EQUITY ALLOCATION FUND Management's Discussion and Analysis Letter 3 Investment Portfolio 6 Schedule of Short Futures Contracts 8 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 EQUITY ALLOCATION 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 (8.2%) (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 Fund's allocation to equity positions during this period fluctuated in the range of 70% to 87%, 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. The Fund 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 technology and financial stocks as well as healthcare issues. 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. 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 ability to retreat to cash during bearish periods 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 December 3, 1997 through June 30, 2002 was 0.16%. The Fund's total return for the one-year ended December 31, 2001 was -20.95%. If the maximum sales charge (4.50%) was reflected, the Fund's returns for the same periods would have been -0.84% and -24.51%, 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 and NASDAQ 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: 71.29% AUTOMOTIVE - PARTS & EQUIPMENT: 1.07% 1,900 Lear Corp.* $ 87,875 ---------- BANKS: 4.29% 2,200 Bank One Corp. 84,656 3,400 Washington Mutual, Inc. 126,174 2,800 Wells Fargo & Co. 140,168 ---------- 350,998 ---------- BEVERAGES - ALCOHOLIC: 1.28% 2,100 Anheuser-Busch Companies, Inc. 105,000 ---------- CAPITAL GOODS: 1.30% 1,000 General Dynamics Corp. 106,350 ---------- CHEMICALS: 2.37% 2,000 Air Products and Chemicals, Inc. 100,940 2,300 Rohm and Haas Co. 93,127 ---------- 194,067 ---------- CHEMICALS - SPECIALTY: 1.44% 1,900 PPG Industries, Inc. 117,610 ---------- COMPUTERS - MEMORY DEVICES: 0.38% 2,500 Network Appliance, Inc.* 31,100 ---------- COMPUTER SERVICES: 0.46% 800 Affiliated Computer Services, Inc. Class A* 37,984 ---------- COMPUTER SOFTWARE: 2.41% 3,600 Microsoft Corp.* 196,920 ---------- CONSUMER CYCLICAL: 2.46% 1,150 Best Buy Co., Inc.* 41,745 2,000 Clear Channel Communications, Inc.* 64,040 2,100 Lowe's Companies, Inc. 95,340 ---------- 201,125 ---------- CONSUMER FINANCE: 0.73% 1,200 Household International, Inc. 59,640 ---------- CONSUMER STAPLES: 4.54% 1,500 Colgate-Palmolive Co. 75,075 1,000 Kimberly-Clark Corp. 62,000 1,700 PepsiCo., Inc. 81,940 1,700 The Procter & Gamble Co. 151,810 ---------- 370,825 ---------- DIVERSIFIED FINANCIAL SERVICES: 0.49% 1,033 Citigroup, Inc. 40,029 ---------- DIVERSIFIED MANUFACTURING: 5.85% 5,300 General Electric Co. 153,965 1,900 Ingersoll-Rand Co. - Class A# 86,754 2,400 Masco Corp. 65,064 1,400 3M Co. 172,200 ---------- 477,983 ---------- DRUGS & PHARMACEUTICALS: 3.81% 2,500 Johnson & Johnson 130,650 2,825 Pfizer, Inc. 98,875 1,600 Wyeth 81,920 ---------- 311,445 ---------- ELECTRIC - INTEGRATED: 1.22% 1,500 Dominion Resources, Inc. 99,300 ---------- ELECTRIC POWER: 1.06% 2,400 Cinergy Corp. 86,376 ---------- ELECTRIC UTILITIES: 1.77% 2,800 TXU Corp. 144,340 ---------- ELECTRONIC COMPONENTS - SEMICONDUCTORS: 0.51% 2,300 Intel Corp. 42,021 ---------- ENERGY: 1.99% 2,900 EOG Resources, Inc. 115,130 800 Phillips Petroleum Co. 47,104 ---------- 162,234 ---------- FINANCE - INVESTMENT BANKERS/BROKERS: 1.57% 2,100 The Bear Stearns Companies, Inc. 128,520 ---------- FINANCE - MORTGAGE LOANS: 1.44% 1,600 Fannie Mae 118,000 ---------- FINANCIAL GUARANTEE INSURANCE: 0.94% 2,000 The PMI Group, Inc. 76,400 ---------- FOOD - MISC./DIVERSIFIED: 0.93% 2,700 ConAgra Foods, Inc. 74,655 34 The J.M. Smucker Co. 1,160 ---------- 75,815 ---------- HEALTHCARE: 4.84% 1,300 Amgen, Inc.* 54,444 1,700 Anthem, Inc.* 114,716 2,800 Pharmacia Corp. 104,860 1,700 Tenet Healthcare Corp.* 121,635 ---------- 395,655 ---------- INSURANCE - BROKERS: 0.71% 600 Marsh & McLennan Companies, Inc. 57,960 ---------- INSURANCE - MULTILINE: 1.30% 1,560 American International Group, Inc. 106,439 ---------- LODGING: 1.25% 3,100 Starwood Hotels & Resorts Worldwide, Inc. 101,959 ---------- MEDIA: 1.06% 2,000 Tribune Co. 87,000 ---------- MEDICAL INSTRUMENTS: 0.58% 1,100 Medtronic, Inc. 47,135 ---------- MOVIES & ENTERTAINMENT: 0.71% 1,300 Viacom Inc., Class B* 57,681 ---------- OIL - EXPLORATION & PRODUCTION: 0.81% 1,800 Unocal Corp. 66,492 ---------- OIL & GAS - DRILLING: 0.91% 2,100 Nabors Industries, Inc.*# 74,130 ---------- OIL & GAS - MACHINERY & EQUIPMENT: 0.75% 900 Smith International, Inc.* 61,371 ---------- PAPER & PAPER PRODUCTS: 1.06% 1,500 Temple-Inland, Inc. 86,790 ---------- PETROLEUM PRODUCTS: 2.15% 4,300 Exxon Mobil Corp. 175,956 ---------- RETAIL: 2.26% 1,100 Target Corp. 41,910 2,600 Wal-Mart Stores, Inc. 143,026 ---------- 184,936 ---------- SEMICONDUCTOR EQUIPMENT: 1.63% 3,800 Applied Materials, Inc.* 72,276 1,800 Novellus Systems, Inc.* 61,200 ---------- 133,476 ---------- SPECIALTY STORES: 1.25% 2,700 Bed Bath & Beyond, Inc.* 101,898 ---------- TECHNOLOGY: 3.72% 3,200 Dell Computer Corp.* 83,648 1,100 First Data Corp. 40,920 800 International Business Machines Corp. 57,600 1,500 Microchip Technology, Inc.* 41,145 3,400 Texas Instruments, Inc. 80,580 ---------- 303,893 ---------- TELEPHONE: 0.73% 1,900 BellSouth Corporation 59,850 ---------- TRANSPORTATION - FREIGHT: 1.26% 2,700 CNF, Inc. 102,546 ---------- TOTAL COMMON STOCKS (Cost $5,861,812) 5,827,124 ---------- PRINCIPAL AMOUNT/SHARES ----------------------- SHORT-TERM INVESTMENTS: 26.73% MONEY MARKET INSTRUMENTS: 4.12% 336,653 Federated Cash Trust Treasury Money Market Fund (Cost $336,653) 336,653 ---------- U.S. TREASURY OBLIGATIONS: 22.61% $1,850,000 U.S. Treasury Bill, 7/18/02 (Cost $1,848,555) 1,848,555 ---------- TOTAL SHORT-TERM INVESTMENTS (Cost $2,185,208) 2,185,208 ---------- Total Investments in Securities (Cost $8,047,020): 98.02% 8,012,332 Other Assets in Excess of Liabilities: 1.98% 161,524 ---------- Net Assets: 100.00% $8,173,856 ---------- ---------- * Non-income producing security. # U.S. security of foreign issuer. See accompanying Notes to Financial Statements. SCHEDULE OF SHORT FUTURES CONTRACTS at June 30, 2002 (Unaudited) UNREALIZED CONTRACTS APPRECIATION --------- ------------ SHORT FUTURES CONTRACTS 250 S&P 500 Index Futures Expiring September 2002 (Underlying Face Amount at Market Value $247,525) $2,725 ------ ------ See accompanying Notes to Financial Statements. STATEMENT OF ASSETS AND LIABILITIES at June 30, 2002 (Unaudited) ASSETS Investments in securities, at value (cost $8,047,020) $8,012,332 Cash 188 Receivables: From broker 2,725 Securities sold 180,155 Dividends and interest 5,000 Due from Advisor 1,026 Deferred organization costs 2,969 Prepaid expenses 1,844 ---------- Total assets 8,206,239 ---------- LIABILITIES Payables: Fund shares redeemed 677 Distribution fees 1,712 Administration fees 2,466 Accrued expenses 27,528 ---------- Total liabilities 32,383 ---------- NET ASSETS $8,173,856 ---------- ---------- NET ASSET VALUE AND REDEMPTION PRICE PER SHARE [$8,173,856 / 1,043,099 shares outstanding; unlimited number of shares (par value $.01) authorized] $7.84 ----- ----- OFFERING PRICE PER SHARE ($7.84 /.9550) $8.21 ----- ----- COMPONENTS OF NET ASSETS Paid-in capital $9,624,361 Accumulated net investment loss (467) Accumulated net realized loss on investments (1,418,075) Net unrealized (depreciation) / appreciation on: Investments (34,688) Futures 2,725 ---------- Net assets $8,173,856 ---------- ---------- See accompanying Notes to Financial Statements. STATEMENT OF OPERATIONS For the Six Months Ended June 30, 2002 (Unaudited) INVESTMENT INCOME Income Dividends $ 45,588 Interest 9,219 --------- Total income 54,807 --------- Expenses Advisory fees (Note 3) 36,966 Administration fees (Note 3) 14,876 Distribution fees (Note 4) 10,872 Professional fees 9,919 Fund accounting fees 8,431 Transfer agent fees 7,703 Reports to shareholders 4,199 Deferred organization expense 3,472 Trustee fees 2,429 Custody fees 1,984 Registration expense 1,256 Miscellaneous 992 Insurance expense 641 --------- Total expenses 103,740 Less: advisory fee waiver (Note 3) (38,506) --------- Net expenses 65,234 --------- NET INVESTMENT LOSS (10,427) --------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss on investments (209,464) Net change in unrealized depreciation on investments and financial futures (509,423) --------- Net realized and unrealized loss on investments (718,887) --------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(729,314) --------- --------- 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 (loss) / income $ (10,427) $ 10,085 Net realized loss on investments (209,464) (1,091,758) Net realized loss on financial futures -- (49,828) Net change in unrealized depreciation on investments and financial futures (509,423) (1,467,668) ---------- ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS (729,314) (2,599,169) ---------- ----------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- (6,094) Net realized gain on security transactions -- (83,629) ---------- ----------- TOTAL DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- (89,723) ---------- ----------- TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST Net decrease in net assets derived from net change in outstanding shares (a) (111,959) (802,029) ---------- ----------- TOTAL DECREASE IN NET ASSETS (841,273) (3,490,921) ---------- ----------- NET ASSETS Beginning of period 9,015,129 12,506,050 ---------- ----------- END OF PERIOD $8,173,856 $ 9,015,129 ---------- ----------- ---------- ----------- (a) A summary of share transactions is as follows: Six Months Ended Year June 30, 2002 Ended (Unaudited) December 31, 2001 -------------------- ---------------------- Shares Value Shares Value ------ ----- ------ ----- Shares sold 31,071 $ 258,361 78,087 $ 715,391 Shares issued in reinvestment of distributions -- -- 10,605 89,720 Shares redeemed (44,696) (370,320) (179,661) (1,607,140) ------- --------- -------- ----------- Net decrease (13,625) $(111,959) (90,969) $ (802,029) ------- --------- -------- ----------- ------- --------- -------- ----------- See accompanying Notes to Financial Statements. FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Dec. 3, Six Months Ended Year Ended December 31, 1997* June 30, 2002 ------------------------------------------------- through (Unaudited) 2001 2000 1999 1998 Dec. 31,1997 ----------- ---- ---- ---- ---- ------------ Net asset value, beginning of period $8.53 $10.90 $12.31 $11.84 $10.02 $10.00 ----- ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment (loss) / income (0.01) 0.01 0.01 0.01 0.05 0.01 Net realized and unrealized (loss) / gain on investments (0.68) (2.29) (0.74) 1.98 2.48 0.02 ----- ------ ------ ------ ------ ------ Total from investment operations (0.69) (2.28) (0.73) 1.99 2.53 0.03 ----- ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income -- (0.01) -- -- (0.05) (0.01) From net capital gains -- (0.08) (0.68) (1.52) (0.64) -- Tax return of capital -- -- -- -- (0.02) -- ----- ------ ------ ------ ------ ------ Total distributions -- (0.09) (0.68) (1.52) (0.71) (0.01) ----- ------ ------ ------ ------ ------ Net asset value, end of period $7.84 $8.53 $10.90 $12.31 $11.84 $10.02 ----- ------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ------ Total return (8.09%)** (20.95%) (5.99%) 17.11% 25.81% 0.22%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $8.2 $9.0 $12.5 $14.1 $14.7 $20.2 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before expense reimbursement 2.39%+ 2.31% 2.02% 1.99% 2.03% 1.52%+ After expense reimbursement 1.50%+ 1.50% 1.50% 1.50% 1.50% 1.39%+ RATIO OF NET INVESTMENT (LOSS) / INCOME TO AVERAGE NET ASSETS: After expense reimbursement (0.24%)+ 0.10% 0.05% 0.08% 0.36% 0.47%+ Portfolio turnover rate 23.77%** 79.48% 67.97% 101.86% 79.95% 2.48%**
* Commencement of operations. ** Not Annualized. + Annualized. See accompanying Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS at June 30, 2002 (Unaudited) NOTE 1 - ORGANIZATION The Avatar Advantage Equity Allocation 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 by investing in equity stocks. The Fund began operations on December 3, 1997. 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. Financial Futures Contracts: A financial futures contract is an agreement to purchase (long) or sell (short) an agreed amount of securities at a set price for delivery on a future date. Upon entering into a financial futures contract, a Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount. This amount is known as the "initial margin." Subsequent payments, known as "variation margin, "are made or received by a Fund each day, depending on the daily fluctuations in the value of the underlying security. Such variation margin is recorded for financial statement purposes on a daily basis as unrealized gain or loss. When the contract expires or is closed the gain or loss is realized and is presented in the statement of operations as net realized gain (loss) on the financial futures contracts. The portfolio invests in financial futures contracts in order to hedge existing portfolio securities, or securities the portfolio intends to purchase against fluctuations in value. Under a variety of circumstances, the portfolio may not achieve the anticipated benefits of the financials futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts and the underlying assets. C. 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. D. 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. E. Deferred Organization Costs: The Avatar Advantage Balanced Fund has incurred expenses of $35,000 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. F. 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 0.85% based upon the average daily net assets of the Fund. For the six months ended June 30, 2002, the Fund incurred $36,966 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 1.50% 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 $38,506; no amounts were reimbursed to the Advisor. Cumulative expenses subject to recapture pursuant to the aforementioned conditions amounted to $338,337 at June 30, 2002. Cumulative expenses subject to recapture expire as follows: Year Amount ---- ------ 2002 $ 2,080 2003 146,535 2004 151,216 2005 38,506 -------- $338,337 -------- -------- U.S. Bancorp Fund Services, L.L.C. (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, L.L.C. (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 - DISTRIBUTION The Avatar Advantage Equity Allocation Fund has adopted a Distribution Plan pursuant to Rule 12b-1 (the "Plan"). The Plan permits the Fund to pay for distribution and related expenses at an annual rate of up to 0.25% of the Fund's average daily net assets annually. The expenses covered by the Plan may include the cost of preparing and distributing prospectuses and other sales material, advertising and public relations expenses, payments to financial intermediaries and compensation of personnel involved in selling shares of the Fund. Payments made pursuant to the Plan will represent compensation for distribution and service activities, not reimbursements for specific expenses incurred. Pursuant to a distribution coordination agreement adopted under the Plan, distribution fees are paid to the Advisor as "Distribution Coordinator". For the six months ended June 30, 2002, The Avatar Advantage Equity Allocation Fund paid the Distribution Coordinator in the amount of $10,872. NOTE 5 - 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 $1,798,970 and $4,008,280 respectively. NOTE 6 - 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 $8,051,017 ---------- ---------- Gross tax unrealized appreciation $ 454,563 Gross tax unrealized depreciation (493,248) ---------- Net tax unrealized depreciation on investments $ (38,685) ---------- ---------- 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.