N-30D 1 taabf-a.txt THE AVATAR ADVANTAGE BALANCED FUND Annual Report For the Year Ended December 31, 2002 TABLE OF CONTENTS THE AVATAR ADVANTAGE BALANCED FUND Management's Discussion and Analysis Letter 3 Performance Graph 7 Schedule of Investments 8 Statement of Assets and Liabilities 11 Statement of Operations 12 Statements of Changes in Net Assets 13 Financial Highlights 14 Notes to Financial Statements 15 Report of Independent Accountants 19 Information about Trustees and Officers 20 February 7, 2003 Dear Shareholder, We wish to report 2002 year-end performance results for the Avatar Advantage Balanced Fund for the periods ending December 31, 2002. BALANCED FUND BENCHMARK PERIOD PERFORMANCE PERFORMANCE* ------ ----------- ---------------- Q1 2002 0.30 0.03 Q2 2002 -4.36 -6.53 Q3 2002 -5.93 -8.08 Q4 2002 0.98 5.74 One-year -8.87 -9.19 Three-year -7.81 -4.56 Since Inception (1/13/98) 1.53 3.21 * The fund's benchmark is 60% S&P 500 Index and 40% Lehman Government/Credit Bond Index 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. If the maximum sales charge (4.50%) was reflected, the Fund's returns for the 1-yr, 3-yr and since inception periods would have been -12.97%, -9.21%, and 0.60% respectively. Please see the prospectus for fees and expenses that do apply to a continued investment in the fund. The past 3 years have not been easy for many investors as markets have been volatile and difficult to navigate. Avatar's investment philosophy and asset allocation methodology have sought to participate in market gains during market upswings while protecting those gains against loss during market downturns. This approach has again been tested throughout this period of market instability. Losses in the fund amounted to 8.87% (excluding the sales charge), while the S&P 500 Index was down 22.11% and the NASDAQ Index declined 31.26% for the same period. The Fund's equity allocation during this period fluctuated in the range of 47% to 65% with the remainder in fixed income securities. 2002 - THE SECOND SIX MONTHS IN REVIEW: --------------------------------------- The third quarter of 2002 was marked by a broad market sell-off and one of the poorest performance periods since 1987. Both the Dow and the S&P 500 were down in excess of 17% for the period, and the NASDAQ Index was down over 19%. We entered the second half of the year with a defensive posture toward equities, as our research signaled a bearish market environment. Credit spreads continued to widen as distressed telecom securities and corporate governance woes weighed heavily on both stock and bond markets. Our Market Momentum research reflected generally poor market breadth, and Investor Liquidity readings suggested heightened skepticism toward the market. Our bond holdings largely emphasized credit quality with a duration slightly above the benchmark. Our defensive position proved to protect against some of the downside, as the market broke multi-year lows in July. Our equity indicators started to show signs of improvement in late July as the yield curve steepened amid speculation that the Fed might again cut interest rates. In conjunction, broad market advance/decline data, as well as momentum indicators, started to show signs of a recovery. As we continued to see improvement in our indicators, we steadily put money back to work in equities while lowering our bond allocations. We experienced a rally in the fourth quarter, largely led by distressed securities. Many top performing equities had previously declined 50% or more, and this change in "leadership," favoring the poorest performing stocks, was evident within many sectors. Numerous changes were made to the fund during this dynamic period, including raising exposure to both technology and telecom services. The telecom services sector was the highest performing group in the fourth quarter, rising approximately 38%. Although Avatar's holdings in this group kept pace with the sector's performance, our underweight position in this sector hindered performance for the three months. However, as telecom services under-performed the market earlier in the year, our underweight position in the sector did add value throughout the prior nine months. Select healthcare holdings also lagged market performance in the fourth quarter. Hospital stocks were strong performers through the first nine months of the year, and while Avatar took partial profits, prices came under pressure from concerns about earnings quality and growth sustainability. Broadly speaking, performance was interrupted by the market's rapid transformation in October. However, stock selection did add value for 2002 as a whole. 2003 - FIRST HALF MARKET OUTLOOK: --------------------------------- Entering 2003, we feel the portfolio is well diversified among large-cap stocks with an emphasis on quality and transparency. Holdings are generally positioned to benefit from continued economic growth throughout the year, concurrent with expected growth in corporate profits. Looking forward, the investment landscape will remain challenging and at times turbulent. After a strong start, equities gave back gains as most major stock indexes once again fell into negative territory. Bearish influences weighing on stocks include the threat of war and a lukewarm near-term outlook for many sectors of the economy. Indeed, the challenges here are numerous and mounting. The legacy of distrust continues as corporate losses, misstatements and misdeeds surface, supporting the argument that there was more of a systemic problem than only a "few rotten apples." If so, corporate governance will remain on the front burner as new issues are uncovered. As there may not be a quick fix for investor confidence, there is also concern that a major sector of the global economy, telecommunications, may not experience a "V" recovery. Our outlook is very similar to our views in the recent past, largely characterized by fundamental uncertainty and expected volatility. In the past, periods such as this have tended to last longer than many investors anticipate. Fortunately, we have probably passed the point where investors expect the bubble to magically re-inflate. Yet, consensus expectations for long-run returns and corporate profit growth may be inflated. Overall, there have been no significant changes to sector weights as we enter 2003. Groups that are over-weighted in portfolios include energy, technology, financials and electric utilities. Consumer staples, basic materials, and telecom services are roughly market-weighted. Finally, the consumer cyclical, healthcare, and capital goods sectors are under-weighted. Bond market fundamentals continue to suggest that the lows for rates have been seen. With a surplus of data that includes growing supply, a weak dollar and commodity price pressures, bond bears have grounds to make their case. The Fund is cautiously positioned to protect gains, while poised to participate in market advances. While 2003 may be challenging, Avatar Investors Associates Corp. continues to follow a time-tested investment discipline that has navigated through all types of market conditions for over thirty-two years. We believe the Fund continues to be diversified among leading securities that focus on quality and long-term fundamental value, and we believe that our balanced portfolio should serve our long-term investors well. Sincerely, /s/Charles White Charles White Vice-Chairman and Portfolio Manager Avatar Investors Associates Corp. The S&P 500, NASDAQ, and Dow Indices are unmanaged indices commonly used to measure the performance of U.S. stocks. The Lehman Brothers(R) Government Index is a composite made up of the Lehman Brothers Government and Credit bond indices that includes U.S. Government Treasury and Agency Securities as well as high grade corporate bonds. One cannot invest directly in an index. Sector allocations are subject to change at any time and are not recommendations to buy or sell any securities within a sector. THE AVATAR ADVANTAGE BALANCED FUND COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE AVATAR ADVANTAGE BALANCED FUND VERSUS THE S&P 500 INDEX (60%)/LEHMAN GOV'T/CREDIT INDEX (40%) The Avatar Advantage S&P 500 Index (60%)/ Date Balanced Fund Lehman Gov't/Credit (40%) ---- ------------- ------------------------- 1/13/98 $10,000 $10,000 3/31/98 $10,581 $10,950 6/30/98 $10,792 $11,282 9/30/98 $10,553 $10,832 12/31/98 $11,757 $12,221 3/31/99 $11,826 $12,528 6/30/99 $12,091 $13,003 9/30/99 $11,708 $12,544 12/31/99 $13,147 $13,643 3/31/00 $13,856 $13,977 6/30/00 $13,676 $13,836 9/30/00 $14,026 $13,915 12/31/00 $13,010 $13,504 3/31/01 $11,392 $12,717 6/30/01 $11,403 $13,179 9/30/01 $10,651 $12,269 12/31/01 $11,301 $13,058 3/31/02 $11,336 $13,056 6/30/02 $10,842 $12,202 9/30/02 $10,200 $11,215 12/31/02 $10,299 $11,859 Average Annual Total Return1 -------------------------------- 1 Year (12.97%) Since inception (1/13/98) 0.60% Past performance is no guarantee of future results. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions, or redemption of Fund shares. Share value will fluctuate, so that an investors shares, when redeemed, may be worth more or less than the original investment. Indices do not incur expenses and are not available for investment. 1 Average Annual Total Return represents the average change in account value over the periods indicated. The Blended Index consists of the S&P 500 Stock Index (60%) and the Lehman Corporate Bond Index (40%). The S&P 500 Stock Index is a broad market capitalization-weighted index of 500 stocks designed to represent the broad domestic economy. The Lehman Corporate Bond Index includes all publicly issued, fixed-rate, non-convertible investment grade domestic corporate debt issues and also includes Yankee Bonds. The Blended Index initial value is as of December 31, 1997. The percentage weights which have been applied to the indices are intended to replicate the long-term asset allocation of the Fund. SCHEDULE OF INVESTMENTS at December 31, 2002 SHARES MARKET VALUE ------ ------------ COMMON STOCKS: 55.10% AEROSPACE/DEFENSE: 0.45% 200 Lockheed Martin Corp. $ 11,550 ---------- AUTOMOTIVE - PARTS & EQUIPMENT: 0.52% 400 Lear Corp.* 13,312 ---------- BANKS: 4.33% 400 Bank of America Corp. 27,828 800 Bank One Corp. 29,240 600 Washington Mutual, Inc 20,718 700 Wells Fargo Co. 32,809 ---------- 110,595 ---------- BEVERAGES - ALCOHOLIC: 0.57% 300 Anheuser-Busch Companies, Inc. 14,520 ---------- CAPITAL GOODS: 0.93% 300 General Dynamics Corp. 23,811 ---------- CHEMICALS: 0.33% 200 Air Products & Chemicals, Inc. 8,550 ---------- CHEMICALS - SPECIALTY: 1.15% 1,100 Methanex Corp. 9,218 400 PPG Industries, Inc. 20,060 ---------- 29,278 ---------- COMMUNICATIONS: 0.32% 700 Nextel Communication Inc. - Class A* 8,085 ---------- COMPUTER SERVICES: 0.83% 400 Affiliated Computer Services, Inc. - Class A* 21,060 ---------- COMPUTER SOFTWARE: 2.02% 1,000 Microsoft Corp.* 51,700 ---------- CONSUMER CYCLICAL: 1.61% 400 Kohls Department Stores* 22,380 500 Lowes Companies, Inc. 18,750 ---------- 41,130 ---------- CONSUMER STAPLES: 2.99% 600 Coca-Cola Co 26,292 300 Colgate-Palmolive Co. 15,729 400 The Procter & Gamble Co. 34,376 ---------- 76,397 ---------- DIVERSIFIED FINANCIAL SERVICES: 0.55% 400 Citigroup, Inc. 14,076 ---------- DIVERSIFIED MANUFACTURING: 2.98% 1,400 General Electric Co. 34,090 400 Ingersoll-Rand Co. - Class A # 17,224 200 3M Co. 24,660 ---------- 75,974 ---------- DRUGS & PHARMACEUTICALS: 4.40% 600 Johnson & Johnson 32,226 400 Merck & Co. 22,644 1,150 Pfizer, Inc. 35,156 600 Wyeth 22,440 ---------- 112,466 ---------- ELECTRIC - INTEGRATED: 0.65% 300 Dominion Resources, Inc. 16,470 ---------- ELECTRIC POWER: 1.32% 1,000 Cinergy Corp. 33,720 ---------- ELECTRONIC COMPONENTS - SEMICONDUCTORS: 0.73% 1,200 Intel Corp. 18,684 ---------- ENERGY: 0.94% 600 EOG Resources, Inc. 23,952 ---------- ENTERTAINMENT SOFTWARE: 0.19% 100 Electronic Arts * 4,977 ---------- FINANCE - BANK: 1.37% 500 Commerce Bancorp Inc. 21,595 700 Hibernia Corp. 13,482 ---------- 35,077 ---------- FINANCE - INVESTMENTS BANKERS/BROKERS: 1.96% 500 The Bear Stearns Companies, Inc. 29,700 300 Goldman Sachs Group Inc. 20,430 ---------- 50,130 ---------- FINANCE - MORTGAGE LOANS: 0.76% 300 Fannie Mae 19,299 ---------- FOOD - MISC./DIVERSIFIED: 1.28% 1,000 ConAgra Foods, Inc. 25,010 500 Winn-Dixie Stores Inc. 7,640 ---------- 32,650 ---------- HEALTHCARE: 1.39% 300 Amgen, Inc.* 14,502 500 Pharmacia Corp. 20,900 ---------- 35,402 ---------- INSURANCE - BROKERS: 0.54% 300 Marsh & McLennan Companies, Inc. 13,863 ---------- INSURANCE - MULTILINE: 1.56% 519 American International Group, Inc. 30,024 300 Fidelity National Finl Inc. 9,849 ---------- 39,873 ---------- MACHINERY CONSTRUCTION: 0.36% 200 Caterpillar Inc 9,144 ---------- MANUFACTURERS - APPAREL: 0.42% 300 VF Corp. 10,815 ---------- MANUFACTURERS - PRINTING AND PUBLISHING: 0.95% 400 McGraw Hill Cos Inc. 24,176 ---------- MEDIA: 0.71% 400 Tribune Co. 18,184 ---------- MEDICAL - INSTRUMENTS: 0.54% 300 Medtronic, Inc. 13,680 ---------- MEDICAL - PRODUCTS: 0.55% 500 Baxter International Inc. 14,000 ---------- MOVIES & ENTERTAINMENT: 1.60% 523 Comcast Corp.* 12,327 700 Viacom Inc. - Class B* 28,532 ---------- 40,859 ---------- OIL - EXPLORATION & PRODUCTION: 1.05% 300 Conocophillips 14,517 400 Unocal Corp. 12,232 ---------- 26,749 ---------- OIL - OIL & GAS: 0.69% 500 Nabors Industries Ltd 17,635 ---------- OIL & GAS - MACHINERY & EQUIPMENT: 0.51% 400 Smith International, Inc.* 13,048 ---------- PAPER & PAPER PRODUCTS: 0.35% 200 Temple-Inland, Inc. 8,962 ---------- PETROLEUM PRODUCTS: 1.64% 1,200 Exxon Mobil Corp. 41,928 ---------- REINSURANCE: 0.77% 500 Renaissance RE Holdings Ltd. 19,800 ---------- RETAIL: 1.34% 300 Target Corp. 9,000 500 Wal-Mart Stores, Inc. 25,255 ---------- 34,255 ---------- SEMICONDUCTOR EQUIPMENT: 0.86% 600 Applied Materials, Inc.* 7,818 400 KLA-Tencor Corporation* 14,148 ---------- 21,966 ---------- TECHNOLOGY: 3.61% 900 Cisco Systems Inc.* 11,790 1,400 Dell Computer Corp.* 37,436 400 International Business Machines Corp. 31,000 800 Texas Instruments, Inc. 12,008 ---------- 92,234 ---------- TELEPHONE: 1.83% 500 AT&T Corp. 13,055 1,300 BellSouth Corp. 33,631 ---------- 46,686 ---------- TRANSPORTATION - FREIGHT: 0.65% 500 CNF Transportation, Inc. 16,620 ---------- TOTAL COMMON STOCKS (Cost $1,508,042) 1,407,342 ---------- PRINCIPAL AMOUNT MARKET VALUE --------- ------------ CORPORATE BONDS: 9.64% $ 75,000 Bank of New York, 5.20%, 07/01/2007 80,817 100,000 Viacom Inc., 5.625%, 05/01/2007 109,262 50,000 Wells Fargo & Company, 6.45%, 02/01/2011 56,219 ---------- TOTAL CORPORATE BONDS (Cost $227,266) 246,298 ---------- PRINCIPAL AMOUNT/SHARES MARKET VALUE ------------- ------------ U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS: 25.28% $200,000 Federal National Mortgage Associations, 5.75%, 04/29/2009 208,622 300,000 U.S. Treasury Bonds, 12.00%, 08/15/2003 436,934 ---------- TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $621,083) 645,556 ---------- SHORT-TERM INVESTMENTS: 9.37% MONEY MARKET INSTRUMENTS: 3.50% 89,261 Federated Cash Trust Treasury Money Market Fund (Cost $89,261) 89,261 ---------- U.S. TREASURY OBLIGATIONS: 5.87% $150,000 U.S. Treasury Bill, 07/18/2002 (Cost $149,915) 149,915 ---------- TOTAL SHORT-TERM INVESTMENTS (Cost $239,176) 239,176 ---------- Total Investments in Securities (Cost $2,595,566): 99.39% 2,538,372 Other Assets in Excess of Liabilities: 0.61% 15,573 ---------- Net Assets: 100.00% $2,553,945 ---------- ---------- * Non-income producing security. # U.S. security of foreign issuer. See Accompanying Notes to Financial Statements. STATEMENT OF ASSETS AND LIABILITIES at December 31, 2002 ASSETS Investments in securities, at value (cost $2,595,567) $2,538,372 Cash 46 Receivables: Investment securities sold 12,739 Dividends and interest 21,215 Due from advisor 6,265 Deferred organization expense 74 Prepaid expenses 1,608 ---------- Total assets 2,580,319 ---------- LIABILITIES Payables: Administration fees 2,548 Accrued expenses 23,826 ---------- Total liabilities 26,374 ---------- NET ASSETS $2,553,945 ---------- ---------- NET ASSET VALUE AND REDEMPTION* PRICE PER SHARE [$2,553,945 /289,241 shares outstanding; unlimited number of shares (par value $.01) authorized] $8.83 ----- ----- OFFERING PRICE PER SHARE ($8.83 / .9550) $9.25 ----- ----- COMPONENTS OF NET ASSETS Paid-in capital $2,930,605 Accumulated net realized loss on investments (319,465) Net unrealized depreciation on investments (57,195) ---------- Net assets $2,553,945 ---------- ---------- * 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 Year Ended December 31, 2002 INVESTMENT INCOME Income Dividends 18,250 Interest 52,025 --------- Total income 70,275 --------- Expenses Administration fees (Note 3) 30,000 Professional fees 20,803 Advisory fees (Note 3) 16,769 Fund accounting fees 14,101 Transfer agent fees 10,301 Trustee fees 5,498 Reports to shareholders 1,400 Amortization of organization expense 2,500 Custody fees 2,836 Insurance expense 938 Miscellaneous 1,778 Registration expense 1,310 --------- Total expenses 108,234 Less: advisory fee waiver and absorption (Note 3) (76,931) --------- Net expenses 31,303 --------- NET INVESTMENT INCOME 38,972 --------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss on investments (176,126) Net change in unrealized depreciation on investments (104,198) --------- Net realized and unrealized loss on investments (280,324) --------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(241,352) --------- --------- See Accompanying Notes to Financial Statements. STATEMENTS OF CHANGES IN NET ASSETS Year Ended Year Ended December 31, 2002 December 31, 2001 ----------------- ----------------- NET INCREASE/(DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income $ 38,972 $ 28,793 Net realized loss on investments (176,126) (128,815) Net unrealized depreciation on investments (104,198) (124,394) ---------- ---------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS (241,352) (224,416) ---------- ---------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income (38,992) (32,162) ---------- ---------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (38,992) (32,162) ---------- ---------- TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST Total increase in net assets derived from net change in outstanding shares (a) 1,351,137 32,363 ---------- ---------- TOTAL INCREASE/(DECREASE) IN NET ASSETS 1,070,793 (224,215) ---------- ---------- NET ASSETS Beginning of year 1,483,152 1,707,367 ---------- ---------- END OF YEAR $2,553,945 $1,483,152 ---------- ---------- ---------- ----------
(a) A summary of share transactions is as follows: Year Ended Year Ended December 31, 2002 December 31, 2001 ----------------- ----------------- Shares Value Shares Value ------ ----- ------ ----- Shares sold 134,041 $1,312,156 20 $ 200 Shares issued in reinvestment of distributions 4,426 38,991 3,292 32,163 Shares redeemed (1) (10) -- -- ------- ---------- ----- ------- Net increase 138,466 $1,351,137 3,312 $32,363 ------- ---------- ----- ------- ------- ---------- ----- ------- See Accompanying Notes to Financial Statements. FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR January 13, 1998 * through Year Ended December 31, December 31, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net asset value, beginning of period $ 9.84 $11.58 $12.41 $11.95 $10.00 ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.13 0.20 0.22 0.21 0.19 Net realized and unrealized (loss)/gain on investments (1.00) (1.72) (0.34) 1.17 2.11 ------ ------ ------ ------ ------ Total from investment operations (0.87) (1.52) (0.12) 1.38 2.30 ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income (0.14) (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 (0.14) (0.22) (0.71) (0.92) (0.35) ------ ------ ------ ------ ------ Net asset value, end of period $ 8.83 $ 9.84 $11.58 $12.41 $11.95 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total return (8.87%) (13.13%) (1.04%) 11.82% 23.11%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $2,554 $1,483 $1,707 $1,725 $1,543 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before expense reimbursement 4.84% 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 1.74% 1.90% 1.72% 1.73% 1.89%** Portfolio turnover rate 75.33% 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 December 31, 2002 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 generally accepted 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 on 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. Discounts and premiums on securities purchased and amortized over the life of the respective securities. The amount of dividends and distributions to shareholders from net investment income and net realized 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 generally accepted 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 year ended December 31, 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 year ended December 31, 2002, the Fund incurred $16,769 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 year ended December 31, 2002, the Advisor reduced its fees and absorbed Fund expenses in the amount of $76,931; no amounts were reimbursed to the Advisor. Cumulative expenses subject to recapture pursuant to the aforementioned conditions amounted to $434,813 at December 31, 2002. Cumulative expenses subject to recapture expire as follows: Year Amount ---- ------ 2003 $183,744 2004 174,138 2005 76,931 -------- $434,813 -------- -------- 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 and the Distributor. NOTE 4 - PURCHASES AND SALES OF SECURITIES For the year ended December 31, 2002, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, were $2,714,312 and $1,577,611 respectively. NOTE 5 - DISTRIBUTIONS TO SHAREHOLDERS-AST AVATAR ADVANTAGE BALANCED FUND Income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. The tax character of distributions paid during years ended December 31, 2002 and 2001 were as follows: 2002 2001 ---- ---- Ordinary income $38,992 $32,162 At December 31, 2002, the components of net assets (excluding paid in capital) on a tax basis were as follows: Tax basis capital loss carryforward $(265,888) Post October capital loss (48,086) --------- Accumulated capital loss (313,974) --------- --------- The Fund's capital loss carryforward expires as follows: Capital loss carryforward Expiring Amount ------ 2010 $ 122,549 2009 143,339 --------- $ 265,888 --------- --------- The Fund had elected to defer post-October losses and treat them as arising on January 1, 2003. Tax basis unrealized appreciation $ 79,119 Tax basis unrealized depreciation (141,805) --------- Net tax basis unrealized depreciation $ (62,686) --------- --------- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Trustees and Shareholders of The Avatar Advantage Balanced Fund In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Avatar Advantage Balanced Fund, a series of Advisor Series Trust, (the "Fund") at December 31, 2002, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the four years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian, provide a reasonable basis for our opinion. The financial highlights for the period from January 13, 1998 (commencement of operations) to December 31, 1998 were audited by other independent accountants whose report dated January 29, 1999 expressed an unqualified opinion on those financial highlights. PricewaterhouseCoopers LLP New York, New York February 21, 2003 INFORMATION ABOUT TRUSTEES AND OFFICERS The business and affairs of the Fund are managed under the direction of the Fund's Board of Trustees. Information pertaining to the Trustees and Officers of the Fund is set forth below. Unless noted otherwise, each person has held the position listed for a minimum of five years. The SAI includes additional information about the Fund's officers and trustees and is available, without charge, upon request by calling the advisor. INDEPENDENT TRUSTEES -------------------- # of Term of Funds in Other Position Office and complex Directorships Name, Age Held with Length of Principal Occupation overseen Held by and Address the Trust Time Served During Past Five Years by Trustee Trustee ----------- --------- ----------- ---------------------- ---------- ------------- Walter E. Auch Trustee Indefinite Management 16 Nicholas- (Born 1921) Term Consultant Applegate 2020 E. Financial Way Funds, Glendora, CA 91741 Since Salomon 1997 Smith Barney Funds, Bayan Strategic Realty Trust, Legend Properties, Pimco Advisors LLP, and Senele Group James Clayburn Trustee Indefinite Dean Emeritus, John E. 16 The Payden LaForce Term Anderson Graduate & Rygel (Born 1927) School of Management, Investment 2020 E. Financial Way Since University of California, Group, PIC Glendora, CA 91741 March 2002 Los Angeles Investment Trust, PIC Small Cap Portfolio, PIC Balanced Portfolio, PIC Growth Portfolio, PIC Mid Cap Portfolio, Provident Investment Counsel Institutional Money Market Fund, Black Rock Funds, Jacobs Engineering, Timken Co., Concervex Donald E. O'Connor Trustee Indefinite Financial Consultant; 16 The Parnassus (Born 1936) Term formerly Executive Fund 2020 E. Financial Way Vice President and The Parnassus Glendora, CA 91741 Since Chief Operating officer Income Fund 1997 of ICI Mutual Insurance The Forward Company (until January, Funds 1997); Vice President, Operations, Investment Company Institute (until July, 1993). George J. Rebhan Trustee Indefinite Retired; formerly 16 E*Trade (Born 1934) Term President, Hotchkis Funds 2020 E. Financial Way and Wiley Funds Glendora, CA 91741 Since (mutual funds) March 2002 from 1985 to 1993. George T. Wofford III Trustee Indefinite Senior Vice President, 16 Not (Born 1939) Term Information Services, Applicable 2020 E. Financial Way Federal Home Loan Glendora, CA 91741 Since Bank of San Francisco. 1997
INTERESTED TRUSTEES AND OFFICERS -------------------------------- # of Funds in Other Term of complex Directorships Position Office and overseen Held by Name, Age Held with Length of Principal Occupation by Trustee Trustee and Address the Trust Time Served During Past Five Years or Officer or Officer ----------- --------- ----------- ---------------------- ---------- ------------- Eric M. Banhazl Trustee & Indefinite Senior Vice President, 16 None (Born 1957) President Term U.S. Bancorp Fund 2020 E. Financial Way Services, LLC, the Glendora, CA 91741 Since Fund's administrator 1997 (since July, 2001); Treasurer, Investec Funds; formerly, Executive Vice President, Investment Company Administration, LLC (ICA) (The Fund's former administrator). John S. Wagner Treasurer Indefinite Assistant Vice 16 None (Born 1965) Term President Compliance 615 E. Michigan Street and Administration, Milwaukee, WI 53202 Since U.S. Bancorp Fund September Services, LLC since 2002 June 1999. Chad E. Fickett Secretary Indefinite Compliance 16 None (Born 1973) Term Administrator, U.S. 615 E. Michigan Street Bancorp Fund Services, Milwaukee, WI 53202 Since LLC since July 2000. March 2002
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 10036 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.