-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FUuR/avJcATfhDI2FxYXhXbN953EWviOTMPyPOXogVEP5WkiPgQ+M9ZBKHgAK9Dh G5oJEm8IfL4xipJMYwNxPg== 0000950147-00-000415.txt : 20000321 0000950147-00-000415.hdr.sgml : 20000321 ACCESSION NUMBER: 0000950147-00-000415 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVISORS SERIES TRUST CENTRAL INDEX KEY: 0001027596 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-07959 FILM NUMBER: 573554 BUSINESS ADDRESS: STREET 1: 2020 E FINANCIAL WAY SUITE 100 CITY: GLENDORA STATE: CA ZIP: 91741 BUSINESS PHONE: 8188521033 MAIL ADDRESS: STREET 1: 2020 E FINANCIAL WAY STREET 2: SUITE 100 CITY: GLENDORA STATE: CA ZIP: 91741 N-30D 1 ANNUAL REPORT FOR THE YEAR ENDED 12/31/99 THE AVATAR ADVANTAGE BALANCED FUND Annual Report For the year ended December 31, 1999 February 2000 Dear Shareholder, We are pleased to report on the progress of THE AVATAR ADVANTAGE BALANCED FUND for the year ended December 31, 1999. For the year, Avatar's asset allocation philosophy - participating in market gains during market upswings while protecting those gains against loss during market downturns - helped the Fund realize a total return of 11.82% (not including the sales charge). The fully invested S&P 500 Index returned 21.03% for the year while the Lehman Brothers Govt./Corp. Bond Index lost 2.15% for the same period. For the second half of the year, Avatar maintained a significant equity position. Our exposure ranged between 45% and 65% invested in equities, 30% to 40% in bonds and the remainder in cash. 1999 -- THE SECOND SIX MONTHS IN REVIEW For a year that began with a presidential impeachment trial, a war in Kosovo and political characters of all stripes jockeying to succeed Bill Clinton, the last half of the year was positively dull. The only questions that seemed to occupy the public were the extent of Y2K problems and which city would have the best millenium celebration. Even the question of Fed Chairman Alan Greenspan's reappointment was settled before year-end. The last half of the year saw the Fund begin with a cautious exposure to equities. This reflected the firm's moderately negative research, caused primarily by the rising interest rate environment witnessed in late summer. As the quarter progressed, however, rates eased somewhat and market momentum improved. Due to these and other positive factors shown by our models, we increased the Fund's allocation in equities in steps to a 65% position by mid-November. As a result, the Fund caught the strong year-end rally in stocks. The technology sector component of the S&P 500 increased an amazing 35% in the last quarter of 1999 alone. We took advantage of this strength by over-weighting that sector in the Fund. Exposure within technology was balanced across many of the faster growing areas including fiber optics, data storage, semiconductors and telecommunication equipment. Basic industries also performed well, helped by higher commodity prices and global GDP growth. The healthcare, consumer staples and utilities sectors were de-emphasized during this period, as was the energy sector. It was a completely different story on the bond side. While the stock market enjoyed its run-up, bond rates began to climb, too, reflecting concern that continued rapid growth in the economy would lead to a boost in interest rates by the Federal Reserve. Overall, 1999 turned out to be the worst year for bonds since 1994. 2 2000 MARKET OUTLOOK Corporate earnings for the last quarter appear to be poised to surpass analysts' expectations and will come in at the low double-digit range. The strong growth in corporate profits and the generally favorable positive flows of funds into the equity market have added impetus to a favorably developing economic backdrop. In a resounding manner, consumers have given a collective "thumbs up" to the U.S. economy. Holiday spending was well ahead of last year and consumer confidence surveys continue to reach upward. We expect, as a consequence, that prospective GDP growth will extend the current business cycle into the longest expansion in economic history. More importantly, this is all happening with only a modest up-tick in inflation and new signs of a slowdown in the housing sector. While long-term interest rates have marched higher with all of this good news, surprisingly it has not adversely impacted the stock market. If inflation fails to accelerate sharply in the months ahead, a good case can be made that potential negative scenarios have already been priced into the level of both long and short term interest rates, helping to restrain the Federal Reserve from instituting a harsh new round of monetary tightening. We continue to be concerned about the narrow stock market leadership. Broadening of the market would be a welcome and healthy development. We begin the new millenium in a neutral weight in our equity exposure. We expect continued volatility as the country's political forces share center stage with its economic forces to shape the coming year. Growth expectations for the remainder of the year have been revised upward. On the bond side, we believe that the surplus which will result in a reduction in the amount of sales by the Treasury will increase bond prices while lowering yields. This improvement, we believe, will have a positive impact on both the stock and bond markets. Our models show that the U.S. economy should continue to percolate at a good, sustainable level that will not set off inflation or recession fears. While the technology sector has emerged as the current market leader, we continue to hope for a broadening of the equity markets and a sense of normalcy in the bond markets. Our goal at Avatar is to evaluate current investment risk and alter the portfolio mix to reflect the current environment. We achieved this in the past year under very difficult circumstances. /s/ Charles White Charles White Portfolio Manager 3 THE AVATAR ADVANTAGE BALANCED FUND Comparison of the change in value of a $10,000 investment in The Avatar Advantage Balanced Fund versus the Blended 60% S&P 500 Stock Index / 40% Lehman Gov't Corporate Index. Blended 60% The Avatar S&P 500 Stock Index/ Advantage 40% Lehman Gov't Quarter Balanced Fund Corporate Index ------- ------------- --------------- 13-Jan-98 $10,000 $10,000 31-Mar-98 $11,080 $10,871 30-Jun-98 $11,300 $11,176 30-Sep-98 $11,050 $10,642 31-Dec-98 $12,311 $12,010 31-Mar-99 $12,383 $10,249 30-Jun-99 $12,661 $10,636 30-Sep-99 $12,259 $10,257 31-Dec-99 $13,146 $11,140 Average Annual Total Return(1) 1 year......................... 6.79% Since inception (1/13/98)...... 14.94% - ---------- (1) Average Annual Total Return represents the average change in account value over the periods indicated and includes sales charges. 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. Performance figures of the Fund and indexes referenced represent past performance and are not indicative of future performance of the Fund or the indexes. Share value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original investment. Indexes do not incur expenses and are not available for investment. The Fund is distributed by First Fund Distributors, Inc., Phoenix, AZ. Member NASD. 4 THE AVATAR ADVANTAGE BALANCED FUND SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999 - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 61.46% Market Value - -------------------------------------------------------------------------------- AEROSPACE/DEFENSE EQUIPMENT: 0.75% 200 United Technologies Corporation..................... $ 13,000 ----------- AUTOMOBILES: 0.62% 200 Ford Motor Company.................................. 10,688 ----------- BANKS: 1.74% 400 Citigroup Inc....................................... 22,225 100 The Chase Manhattan Bank............................ 7,769 ----------- 29,994 ----------- BANKS - REGIONAL: 1.07% 200 Northern Trust Corporation.......................... 10,600 200 UnionBanCal Corporation............................. 7,888 ----------- 18,488 ----------- BEVERAGE - ALCOHOL: 0.82% 200 Anheuser-Busch Companies, Inc....................... 14,175 ----------- BIOTECHNOLOGY: 0.98% 200 Biogen Inc. *....................................... 16,900 ----------- BROADCASTING - TELEVISION, RADIO: 0.37% 100 CBS Corporation *................................... 6,394 ----------- BUILDING MATERIALS CHAINS: 1.79% 450 The Home Depot, Inc................................. 30,853 ----------- CABLE TELEVISION: 0.44% 100 Cablevision Systems Corporation *................... 7,550 ----------- CHEMICALS: 0.76% 200 E. I. du Pont de Nemours and Company................ 13,175 ----------- COMPUTER - SOFTWARE: 3.08% 300 Microsoft Corporation *............................. 35,025 400 Xilinx, Inc. *..................................... 18,188 ----------- 53,213 ----------- See Notes to Financial Statements. 5 THE AVATAR ADVANTAGE BALANCED FUND SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- COMPUTER SERVICES: 2.77% 200 America Online, Inc. *.............................. $ 15,087 300 EMC Corporation *................................... 32,775 ----------- 47,862 ----------- COMPUTERS - HARDWARE: 2.41% 300 Dell Computer Corporation* ......................... 15,300 100 International Business Machines Corporation....................................... 10,800 200 Sun Microsystems, Inc.* ............................ 15,488 ----------- 41,588 ----------- COMPUTERS - PERIPHERALS: 0.52% 100 Lexmark International Group, Inc., Class A* ......................................... 9,050 ----------- COMPUTERS - SOFTWARE AND SERVICES: 0.49% 100 Electronic Arts Inc. *.............................. 8,400 ----------- COSMETICS AND TOILETRIES: 0.75% 200 Colgate-Palmolive Company........................... 13,000 ----------- DIVERSIFIED MANUFACTURING: 1.79% 200 General Electric Company............................ 30,950 ----------- ELECTRIC COMPANIES: 0.46% 300 Edison International................................ 7,856 ----------- ELECTRICAL EQUIPMENT: 1.00% 300 Honeywell International, Inc.* ..................... 17,306 ----------- ELECTRONIC COMPONENTS - SEMICONDUCTORS: 2.42% 200 Applied Materials, Inc.* ........................... 25,337 200 Intel Corporation .................................. 16,462 ----------- 41,799 ----------- ELECTRONICS: 3.74% 400 JDS Uniphase Corporation* .......................... 64,525 ----------- See Notes to Financial Statements. 6 THE AVATAR ADVANTAGE BALANCED FUND SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- ENTERTAINMENT: 0.84% 200 Time Warner, Inc.................................... $ 14,488 ----------- FINANCE - MORTGAGE LOANS: 1.09% 300 Fannie Mae.......................................... 18,731 ----------- FINANCIAL - DIVERSIFIED: 0.83% 100 Morgan Stanley Dean Witter & Co..................... 14,275 ----------- FINANCIAL SERVICES: 0.96% 100 American Express Company............................ 16,625 ----------- FOODS: 0.83% 400 General Mills, Inc. ................................ 14,300 ----------- HEALTHCARE - MEDICAL PRODUCTS: 0.42% 200 Medtronic, Inc...................................... 7,287 ----------- INSURANCE: 1.34% 213 American International Group, Inc................... 23,031 ----------- INSURANCE BROKERS: 0.56% 100 Marsh & McLennan Companies, Inc..................... 9,569 ----------- MANUFACTURING - DIVERSIFIED: 0.75% 100 Corning Incorporated................................ 12,894 ----------- MEDICAL - DRUGS: 2.54% 300 Bristol-Myers Squibb Company........................ 19,256 300 Warner-Lambert Company.............................. 24,581 ----------- 43,837 ----------- METALS - ALUMINUM: 0.96% 200 Alcoa Inc........................................... 16,600 ----------- NETWORKING PRODUCTS: 1.86% 300 Cisco Systems, Inc.* ............................... 32,137 ----------- See Notes to Financial Statements. 7 THE AVATAR ADVANTAGE BALANCED FUND SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- OIL - INTEGRATED: 0.65% 200 Schlumberger Limited................................ $ 11,250 ----------- OIL & GAS - DRILLING & EQUIPMENT: 0.08% 39 Transocean Sedco Forex, Inc.* ...................... 1,307 ----------- PAPER & FOREST PRODUCTS: 1.30% 300 Georgia-Pacific Corporation......................... 15,225 100 Weyerhaeuser Company................................ 7,181 ----------- 22,406 ----------- PETROLEUM-PRODUCING: 0.64% 300 Apache Corporation.................................. 11,081 ----------- PETROLEUM PRODUCTS: 2.13% 400 Enron Corp.......................................... 17,750 100 Exxon Mobil Corporation ............................ 8,056 200 Texaco Inc.......................................... 10,863 ----------- 36,669 ----------- RETAIL - COMPUTERS & ELECTRONICS: 0.57% 200 Tandy Corporation................................... 9,837 ----------- RETAIL - DEPARTMENT STORES: 0.43% 100 Dayton Hudson Corporation........................... 7,344 ----------- RETAIL - GENERAL MERCHANDISE: 0.53% 100 Costco Companies, Inc.* ............................ 9,125 ----------- RETAIL - SPECIALTY: 0.17% 100 Linens `n Things, Inc.* ............................ 2,962 ----------- SERVICES - ADVERTISING / MARKETING: 1.16% 200 Omnicom Group Inc. ................................. 20,000 ----------- See Notes to Financial Statements. 8 THE AVATAR ADVANTAGE BALANCED FUND SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- TELECOMMUNICATIONS EQUIPMENT: 8.00% 365 Lucent Technologies Inc............................. $ 27,307 100 Nokia Corporation, ADR, Class A..................... 19,000 100 Nortel Networks Corporation......................... 10,100 400 QUALCOMM Incorporated* ............................. 70,500 200 Scientific-Atlanta, Inc............................. 11,125 ----------- 138,032 ----------- TELECOMMUNICATIONS SERVICES: 1.10% 200 GTE Corporation..................................... 14,113 100 Metromedia Fiber Network, Inc.* .................... 4,794 ----------- 18,907 ----------- TELEPHONE SERVICES: 2.01% 400 BellSouth Corporation............................... 18,725 300 MCI WorldCom Incorporated* ......................... 15,919 ----------- 34,644 ----------- TRANSPORTATION - RAIL: 0.51% 200 Union Pacific Corporation* ......................... 8,725 ----------- UTILITIES: 0.43% 100 The AES Corporation* ............................... 7,475 ----------- Total Common Stocks (cost $741,506)................................... 1,060,304 ----------- Principal Amount FEDERAL AGENCY OBLIGATIONS: 18.91% - -------------------------------------------------------------------------------- $225,000 Federal Home Loan Mortgage Corporation, 5.75%, 7/15/2003.................................. 217,865 50,000 Freddie Mac Discount Note, 5.35%, 1/13/2000......................................... 49,911 60,000 Fannie Mae, 6.09%, 8/13/2003 ....................... 58,448 ----------- Total Federal Agency Obligations (cost $335,491)................................... 326,224 ----------- Principal Amount U.S. GOVERNMENT OBLIGATIONS: 17.80% - -------------------------------------------------------------------------------- 230,000 U.S. Treasury Bond, 12.00%, 8/15/2013 (cost $335,032)................................... 307,050 ----------- See Notes to Financial Statements. 9 THE AVATAR ADVANTAGE BALANCED FUND SCHEDULE OF INVESTMENTS AT DECEMBER 31, 1999, CONTINUED - -------------------------------------------------------------------------------- Principal Amount SHORT-TERM INVESTMENTS: 1.86% Market Value - -------------------------------------------------------------------------------- $32,077 Firstar Stellar Treasury Fund (cost $32,077)................................. $ 32,077 ----------- Total Investments in Securities (cost $1,444,106+): 100.03%.................... 1,725,655 Liabilities in excess of Other Assets: (0.03)%.......................... (514) ----------- TOTAL NET ASSETS: 100.00% ....................... $ 1,725,141 =========== * Non-income producing securities. + At December 31, 1999, the cost of securities for Federal tax purposes is $1,444,620. Gross unrealized appreciation and depreciation of securities is as follows: Gross unrealized appreciation.................... $ 339,112 Gross unrealized depreciation.................... (58,077) ----------- Net unrealized appreciation...................... $ 281,035 =========== See Notes to Financial Statements. 10 THE AVATAR ADVANTAGE BALANCED FUND STATEMENT OF ASSETS AND LIABILITIES AT DECEMBER 31, 1999 - -------------------------------------------------------------------------------- ASSETS Investments in securities, at value (identified cost $1,444,106) ............................. $ 1,725,655 Receivables: Due from Advisor (Note 3) ............................... 5,717 Dividends and interest .................................. 18,397 Deferred organization costs ................................ 7,582 Prepaid expenses ........................................... 596 ----------- Total assets ......................................... 1,757,947 ----------- LIABILITIES Payables: Distribution fees (Note 4) .............................. 347 Accrued expenses ........................................... 32,459 ----------- Total liabilities .................................... 32,806 ----------- NET ASSETS .................................................... $ 1,725,141 =========== NET ASSET VALUE AND REDEMPTION* PRICE PER SHARE ($1,725,141 / 139,046 shares outstanding; unlimited number of shares (par value $.01) authorized) .............. $ 12.41 =========== OFFERING PRICE PER SHARE ($12.41/.9550) ....................... $ 12.99 =========== COMPONENTS OF NET ASSETS Paid-in capital ............................................ $ 1,449,194 Distributions in excess of net realized gains .............. (5,602) Net unrealized appreciation on investments ................. 281,549 ----------- Net assets .............................................. $ 1,725,141 =========== * Redemption of shares held less than 1 year are subject to a 1% redemption fee payable to the Fund. See Notes to Financial Statements. 11 THE AVATAR ADVANTAGE BALANCED FUND STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 - -------------------------------------------------------------------------------- INVESTMENT INCOME Income Dividends ................................................ $ 8,578 Interest ................................................. 40,515 --------- Total income .......................................... 49,093 --------- Expenses Administration fees (Note 3) ............................. 30,000 Audit fees ............................................... 19,600 Fund Accounting fees ..................................... 16,002 Transfer agent fees ...................................... 13,001 Advisory fees (Note 3) ................................... 11,764 Legal fees ............................................... 6,600 Custody fees ............................................. 5,531 Distribution fees (Note 4) ............................... 3,921 Trustees' fees ........................................... 2,835 Amortization of deferred organization costs .............. 2,500 Insurance ................................................ 941 Registration fees ........................................ 876 Miscellaneous ............................................ 863 --------- Total expenses ........................................ 114,434 Less: Advisory fee waiver and absorption (Note 3) ................................. (92,474) --------- Net expenses .......................................... 21,960 --------- NET INVESTMENT INCOME .............................. 27,133 --------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain from security transactions ................ 81,571 Net change in unrealized appreciation on investments ........ 73,561 --------- Net realized and unrealized gain on investments .......... 155,132 --------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................. $ 182,265 ========= See Notes to Financial Statements. 12 THE AVATAR ADVANTAGE BALANCED FUND STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- Year Ended January 13, 1998* December 31, through 1999 December 31, 1998 ------------ ----------------- NET INCREASE/(DECREASE) IN ASSETS FROM OPERATIONS Net investment income ................... $ 27,133 $ 23,957 Net realized gain from security transactions ........................... 81,571 23,650 Net change in unrealized appreciation on investments ............ 73,561 207,988 ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................ 182,265 255,595 ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income ................... (27,583) (23,503) Net realized gain on security transactions ........................... (86,640) (19,605) In excess of net realized gains ......... (5,602) -- ----------- ----------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS ..... (119,825) (43,108) ----------- ----------- CAPITAL SHARE TRANSACTIONS Net increase in net assets derived from net change in outstanding shares (a) ............................. 119,793 1,330,421 ----------- ----------- TOTAL INCREASE IN NET ASSETS ............ 182,233 1,542,908 ----------- ----------- NET ASSETS Beginning of period ........................ 1,542,908 -- ----------- ----------- END OF PERIOD (including undistributed net investment income of $0 and $454, respectively) ............................. $ 1,725,141 $ 1,542,908 =========== =========== (a) A summary of capital shares transactions is as follows: Year January 13, 1998* Ended through December 31, 1999 December 31, 1998 ---------------------- ----------------------- Shares Value Shares Value ------ ----- ------ ----- Shares sold ................. 167 $ 2,000 125,350 $1,287,313 Shares issued in reinvestment of distributions .......... 9,911 119,825 3,785 43,108 Shares redeemed ............. (167) (2,032) -- -- ------ --------- ------- ---------- Net increase ................ 9,911 $ 119,793 129,135 $1,330,421 ====== ========= ======= ========== * Commencement of operations. See Notes to Financial Statements. 13 THE AVATAR ADVANTAGE BALANCED FUND FINANCIAL HIGHLIGHTS - FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD - -------------------------------------------------------------------------------- Year Ended January 13, 1998* December 31, through 1999 December 31, 1998 ------------ ----------------- Net asset value, beginning of period.......... $11.95 $10.00 ------ ------ Income from investment operations: Net investment income...................... 0.21 0.19 Net realized and unrealized gain on investments............................. 1.17 2.11 ------ ------ Total from investment operations.............. 1.38 2.30 ------ ------ Less distributions: From net investment income................. (0.21) (0.19) From net realized gains.................... (0.67) (0.16) In excess of net realized gains............ (0.04) - ------ ------ Total distributions........................... (0.92) (0.35) ------ ------ Net asset value, end of period................ $12.41 $11.95 ====== ====== Total return.................................. 11.82% 23.11%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands)......... $1,725 $1,543 Ratio of expenses to average net assets: Before expense reimbursement............... 7.28% 8.59%+ After expense reimbursement................ 1.40% 1.40%+ Ratio of net investment income to average net assets: After expense reimbursement................ 1.73% 1.89%+ Portfolio turnover rate....................... 101.53% 95.00% * Commencement of operations. ** Not Annualized. + Annualized. See Notes to Financial Statements. 14 THE AVATAR ADVANTAGE BALANCED FUND NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1999 - -------------------------------------------------------------------------------- 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 began operations on January 13, 1998. The Fund's 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 securities. 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. 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. Dividend income and distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. 15 THE AVATAR ADVANTAGE BALANCED FUND NOTES TO FINANCIAL STATEMENTS, CONTINUED - -------------------------------------------------------------------------------- Distributions which exceed net realized gains for financial reporting purposes but not for tax purposes are reported as distributions in excess of net realized gains and are primarily due to differing treatments for wash sales and losses realized subsequent to October 31 on sale of securities. Realized gains and losses on securities sold are determined on the basis of identified cost. Discounts and premiums on securities purchased are amortized over the life of the respective securities. D. DEFERRED ORGANIZATION COSTS: The Fund has incurred expenses of $12,500 in connection with its organization. These costs have been deferred and are being amortized on a straight-line basis over a period of sixty months from the date the Fund commenced investment operations. E. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles 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 period ended December 31, 1999, 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, 1999, the Fund incurred $11,764 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 reductions 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 16 THE AVATAR ADVANTAGE BALANCED FUND NOTES TO FINANCIAL STATEMENTS, CONTINUED - -------------------------------------------------------------------------------- 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 year ended December 31, 1999, the Advisor reduced its fees and absorbed Fund expenses in the amount of $92,474 which includes fees due to the Advisor as Distribution Coordinator; no amounts were reimbursed to the Advisor. Cumulative expenses subject to recapture pursuant to the aforementioned conditions amounted to $183,774 for the Fund at December 31, 1999. Investment Company Administration, 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 First Fund Distributors, Inc. (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 and/or directors of the Administrator and the Distributor. NOTE 4 - DISTRIBUTION COSTS The 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 17 THE AVATAR ADVANTAGE BALANCED FUND NOTES TO FINANCIAL STATEMENTS, CONTINUED - -------------------------------------------------------------------------------- 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". During the year ended December 31, 1999, the Fund paid the Distribution Coordinator in the amount of $3,921. NOTE 5 - PURCHASES AND SALES OF SECURITIES For the year ended December 31, 1999, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, were $1,444,162 and $1,460,060, respectively. 18 INDEPENDENT AUDITOR'S REPORT - -------------------------------------------------------------------------------- TO THE BOARD OF TRUSTEES AND SHAREHOLDERS 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, series of Advisors Series Trust (the "Fund") at December 31, 1999, and the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States. 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 audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States 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 audit, which included confirmation of securities at December 31, 1999 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. The financial statements for the period from January 13, 1998 (commencement of operations) to December 31, 1998, including the financial highlights for the period then ended, were audited by other independent accountants whose report dated January 29, 1999 expressed an unqualified opinion on those financial statements. PricewaterhouseCoopers LLP New York, New York February 4, 2000 19 CHANGE IN INDEPENDENT ACCOUNTANT - -------------------------------------------------------------------------------- On August 27, 1999, McGladrey & Pullen, LLP ("McGladrey") resigned as independent auditors of the Fund pursuant to an agreement by PricewaterhouseCoopers LLP ("PwC") to acquire McGladrey's investment company practice. The McGladrey partners and professionals serving the Fund at the time of the acquisition joined PwC. The reports of McGladrey on the financial statements of the Fund during the prior fiscal year contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainly, audit scope or accounting principles. In connection with its audit for the period from January 13, 1998 (commencement of operations) through December 31, 1998 and through August 27, 1999, there were no disagreements with McGladrey on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of McGladrey would have caused it to make reference to the subject matter of disagreement in connection with its report. On September 10, 1999, the Fund, with the approval of its Board of Trustees and its Audit Committee, engaged PwC as its independent auditors. 20 ADVISOR Avatar Investors Associates Corp. 900 Third Avenue New York, New York 10022 DISTRIBUTOR First Fund Distributors, Inc. 4455 E. Camelback Road, Suite 261-E Phoenix, Arizona 85018 CUSTODIAN Firstar Bank, N.A. 425 Walnut Street, M/L 6118 Cincinnati, Ohio 45202 TRANSFER AGENT American Data Services, Inc. 150 Motor Parkway, Suite 109 Hauppauge, New York 11788 888-263-6452 LEGAL COUNSEL Paul, Hastings, Janofsky & Walker LLP 345 California Street, 29th Floor San Francisco, California 94104 AUDITORS 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. -----END PRIVACY-ENHANCED MESSAGE-----