-----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, J4DUoElmR/jKkQu4/+hfZlaSbOlr+V/g4s7Tluk9kKrcR9mtII7dP2cjId7AiaZd yKS1qH+rIo19bWOunek6Ww== 0000950147-01-501558.txt : 20010903 0000950147-01-501558.hdr.sgml : 20010903 ACCESSION NUMBER: 0000950147-01-501558 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010831 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: 1940 Act SEC FILE NUMBER: 811-07959 FILM NUMBER: 1729024 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 e-7425.txt SEMI-ANNUAL REPORT FOR PERIOD ENDED 6-30-01 THE AVATAR ADVANTAGE BALANCED FUND - -------------------------------------------------------------------------------- Semi-Annual Report - -------------------------------------------------------------------------------- For the Six Months Ended June 30, 2001 TABLE OF CONTENTS THE AVATAR ADVANTAGE BALANCED FUND Management's Discussion and Analysis Letter ...................... 3 Investment Portfolio ............................................. 6 Statement of Assets and Liabilities .............................. 9 Statement of Operations .......................................... 10 Statements of Changes in Net Assets .............................. 11 Financial Highlights ............................................. 12 Notes to Financial Statements .................................... 13 THE AVATAR ADVANTAGE BALANCED FUND August 2001 Dear Shareholder, We wish to report on the results of the AVATAR ADVANTAGE BALANCED FUND for the six months ended June 30, 2001. For this most challenging of periods, Avatar's asset allocation philosophy- participating in market gains during rising markets while protecting capital during declining markets- was severely tested as losses in the Fund amounted to (12.35%) (not including the sales charge). The fully invested S&P 500 Index was down (6.68%) for the same period while the NASDAQ declined (12.24%). Lehman Brothers Corporate/Government Bond Index was up 3.51% for the period. For the first half of the year, the Fund maintained a fluctuating equity position. Its exposure ranged between 45% and 60% invested in equities, 35% to 40% in bonds and the remainder in cash. 2001-- THE FIRST SIX MONTHS IN REVIEW The period began with so much promise for equities as the Federal Reserve instituted an intra-meeting cut in interest rates on January 3 and followed through with 5 more rate cuts through June; however, the end result was deeply disappointing. The difficult market conditions that characterized the last quarter of 2000 continued into the first quarter of 2001. January's initial rate cut gave only a temporary boost to the equity markets, which then finished down for that week. Over the next few weeks, both the S&P and the NASDAQ recorded gains. A second rate cut in January lifted the S&P but had little affect on the NASDAQ, further confounding market professionals. We reduced our holdings in technology during this period while our bets on energy, healthcare and utilities did well, as well as our decision to increase the Fund's fixed income position when the equity markets began to decline in late January. By mid-February, the markets were back to where they began in January, wiping out not only the gains but also the high hopes investors held. March saw additional fallbacks in the equity markets and we increased our fixed income and cash positions to cushion the fall in equity prices. The first quarter ended in negative territory for most of the equity indices. The reasons were readily apparent-the economy slowed, energy prices rose and capital spending for all intents and purposes came to a halt. The only good news during this period was the continued absence of any inflationary pressures. This helped to propel the bond market ahead of equities and in the process, value stocks replaced growth issues as the place to be. The second quarter, led by healthy returns in the month of April, saw the various indices advance and the hope for a continued market rally was quite high. We all expected the rate cuts to have a lasting positive effect on the markets but as the quarter continued, dire earnings forecasts and the continued slowdown in corporate spending spelled disaster for the equity markets. May and June saw continued erosion of the gains made in April, and although the equity indices finished in positive territory for the complete second quarter and surpassed gains in the bond market, it was not enough to pull them out of negative territory for the six month period. THE AVATAR ADVANTAGE BALANCED FUND Fixed income investors had a reason to smile as the bond market outperformed equities finishing in positive territory in both the first and second quarters. Yields fell as prices increased. The decline in rates reflected both the expectation of further interest rate cuts and the third straight year of government surpluses (though not as high as initially expected). Economic weakness helped to calm whatever inflation fears there were and allowed the Fed to maintain its focus on resisting recession. The Fund's focus on longer maturity Treasury issues where supply/ demand fundamentals were favorable paid off during the period. The normalization of the yield curve also boosted performance in this area. Overall the fixed income side helped limit the losses found on the equity side, particularly in the first quarter, giving additional validation to our "balanced" approach. 2001--SECOND HALF MARKET OUTLOOK Historically, forecasting of the future has been achieved by extrapolating current trends. This has not worked in the current cycle, due to the abundance of twists and turns experienced by the markets. For example, just as there are growing signs that the American economy will avoid a recession-e.g., continued strength of consumer spending and the strong housing market-unmistakable distress signals are beginning to be heard from other quarters-e.g., rising unemployment, eye-popping number of layoffs and a general downturn in European and Asian economies. A major unanswered question hangs in the balanced: As layoffs increase, will consumers finally pull back, halt spending to shore up savings and thereby plunge the economy into the recession it has so deftly avoided to date? Our research suggests that much of the current economic distress has already been factored into stock prices, but that still has not stopped their overall downward spiral. Liquidity has increased as the Fed eased aggressively. Flows of funds into investment vehicles have been consistent. More importantly, the stock market appears to be spreading the leadership roles to include value and mid-cap issues, not just a handful of large cap stocks, as was the case in 1999. As the economy weakens, another concern is whether corporate profits will fall so dramatically that the normal bullish elixir of aggressive Fed easing will be dissipated. Overall, the equity market has bent but has not been broken. If the economy survives the new weakness from abroad as well as the bad news of increased unemployment and profit reductions then history may well call what we are experiencing a "rally recession". We have experienced other "recessions" before; namely, the downturn in the "rustbelt" in the early 80s, the collapse of the "oil patch" in the mid 80s, the crumpling of real estate in the late 80s, and the restructuring of the defense and financial industries in the 1990s. The current debacle in the technology sector may, if we are lucky, be one more example of the resilience of the American economy, assuming a strong performance by other sectors of the economy that could lift the markets to new heights. For the bond market, the surplus, though smaller than anticipated, will still enable the administration to continue the practice of repurchasing long-dated 4 THE AVATAR ADVANTAGE BALANCED FUND treasury obligations, resulting in lower yields and higher prices over the long term. Lower inflation, a normal yield curve and an accommodating Fed will lead to attractive investment opportunities not only in the equity markets but in the bond markets as well. A continuing issue for the Fed is that the economy has yet to show the typical reaction to interest rate cuts. We expect to see more analysis of this issue in the months ahead. Avatar's investment process evaluates current investment risk and alters the portfolio's asset mix to reflect the current investment environment, whether favorable or not. We continuously evaluate our portfolio holdings versus their peer group and the market to ensure each stock is fundamentally sound and to determine if portfolio revisions are required. The first six months of 2001 marked the end of a trailing one-year period that featured the largest swings in historical performance factors in market history. Further more, the past 2 years of market performance has impacted investors' ability to evaluate near term performance in a sensible context due to a series of `once in a lifetime' market events. We continue to follow our investment discipline that has navigated us through all types of market conditions for over 31 years. In the near term, we have not been as successful in this endeavor as in the past, as the market's lukewarm reaction to Fed action and the technology sector's impact on an already uncertain market has provided a challenging investment environment. We have adjusted the portfolio's industry sector weightings on the equity side to reflect these uncertain times and feel the portfolio is well positioned as we enter the second half of the year. /s/ Charles White Charles White Portfolio Manager President - Avatar Investors Associates Corporation The Fund's average annual total return for the period from inception on January 13, 1998 through June 30, 2001 was 5.25%. If the maximum sales charge were reflected, the Fund's return for the same period would have been 3.86%. The NASDAQ Stock Market is the largest electronic, screen-based market in the world with over 5,100 companies listed. 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 Government Bond Index is composed of the Treasury Bond Index and the Agency Bond Index. Indexes do not incur expenses and are not available for direct investment. The Fund is distributed by First Fund Distributors Inc., Phoenix, AZ. 5 THE AVATAR ADVANTAGE BALANCED FUND SCHEDULE OF INVESTMENTS at June 30, 2001 (Unaudited) - -------------------------------------------------------------------------------- SHARES VALUE - -------------------------------------------------------------------------------- COMMON STOCKS: 57.39% AUTOMOBILES: 0.49% 300 Ford Motor Co. $ 7,365 -------- BANKS: 2.32% 200 The Bank of New York Company, Inc. 9,600 300 Washington Mutual, Inc 11,265 300 Wells Fargo & Co. 13,929 -------- 34,794 -------- BEVERAGES - ALCOHOLIC: 0.83% 300 Anheuser-Busch Companies, Inc. 12,360 -------- CHEMICALS: 1.74% 300 Air Products and Chemicals, Inc. 13,725 200 Millipore Corp. 12,396 -------- 26,121 -------- CHEMICALS - SPECIALTY: 1.05% 300 PPG Industries, Inc. 15,771 -------- COMPUTER HARDWARE: 0.69% 200 Celestica, Inc.* 10,300 -------- COMPUTER SOFTWARE: 0.48% 100 Microsoft Corp.* 7,260 -------- COMPUTERS - MICRO: 0.94% 900 Sun Microsystems, Inc.* 14,148 -------- COMPUTERS - PERIPHERALS: 0.78% 400 EMC Corp. 11,620 -------- CONSUMER FINANCE: 2.38% 300 AmeriCredit Corp.* 15,585 300 Household International, Inc. 20,010 -------- 35,595 -------- CONSUMER STAPLES: 1.18% 300 Colgate-Palmolive Co. 17,697 -------- DIVERSIFIED FINANCIAL SERVICES: 1.29% 366 Citigroup, Inc. 19,339 -------- DIVERSIFIED MANUFACTURING: 2.77% 400 General Electric Co. 19,500 300 Honeywell International, Inc. 10,497 100 Minnesota Mining and Manufacturing Co. 11,410 -------- 41,407 -------- DRUGS & PHARMACEUTICALS: 3.16% 200 Johnson & Johnson 10,000 750 Pfizer, Inc. 30,038 200 Schering-Plough Corp. 7,248 -------- 47,286 -------- ELECTRIC - INTEGRATED: 1.20% 300 Dominion Resources, Inc. 18,039 -------- ELECTRIC POWER: 1.40% 600 Cinergy Corp. 20,970 -------- ELECTRIC UTILITIES: 0.64% 200 TXU Corp. 9,638 -------- ELECTRONIC COMPONENTS - SEMICONDUCTORS: 2.11% 800 Intel Corp. 23,400 200 Xilinx, Inc.* 8,248 -------- 31,648 -------- FINANCE - INVESTMENTS BANKERS/BROKERS: 0.79% 200 Merrill Lynch & Co., Inc. 11,850 -------- FINANCE - MORTGAGE LOANS: 1.14% 200 Fannie Mae 17,030 -------- FINANCIAL GUARANTEE INSURANCE: 0.96% 200 The PMI Group, Inc. 14,332 -------- FOOD - RETAIL: 0.67% 400 The Kroger Co.* 10,000 -------- FOOD - WHOLESALE: 1.27% 700 SYSCO Corp. 19,005 -------- HEALTHCARE: 1.38% 400 Tenet Healthcare Corp.* 20,636 -------- HEALTHCARE - DRUGS: 1.05% 300 Bristol-Myers Squibb Co. 15,690 -------- 6 THE AVATAR ADVANTAGE BALANCED FUND SCHEDULE OF INVESTMENTS at June 30, 2001 (Unaudited) - -------------------------------------------------------------------------------- SHARES VALUE - -------------------------------------------------------------------------------- INSURANCE - BROKERS: 0.67% 100 Marsh & McLennan Companies, Inc. $ 10,100 --------- INSURANCE - MULTILINE: 1.26% 219 American International Group, Inc. 18,834 --------- MACHINERY CONST/FARM: 0.51% 100 Cummins Engine Company, Inc. 3,870 100 Deere & Co. 3,785 --------- 7,655 --------- MARINE: 0.80% 300 Teekay Shipping Corp. 12,006 --------- MEDIA: 0.71% 200 AOL Time Warner, Inc.* 10,600 --------- MEDICAL - BIOMEDICAL GENETICS: 1.31 400 Baxter International, Inc. 19,600 --------- MOVIES & ENTERTAINMENT: 0.69% 200 Viacom Inc., Class B* 10,350 --------- OIL - EXPLORATION & PRODUCTION: 1.41% 200 Devon Energy Corp. 10,500 300 EOG Resources 10,665 --------- 21,165 --------- OIL & GAS - DRILLING: 0.50% 200 Nabors Industries, Inc.* 7,440 --------- PAPER & PAPER PRODUCTS: 1.98% 400 Georgia-Pacific Corp. 13,540 300 Temple-Inland, Inc. 15,987 --------- 29,527 --------- PETROLEUM PRODUCTS: 1.75% 300 Exxon Mobil Corp. 26,205 --------- PHARMACEUTICALS: 1.17% 300 American Home Products Corp. 17,532 --------- REINSURANCE: 0.50% 100 Everest Re Group, Ltd. 7,480 --------- RETAIL 2.55% 400 Target Corp. 13,840 500 Wal-Mart Stores, Inc. 24,400 --------- 38,240 --------- RETAIL PRODUCTS: - BUILDING 0.78% 250 The Home Depot, Inc. 11,638 --------- RETAIL-APPAREL: 1.12% 200 AnnTaylor, Inc.* 7,160 300 The TJX Companies, Inc. 9,561 --------- 16,721 --------- SEMICONDUCTOR EQUIPMENT: 2.19% 300 Applied Materials, Inc. 14,730 200 Novellus Systems, Inc.* 11,358 200 Teradyne, Inc.* 6,620 --------- 32,708 --------- SPECIALTY STORES: 0.60% 300 Bed Bath & Beyond, Inc.* 9,000 --------- SYSTEMS SOFTWARE: 1.02% 800 Oracle Corp. 15,200 --------- TELECOMMUNICATIONS - EQUIPMENT: 1.60% 200 QUALCOMM, Inc.* 11,696 300 Scientific-Atlanta Inc. 12,180 --------- 23,876 --------- TELEPHONE: 0.81% 300 BellSouth Corp. 12,081 --------- TRUCKING: 0.75% 400 CNF Transportation, Inc. 11,300 --------- TOTAL COMMON STOCKS (Cost $811,228)+ 859,158 --------- PRINCIPAL AMOUNT - -------------------------------------------------------------------------------- CORPORATE BONDS: 3.29% $ 50,000 Wells Fargo & Company, 6.45%, 02/01/2011 (Cost $50,209) 49,256 --------- 7 THE AVATAR ADVANTAGE BALANCED FUND SCHEDULE OF INVESTMENTS at June 30, 2001 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS: 35.88% $150,000 Federal Home Loan Mortgage Corp., 5.75%, 7/15/03 $ 153,020 15,000 Federal National Mortgage Associations, 6.00%, 12/15/2005 15,317 50,000 Federal National Mortgage Associations, 6.625%, 11/15/2030 50,380 230,000 U.S. Treasury Bonds, 12.00%, 08/15/13 318,496 ---------- TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $543,732)+ 537,212 ---------- SHORT-TERM INVESTMENT: 2.16% 32,319 Firstar Stellar Treasury Fund (Cost $32,319) 32,319 ---------- TOTAL INVESTMENTS IN SECURITIES (Cost $1,437,489): 98.72% 1,477,945 Other Assets less Liabilities: 1.28% 19,228 ---------- Net Assets: 100.00% $1,497,173 ========== * Non-income producing security. + Gross unrealized appreciation and depreciation of securities is as follows: Gross unrealized appreciation $ 93,087 Gross unrealized depreciation (52,631) --------- Net unrealized appreciation $ 40,456 ========= 8 THE AVATAR ADVANTAGE BALANCED FUND STATEMENT OF ASSETS AND LIABILITIES at June 30, 2001 (Unaudited) - -------------------------------------------------------------------------------- ASSETS Investments in securities, at value (cost $1,437,489) ....... $ 1,477,945 Receivables: Dividends and interest .................................... 16,561 Due from advisor .......................................... 11,956 Securities sold ........................................... 20,925 Deferred organization costs ................................. 3,835 Prepaid expenses ............................................ 822 ----------- Total assets ............................................ 1,532,044 ----------- LIABILITIES Payables: Administration fees ....................................... 2,466 Securities purchased ...................................... 10,509 Accrued expenses .......................................... 21,896 ----------- Total liabilities ....................................... 34,871 ----------- NET ASSETS .................................................... $ 1,497,173 =========== NET ASSET VALUE AND REDEMPTION* PRICE PER SHARE [$1,497,173 / 147,463 shares outstanding; unlimited number of shares (par value $.01) authorized] ............. $ 10.15 =========== OFFERING PRICE PER SHARE ($10.15 / .9550) .................. $ 10.63 =========== COMPONENTS OF NET ASSETS Paid-in capital ............................................. $ 1,547,500 Accumulated net investment income ........................... 16,001 Accumulated net realized loss on investments ................ (106,784) Net unrealized appreciation on investments .................. 40,456 ----------- Net assets .............................................. $ 1,497,173 =========== * 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. 9 THE AVATAR ADVANTAGE BALANCED FUND STATEMENT OF OPERATIONS For the Six Months Ended June 30, 2001 (Unaudited) - -------------------------------------------------------------------------------- INVESTMENT INCOME Income Interest ..................................................... $ 18,994 Dividends .................................................... 4,529 Other ........................................................ 1,288 --------- Total income .............................................. 24,811 --------- Expenses Administration fees (Note 3) ................................. 14,876 Professional fees ............................................ 11,274 Fund accounting fees ......................................... 7,444 Advisory fees (Note 3) ....................................... 5,836 Transfer agent fees .......................................... 5,593 Custody fees ................................................. 2,370 Trustee fees ................................................. 2,132 Deferred organization expense ................................ 1,240 Miscellaneous ................................................ 993 Insurance expense ............................................ 645 Reports to shareholders ...................................... 404 Registration expense ......................................... 36 --------- Total expenses ............................................ 52,843 Less: advisory fee waiver and absorption (Note 3) ......... (41,950) --------- Net expenses .............................................. 10,893 --------- NET INVESTMENT INCOME ................................... 13,918 --------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss on investments ............................. (93,171) Net change in unrealized depreciation on investments ......... (130,941) --------- Net realized and unrealized loss on investments ............ (224,112) --------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ..... $(210,194) ========= See accompanying Notes to Financial Statements. 10 THE AVATAR ADVANTAGE BALANCED FUND STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- Six Months Year Ended Ended December 31, June 30, 2001# 2000 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income ...................... $ 13,918 $ 30,533 Net realized (loss)/gain on investments .... (93,171) 61,845 Net unrealized depreciation on investments . (130,941) (110,152) ----------- ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... (210,194) (17,774) ----------- ----------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Net investment income ...................... -- (28,449) Net realized gain on security transactions . -- (69,857) In excess of net realized gains ............ -- -- ----------- ----------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS ...... 0 (98,306) ----------- ----------- TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST Total increase in net assets derived from net change in outstanding shares (a) ... 0 98,306 TOTAL DECREASE IN NET ASSETS ............. (210,194) (17,774) ----------- ----------- NET ASSETS BEGINNING OF PERIOD ...................... 1,707,367 1,725,141 ----------- ----------- END OF PERIOD ............................ $ 1,497,173 $ 1,707,367 =========== =========== (a) A summary of share transactions is as follows: Six Months Ended Year Ended June 30, 2001# December 31, 2000 ---------------- ------------------- Shares Value Shares Value ------ ----- ------ ----- Shares sold ....................... 0 $0 0 $ 0 Shares issued in reinvestment of distributions ................... 0 0 8,417 98,306 Shares redeemed ................... 0 0 0 0 ------ ----- ------ ------- Net increase ...................... 0 $0 8,417 $98,306 ====== ===== ====== ======= # Unaudited. See accompanying Notes to Financial Statements. 11 THE AVATAR ADVANTAGE BALANCED FUND FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD - --------------------------------------------------------------------------------
Six Months Year Ended December 31, Jan. 13, 1998* Ended ------------------------- through June 30, 2001# 2000 1999 Dec. 31, 1998 -------------- --------- --------- ------------- Net asset value, beginning of period ............. $ 11.58 $ 12.41 $ 11.95 $ 10.00 --------- --------- --------- --------- INCOME FROM INVESTMENT OPERATIONS: Net investment income .......................... 0.09 0.22 0.21 0.19 Net realized and unrealized gain on investments ............................... (1.52) (0.34) 1.17 2.11 --------- --------- --------- --------- Total from investment operations ................. (1.43) (0.12) 1.38 2.30 --------- --------- --------- --------- LESS DISTRIBUTIONS: From net investment income ..................... 0.00 (0.20) (0.21) (0.19) From net realized gain ......................... 0.00 (0.51) (0.67) (0.16) In excess of net realized gain ................. 0.00 0.00 (0.04) 0.00 --------- --------- --------- --------- Total distributions .............................. 0.00 (0.71) (0.92) (0.35) --------- --------- --------- --------- Net asset value, end of period ................... $ 10.15 $ 11.58 $ 12.41 $ 11.95 ========= ========= ========= ========= Total return ..................................... (12.35%)+ (1.04%) 11.82% 23.11%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) ............ $ 1,497 $ 1,707 $ 1,725 $ 1,543 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before expense reimbursement .................. 6.80%++ 6.47% 7.28% 8.59%++ After expense reimbursement ................... 1.40%++ 1.40% 1.40% 1.40%++ RATIO OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS After expense reimbursement .................... 1.79%++ 1.72% 1.73% 1.89%++ Portfolio turnover rate .......................... 33.63%+ 75.53% 101.53% 95.00%+
* Commencement of operations. # Unaudited. ++ Annualized. + Not annualized. See accompanying Notes to Financial Statements. 12 THE AVATAR ADVANTAGE BALANCED FUND NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ORGANIZATION The Avatar Advantage Balanced Fund (the "Fund") is a series of shares of beneficial interest of Advisors Series Trust (the "Trust"), which is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Avatar Advantage Balanced 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. A. SECURITY VALUATION: The Fund's investments are carried at fair value. Securities that are primarily traded on a national securities exchange shall be valued at the last sale price on the exchange on which they are primarily traded on the day of valuation or, if there has been no sale on such day, at the mean between the bid and asked prices. Securities primarily traded in the NASDAQ National Market System for which market quotations are readily available shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices. Over-the-counter ("OTC") securities which are not traded in the NASDAQ National Market System shall be valued at the most recent trade price. Securities for which market quotations are not readily available, if any, are valued following procedures approved by the Board of Trustees. Short-term investments are valued at amortized cost, which approximates market value. B. FEDERAL INCOME TAXES: It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. C. SECURITY TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS: Security transactions are accounted for on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost. Dividend income and distributions to shareholders are recorded on the ex-dividend date. The amount of dividends and distributions to shareholders from net investment income and net realized capital gains is determined in accordance with Federal income tax regulations which differs from generally accepted 13 THE AVATAR ADVANTAGE BALANCED FUND NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) accounting principles. 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 in the amount 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 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, 2001, Avatar Investors Associates Corp. (the "Advisor") provided the Fund with investment management services under an Investment Advisory Agreement. The Advisor furnished all investment advice, office space, facilities, and provides most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee at the annual rate of 0.75% based upon the average daily net assets of the Fund. For the six months ended June 30, 2001, the Fund incurred $5,836 in Advisory Fees. The Fund is responsible for its own operating expenses. The Advisor has agreed to reduce fees payable to it by the Fund and to pay Fund operating expenses to the extent necessary to limit the Fund's aggregate annual operating expenses to 1.40% of average net assets (the "expense cap"). Any such reduction made by the Advisor in its fees or payment of expenses which are the Fund's obligation are subject to reimbursement by the Fund to the Advisor, if so requested by the Advisor, in subsequent fiscal years if the aggregate amount actually paid by the Fund toward the operating expenses for such fiscal year (taking into account the reimbursement) does not exceed the applicable limitation on Fund expenses. The Advisor is permitted to be reimbursed only for fee reductions and expense payments made in the previous three fiscal years, but is permitted to look back five years and four years, respectively, during the initial six years and seventh year of the Fund's operations. Any such reimbursement is also contingent upon Board of Trustees review and approval at the time the reimbursement is made. Such reimbursement may not be paid prior to the Fund's payment of current ordinary operating expenses. For the six months ended June 30, 2001, the Advisor reduced its fees and absorbed Fund expenses in the 14 THE AVATAR ADVANTAGE BALANCED FUND NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) amount of $41,950; no amounts were reimbursed to the Advisor. Cumulative expenses subject to recapture pursuant to the aforementioned conditions amounted to $315,495 at April 30, 2001. Cumulative expenses subject to recapture expire as follows: Year Amount ---- ------ 2003 $ 183,744 2004 89,771 2005 41,950 --------- $ 315,495 ========= Investment Company Administration, 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: Feed 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 - SECURITIES TRANSACTIONS For the six months ended June 30, 2001, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, were $509,951 and $660,097 respectively. 15 ================================================================================ ADVISOR Avatar Investors Associates Corp. 900 Third Avenue New York, New York 10022 www.avatar-associates.com DISTRIBUTOR First Fund Distributors, Inc. 4455 East Camelback Road, Suite 261-E Phoenix, Arizona 85018 CUSTODIAN Firstar Institutional Custody Services 425 Walnut Street M/L 6118 Cincinnati, Ohio 45202 TRANSFER AGENT ICA Fund Services, Inc. 4455 East Camelback Road, Suite 261-E Phoenix, Arizona 85018 (800)576-8229 LEGAL COUNSEL Paul, Hastings, Janofsky & Walker LLP 345 California Street, 29th Floor San Francisco, California 94104 ================================================================================ This report is intended for the 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-----