PROACTIVE ASSET ALLOCATION FUNDS
OPTI-FLEX(R) DYNAMIC FUND
500 Chesterfield Center, Suite 250
Chesterfield, MO 63017
888-776-2284 (888-PROACTIVE)
314-530-7575
THE PROACTIVE ASSET ALLOCATION FUNDS ARE ORGANIZED AS A BUSINESS TRUST (THE
"TRUST") CONSISTING OF ONE PORTFOLIO (THE "OPTI-FLEX(R) DYNAMIC FUND" OR THE
"FUND"). THE FUND'S OBJECTIVE IS TO SEEK A HIGH TOTAL RETURN OVER THE LONG-TERM
CONSISTENT WITH EXHIBITING LESS INVESTMENT RISK THAN A PORTFOLIO CONSISTING
SOLELY OF COMMON STOCKS. IN SEEKING TO MEET ITS OBJECTIVE, THE FUND ALLOCATES
ITS ASSETS FOR INVESTMENT, PRIMARILY THROUGH MUTUAL FUNDS, AMONG THE FOLLOWING
MARKET SEGMENTS: DOMESTIC AND FOREIGN STOCKS, DOMESTIC AND FOREIGN BONDS, MONEY
MARKET INSTRUMENTS AND GOLD.
ADDITIONAL INFORMATION
This Prospectus sets forth basic information about the Trust and the Fund
that a prospective investor should know before investing and it should be
retained for future reference. A STATEMENT OF ADDITIONAL INFORMATION, dated
__________, 1998, has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. The Statement of Additional Information is
available upon request and without charge by contacting the Trust at the address
given above or by calling 1-888-587-3539 or (614) 798-3149.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
Highlights................................ 2
Synopsis of Financial Information......... 3
Financial Highlights...................... 4
Investment Objective and Policies......... 6
Securities and Investment Practices....... 8
The Trust and Its Management.............. 14
How To Buy Shares......................... 16
How To Make Withdrawals (Redemptions)..... 18
Other Shareholder Services................ 20
Shareholder Accounts...................... 20
Distribution Plan......................... 21
Income Dividends and Taxes................ 22
How Net Asset Value is Determined......... 23
Performance Information and Reports....... 23
Other Information......................... 24
INVESTMENT ADVISER: PROACTIVE MONEY MANAGEMENT, INC.
PROSPECTUS DATED _________, 1998
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HIGHLIGHTS
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INVESTMENT OBJECTIVE: OPTI-FLEX(R) Dynamic Fund's investment objective is
to seek a high total return over the long-term consistent with exhibiting less
investment risk than a portfolio consisting solely of common stocks. In seeking
to meet its objective, the Fund allocates its assets for investment, primarily
through mutual funds, among the following market segments: domestic and foreign
stocks, domestic and foreign bonds, money market instruments and gold. See
"Investment Objective and Policies."
LIQUIDITY: As an open-end investment company, the Fund continuously offers
and redeems shares of beneficial interest at the next determined net asset value
per share. See "How to Buy Shares" and "How to Make Withdrawals (Redemptions).
SALES CHARGES: Shares are sold at net asset value without an initial sales
charge but if held for less than one year, a contingent deferred sales charge
equal to 1% of the lesser of the current market value or the cost of the shares
being redeemed will apply. See "Synopsis of Financial Information", "How to Buy
Shares" and "How to Make Withdrawals (Redemptions)."
MINIMUM INVESTMENT: A minimum investment of $5,000 is required to open an
account, except an IRA account for which the minimum is $4,000. Subsequent
investments must be at least $100. The Fund has the right to redeem the shares
in an account and pay the proceeds to the shareholder if the value of the
account drops below $2,500 ($2,000 for an IRA) because of shareholder
redemptions. The shareholder will be given 30 days written notice and an
opportunity to restore the account to $2,500 ($2,000 for an IRA). An account
will be required to have a net asset value of $10,000 or double the minimum
investment of $5,000 (IRA accounts will be subject to the same $10,000
threshold) on the first trading day of the Fund following April 30 of each year
in order to avoid the annual account maintenance fee of $10.00. See "How to Buy
Shares - Annual Maintenance Fee" below. See "How to Buy Shares", "Other
Shareholder Services" and "Shareholder Accounts."
INVESTMENT ADVISER AND MANAGER: PROACTIVE Money Management, Inc. is the
Fund's Investment Adviser and Manager (the "Investment Adviser" or the
"Manager"). The Manager has served as an investment adviser to individuals,
trusts and corporations for over eleven years. See "The Trust and Its
Management."
SHARES AVAILABLE THROUGH: The Fund's transfer agent, Mutual Funds Service
Co. ("MFSCO"). See "The Trust and Its Management."
DISTRIBUTION PLAN: The Fund has adopted a Rule 12b-1 distribution plan for
using as much as 75/100 of 1% of net assets annually to aid in the distribution
of shares. The Fund has adopted a service plan for using as much as 25/100 of 1%
of net assets annually to aid in the distribution of shares. See "Distribution
Plan."
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HOW TO BUY SHARES: Complete the New Account Application and forward with
payment as directed. Orders accompanied by payment (ordinary check, bank check,
bank wire, and money order) are accepted immediately and priced at the next
determined net asset value per share after receipt of the order. See "How to Buy
Shares" and "How Net Asset Value is Determined."
RISK FACTORS: The Fund concentrates its investments in the shares of other
investment companies. Consequently, in addition to bearing his proportionate
share of the expenses of the Fund, a shareholder also indirectly bears similar
expenses of the underlying investment companies. The Fund may invest, directly
or through investment companies, in what are sometimes referred to as "junk
bonds." Such securities are speculative investments which carry greater risks
than higher quality debt securities. The Fund may invest, through investment
companies, in foreign securities which may involve risks in addition to those of
U.S. investments, including increased political and economic risk, as well as
exposure to currency fluctuation. The Fund may use various investment techniques
to hedge the Fund's risks, including futures contracts and options. Special risk
factors apply to those investments. See "Investment Objective and Policies" and
"Securities and Investment Practices" for a more detailed description of the
risks associated with an investment in the Fund.
SHAREHOLDER INQUIRIES: Shareholder inquiries should be directed to the Fund
by writing the Fund c/o Mutual Funds Service Co., 6000 Memorial Drive, Dublin,
Ohio 43017, or calling 1-888-587-3539. To protect the confidentiality of
shareholder accounts, information relating to a specific account will be
disclosed pursuant to a telephone inquiry if the shareholder identifies the
account by account number or by the taxpayer identification number listed on the
account.
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SYNOPSIS OF FINANCIAL INFORMATION
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases (as a percentage
of offering price).............................. none
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage
of offering price).............................. none
Maximum Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, as applicable)1....................... 1.00%
Redemption Fees (as a percentage of amount
redeemed, if applicable)........................ none
Exchange Fee......................................... none
Annual Account Maintenance Fee (for
accounts under $10,000)......................... $10.00
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ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fees..................................... 0.75%
12b-1 Fees.......................................... 0.75%
Other Expenses
(After Expense Reimbursements)*................... 0.60%
Service Fees2........................................ 0.25%
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TOTAL FUND OPERATING EXPENSES........................ 2.35%
(After Expense Reimbursements)*
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expense on
a $1,000 investment, assuming (1) a 5%
annual return throughout the period
and (2) redemption at the end of each
time period: $34 $73 $126 $269
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of the period: $24 $73 $126 $269
*Expenses used in these illustrations are based upon expenses actually incurred
by the Fund for the year ended December 31, 1997. During the year ended December
31, 1997, the Manager reimbursed expenses in order to reduce the operating
expenses of the Fund. Had operating expenses not been reimbursed Other Expenses
and Total Fund Operating Expenses, as a percentage of average net assets, would
have been 1.58% and 3.33%, respectively. The Manager presently intends to
reimburse the Fund through an expense reimbursement fee to the extent necessary
to keep total expenses at 2.40% of average daily net assets. The Manager may
change this policy at any time without notice to shareholders. This would, in
some circumstances, have a material adverse effect on the net income of the
Fund, and the return earned by shareholders. For planning purposes, prospective
investors and shareholders should understand that any reimbursements are
voluntary and cannot be guaranteed.
(1) A DEFERRED SALES CHARGE ON THE SHARES OF THE FUND APPLIES ONLY IF REDEMPTION
OCCURS WITHIN ONE YEAR FROM PURCHASE. SEE PAGE 18.
(2) 100% OF THE SERVICE FEE IS ALLOCATED TO NATIONAL ASSOCIATION OF SECURITIES
DEALERS, INC. ("NASD") MEMBER FIRMS (INCLUDING SECURITIES DEALERS THAT MAY BE
AFFILIATES OF THE DISTRIBUTOR) FOR CONTINUOUS PERSONAL SERVICE BY SUCH MEMBERS
TO INVESTORS IN THE FUND, SUCH AS RESPONDING TO SHAREHOLDER INQUIRIES, QUOTING
NET ASSET VALUES, PROVIDING CURRENT MARKETING MATERIAL AND ATTENDING TO OTHER
SHAREHOLDER MATTERS.
The expense table is meant to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. The Fund does not impose an exchange fee or redemption fee. For more
complete descriptions of the various costs and expenses of the Fund see "The
Trust and Its Management" and "Distribution Plan."
THE TABLE AND HYPOTHETICAL EXAMPLES ABOVE ARE FOR ILLUSTRATIVE PURPOSES
ONLY. THE INVESTMENT RATE OF RETURN AND EXPENSES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE PERFORMANCE OR PAST OR FUTURE EXPENSES,
RESPECTIVELY, AS ACTUAL RATES OF RETURN AND EXPENSES MAY BE MORE OR LESS THAN
THE RATE AND AMOUNTS SHOWN.
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FINANCIAL HIGHLIGHTS
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The financial highlights for the OPTI-FLEX(R) Dynamic Fund are listed
below. This information has been audited in conjunction with the audit of the
financial statements of the Fund by KPMG Peat Marwick LLP, independent certified
public accountants for the year ended December 31, 1997 and for the period from
October 1, 1996 through December 31, 1996.
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YEAR FOR THE PERIOD
ENDED OCTOBER 1, 1996(1) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
OPTI-FLEX(R) DYNAMIC FUND
NET ASSET VALUE, BEGINNING OF PERIOD $10.13 $10.00
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INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME 0.03 0.09
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Net Gains or Losses from Investments
(BOTH REALIZED AND UNREALIZED) 0.47 0.23
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TOTAL FROM INVESTMENT OPERATIONS 0.50 0.32
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LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (0.02) (0.09)
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FROM NET REALIZED GAINS (0.38) (0.10)
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IN EXCESS OF NET REALIZED GAINS (0.48) (0.00)
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TOTAL DISTRIBUTIONS (0.88) (0.19)
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NET ASSET VALUE, END OF PERIOD $ 9.75 $10.13
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TOTAL RETURN 4.94% 3.22%(3)
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RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD ($000) $13,530 $6,806
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RATIO OF EXPENSES TO AVERAGE NET ASSETS(5) 2.35% 2.39%(2)(4)
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RATIO OF NET INCOME TO AVERAGE NET ASSETS 0.32% 17.25%(4)
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Ratio of Expenses to Average Net Assets,
BEFORE REIMBURSEMENT OF FEES(5) 3.33% 14.61%(2)
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Ratio of Net Investment Income to Average
NET ASSETS, BEFORE REIMBURSEMENT OF FEES (0.66%) 5.03%(2)
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PORTFOLIO TURNOVER RATE 1,237.35% 18.77%
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AVERAGE BROKERAGE COMMISSION PER SHARE $0.0175 $0.0281
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(1) Date of commencement of operations
(2) Annualized
(3) Not Annualized
(4) This ratio is higher than normal for a fund of this type because it is
an annualized ratio based on the net investment income earned during the period
which included annual dividends from its investment holdings.
(5) Ratios exclude the expenses of the mutual funds in which the Fund
invests.
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information.
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INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to seek a high total return over the
long-term consistent with exhibiting less investment risk than a portfolio
consisting solely of common stocks. In seeking to meet its objective, the Fund
allocates its assets for investment, primarily through mutual funds, among the
following market segments: domestic and foreign stocks, domestic and foreign
bonds, money market instruments and gold (the gold segment includes the
securities of companies principally engaged in exploration, mining, processing,
distributing or dealing in gold and other precious metals and minerals).
At least 65% of the Fund's assets will be invested in open-end investment
companies, commonly called mutual funds; however, up to 25% of the Fund's assets
may be invested in closed-end investment companies and up to 10% of the Fund's
assets may be invested in direct investments. Direct investments are investments
in securities other than open-end investment companies and closed-end investment
companies, such as stocks, bonds, and money market instruments and repurchase
agreements.
The Fund's investment adviser, PROACTIVE Money Management, Inc., allocates
the Fund's assets among these types of mutual funds, closed-end investment
companies and direct investments in proportions which reflect the anticipated
returns and risks of each of the following market segments (stocks, bonds, money
market instruments and gold). There are no restrictions on the amount of the
Fund's assets which may be invested in each of the above market segments.
Normally, the Fund expects to invest its assets among many of these market
segments. Some types of investments, such as index funds, can fall into more
than one of the above market segments. The Fund may also make other investments
that do not fall within the above market segments. The Manager may use various
investment techniques to hedge a portion of the Fund risk, but there is no
guarantee that these strategies will be utilized on a timely basis or that they
will work as the Manager intends.
Although the Fund may invest in any mutual fund investing in one or more of
the market segments described above, the Fund will typically invest in the
following types of mutual funds: U.S. emerging growth, blue chip, small
capitalization stock funds and industry sector funds; international and global
stock funds (including developed and emerging markets, regional funds and
country specific funds) and international and global bond funds; U.S. Government
securities funds and high yield bond funds; gold and precious metals funds and
money market funds. Since the Fund is subject to the risks of each investment
type, the Fund and its performance are affected by many factors. See "Securities
and Investment Practices" for a description of the mutual funds and other
securities in which the Fund invests and other investment practices of the Fund.
The Manager will vary the percentage of the Fund's assets invested in each
type of security or underlying fund based upon the mix of such securities or
funds that the Manager believes will be most likely to achieve the Fund's
investment objective. In allocating assets among market segments, the Manager
will employ both fundamental and technical analysis to assess relative risk and
reward potential throughout the financial markets, with the objective of
<PAGE>
providing shareholders the best opportunity for achieving the highest total
return consistent with reduced risk over the long-term. Generally, in seeking
the Fund's objective, the Manager will alter the composition of the Fund's
portfolio as economic and market trends change. The Fund's portfolio is expected
to vary considerably among the various market segments as these changes occur.
The Manager substantially underweights investment segments that it believes have
above average market risk with below average market potential over the short
term; and it overweights investment segments that it believes represent above
average market potential with below average market risk. By allocating its
investments in this manner, the Fund believes it will not be exposed to the same
degree of market risk as a fund which, for example, invests in only one market
segment. However, the allocation process is not limited to determining the
degree to which the Fund's assets should be invested in the different market
segments. The Manager continually explores opportunities in various subclasses
of assets: geoeconomic considerations (i.e., foreign versus domestic),
maturities of fixed income securities (i.e., "short term" versus "long term"),
market capitalization (i.e., "blue chip" versus small capitalization), and
sector rotation (i.e., "high tech" versus staple industries).
The Fund may purchase "no-load" mutual funds, which are bought and sold
without a sales charge, "institutional funds" that normally have below average
expenses and higher minimum investment amounts and "load" mutual funds, but only
if the load, or sales commission, is by previous agreement waived for purchases
or sales made by the Fund. However, when the Manager believes it is appropriate,
the Fund may also purchase, with up to 20% of its total assets, mutual funds
that charge a redemption fee or contingent deferred sales charge of up to 2% for
short-term sales of one year or less. The underlying mutual funds in which the
Fund invests may incur distribution expenses in the form of 12b-1 fees.
The Manager selects underlying funds in which to invest based, in part, on
their investment objectives and policies, their investment adviser and portfolio
manager, and on analysis of their past performance (absolute, relative and
risk-adjusted). The Manager also considers other factors in the selection of
funds, including, but not limited to, fund size, liquidity, expense ratio,
quality of shareholder service, reputation and tenure of portfolio manager,
general composition of its investment portfolio and current and expected
portfolio holdings. Many mutual funds in which the Fund invests may not share
the same investment objective and investment limitations as the Fund. Typically,
the Fund will invest its assets in mutual funds from several different mutual
funds families, managed by a variety of investment advisers, and utilizing a
variety of different investment objectives.
An investor in the Fund should recognize that he may invest directly in
mutual funds and that by investing in mutual funds indirectly through the Fund,
he will bear not only his proportionate share of the expenses of the Fund
(including operating costs and investment advisory and administrative fees) but
also indirectly similar expenses of the underlying mutual funds.
The Fund may employ defensive strategies and hedging strategies described
under "Hedging Strategies," page 12. When the Manager expects a period of
significant market decline, part or all of the Fund's assets may be hedged
and/or liquidated and reinvested in money market instruments or funds until the
Manager determines that there no longer exists a significant risk of substantial
market decline.
<PAGE>
Futures contracts likewise involve some risk. It is possible that the
contract(s) selected by the Manager will not follow exactly the price movement
of the securities covered by the contract. If this occurs, the objective of the
hedging strategy may not be successful.
The Fund diversifies across investment types more than most mutual funds.
However, like any other mutual fund, the Fund does not constitute a complete
investment program. When you sell your Fund shares, they may be worth more or
less than what you paid for them.
Except as otherwise provided in the following paragraph, the investment
objectives and policies of the Fund are not fundamental and may be changed by
the Trustees of the Trust without approval of the Fund's shareholders. No such
change would be made in the Fund without 30 days prior written notice to
shareholders. See "Securities and Investment Practices" for a description of the
securities in which the Fund invests and other investment practices of the Fund.
The Fund's policy of concentrating (investing more than 65% of the value of
the Fund's total assets) in the shares of open-end investment companies,
commonly called mutual funds, is fundamental and may not be changed without
shareholder approval.
Additional information about the investment policies of the Fund appears in
the Statement of Additional Information. There can be no assurance that the
investment objective of the Fund will be achieved.
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SECURITIES AND INVESTMENT PRACTICES
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The following pages contain more detailed information about types of
instruments in which the Fund may invest, strategies the Manager may employ in
pursuit of the Fund's investment objective, and a summary of related risks. Any
restrictions listed supplement those discussed earlier. A complete listing of
the Fund's limitations and more detailed information about the Fund's
investments are contained in the Fund's Statement of Additional Information.
The Manager may not buy all of these instruments or mutual funds or use all
of these techniques unless it believes that they are consistent with the Fund's
investment objective and policies.
The Fund's assets are spread among mutual funds and other securities
representing several of the following market segments, moderating both the risk
and return potential of stock, bond, money market and gold funds and other
securities in which the Fund invests.
While the Fund invests in stock, bond, money market and gold mutual funds
and other securities in varying proportions, investors should not construe the
<PAGE>
Fund as a balanced investment program offering relatively stable allocations
among these asset classes. Because the allocation strategy of the Manager may,
at certain times, result in a portfolio with a primary emphasis on stock mutual
funds, the Fund may from time to time exhibit a level of volatility which is
more consistent with a stock portfolio than a balanced portfolio. However, over
the long-term, the volatility of the Fund's total return is expected to be less
than that of a stock portfolio.
Investors should also be aware that the investment results of the Fund
depend upon the Manager's ability to anticipate correctly the relative
performance and risk of stocks, bonds, money market instruments and gold.
Historical evidence indicates that correctly timing portfolio allocations among
these market segments has been a difficult strategy to implement. While the
Manager has experience in active asset allocation, there can be no assurance
that the Manager will correctly anticipate relative asset class performance in
the future on a consistent basis. The Fund's short-term investment results would
suffer, for example, if only a small portion of the Fund's assets were allocated
to stock mutual funds during a significant stock market advance, or if a major
portion of its assets were allocated to stock mutual funds during a market
decline. Likewise, the Funds' short-term investment results would also suffer if
the Fund were substantially invested in bond mutual funds at a time when
interest rates increased.
Although the Fund seeks to reduce its overall risk by diversifying among
different types of mutual funds, the Fund aggressively invests in a wide variety
of mutual funds, including stocks and bonds issued in developed and developing
countries and derivative transactions. Since the Fund is subject to the risks of
each investment type, the Fund and its performance are affected by many factors.
STOCK SEGMENT. The Fund may invest directly in, or in one or more stock
funds owning, domestic and foreign equity securities including common stocks and
warrants. Common stocks, the most familiar type, represent an equity (ownership)
interest in a corporation. Although equity securities have a history of
long-term growth in value, their prices fluctuate based on changes in a
company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
BOND SEGMENT. The Fund may invest directly in, or in one or more bond funds
owning, domestic and foreign debt securities. Bonds and other debt instruments
are used by issuers to borrow money from investors. The issuer pays the investor
a fixed or variable rate of interest, and must repay the amount borrowed at
maturity. Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values. In general,
bond prices rise when interest rates fall, and vice versa. Debt securities,
loans, and other direct debt have varying degrees of quality and varying levels
of sensitivity to changes in interest rates. Longer-term bonds are generally
more sensitive to interest rate changes than short-term bonds. The Fund may
invest, directly or through investment companies, in what are sometimes referred
to as "junk bonds." Such securities are speculative investments which carry
greater risks than higher quality debt securities. See "Lower-Quality Debt
Securities" below.
<PAGE>
MONEY MARKET SEGMENT. The Fund may invest directly in, or in one or more
money market funds owning, money market instruments. Money market instruments
are high-quality instruments that present minimal credit risk. They may include
U.S. government obligations, commercial paper and other short-term corporate
obligations, and certificates of deposit, bankers' acceptances, bank deposits,
repurchase agreements and other financial institution obligations. These
instruments may carry fixed or variable interest rates. In a repurchase
agreement, the Fund or an underlying money market fund in which the Fund invests
buys a security at one price and simultaneously agrees to sell it back at a
higher price. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent.
Private placement commercial paper ("Rule 144A securities") consists of
unregistered securities which are traded in public markets to qualified
institutional investors, such as the Fund or underlying money market funds in
which the Fund invests. The Fund or the underlying fund's risk is that the
universe of potential buyers for the securities, should the Fund or the
underlying fund desire to liquidate a position, is limited to qualified dealers
and institutions, and therefore such securities could have the effect of being
illiquid.
GOLD SEGMENT. The Fund may invest directly in, or in one or more mutual
funds owning, securities of companies engaged in exploration, mining,
processing, distributing or dealing in gold or other precious metals and
minerals. In addition to investments directly in those securities or mutual
funds, the Fund may invest in securities indexed to the price of gold or other
precious metals.
The price of gold and other precious metals and minerals is affected by
broad economic and political conditions. The price of gold and other precious
metal securities can face substantial short-term volatility caused by
unpredictable monetary policies and economic and political developments, such as
currency devaluations or revaluations; increased environmental costs; the
potential effect of the concentration of the sources of supply of gold and
control over the sale of gold; changes in U.S. or foreign tax, currency or
mining laws; and trade restrictions between countries.
LOWER-QUALITY DEBT SECURITIES. Lower-quality debt securities (sometimes
called "junk bonds") are considered to have speculative characteristics and
involve greater risk of default or price changes due to changes in the issuer's
creditworthiness, or they may already be in default. The market prices of these
securities may fluctuate more than higher-quality securities and may decline
significantly in periods of general economic difficulty.
EXPOSURE TO FOREIGN MARKETS. The Fund is normally exposed to foreign
markets. The Fund may invest in one or more mutual funds owning foreign
securities, foreign currencies, and securities issued by U.S. entities with
substantial foreign operations. These types of securities may involve additional
risks and considerations. These include risks relating to political or economic
conditions in foreign countries, fluctuations in foreign currencies, withholding
or other taxes, operational risks, increased regulatory burdens, and the
potentially less stringent investor protection and disclosure standards of
foreign markets. Additionally, governmental issuers of foreign securities may be
unwilling to repay principal and interest when due, and may require that the
conditions for payment be renegotiated. All of these factors can make foreign
investments, especially those in developing countries, more volatile.
<PAGE>
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS are trading practices in
which payment and delivery for the securities take place at a future date. The
market value of a security could change during this period, which could affect
the Fund's yield.
ILLIQUID AND RESTRICTED SECURITIES. Some securities may be determined by
the Manager, under the supervision of the Board of Trustees, to be illiquid,
which means that there is no readily available market for these securities. The
Fund may not invest more than 15% of its net assets in illiquid securities. The
sale of some illiquid securities and some other securities may be subject to
legal restrictions. Difficulty in selling securities may result in a loss or may
be costly to the Fund.
INVESTMENT IN OPEN-END INVESTMENT COMPANIES. The Fund, together with any
"affiliated persons" as defined in the Investment Company Act of 1940 (the "1940
Act") may purchase only up to 3% of the total outstanding securities of any
underlying fund. Accordingly, when affiliated persons hold shares of any of the
underlying funds, the Fund's ability to invest fully in shares of those funds is
restricted, and the Manager must then in some instances, select alternative
investments that would not have been its first choice.
In the event the Fund holds more than one percent (1%) of an underlying
fund's shares, the 1940 Act provides that the underlying fund will be obligated
to redeem only one percent (1%) of the underlying fund's outstanding shares
during any period of less than 30 days. To the extent that, due to this
restriction, the Fund is unable at its discretion to dispose of shares of an
underlying fund, the Fund would not be able to protect itself against a decline
in value of such shares during the period such restrictions remains in effect.
If an open-end investment company in which the Fund invests requests a
shareholder vote, the Fund will either (i) seek instructions from its
shareholders with regard to the voting of all proxies issued by the open-end
investment company and vote such proxies only in accordance with such
instructions, or (ii) vote the shares of the open-end investment company in the
same proportion as the vote of all other shareholders of the open-end investment
company.
The Manager has no control over, or day-to-day knowledge of, the investment
decisions of the underlying funds. It is possible that the management of one
underlying fund may be purchasing a particular security at or near the same time
that the Fund or the management of another underlying fund is selling the same
security. This would result in an indirect expense to the Fund without
corresponding economic or investment benefit.
INVESTMENT IN CLOSED-END INVESTMENT COMPANIES. The Fund may invest up to
25% of its assets in "closed-end" investment companies (or "closed-end funds"),
subject to the investment restrictions set forth below. The Fund, together with
any company or companies controlled by the Fund, and any other investment
companies having the Manager as an investment adviser, may purchase only up to
10% of the total outstanding voting stock of any closed-end fund. Typically, the
common shares of closed-end funds are offered to the public in a one-time
<PAGE>
initial public offering by a group of underwriters who retain a spread or
underwriting commission. Such securities are then listed for trading on a
national securities exchange or in the over-the-counter markets. Because the
common shares of closed-end funds cannot be redeemed upon demand to the issuer
like the shares of an open-end investment company (such as the Fund), investors
seek to buy and sell common shares of closed-end funds in the secondary market.
The common shares of closed-end funds may trade at a price per share which is
more or less than the net asset value per share, the difference representing the
"market premium" and the "market discount" of such common shares, respectively.
There can be no assurance that a market discount on common shares of any
closed-end fund will ever decrease. In fact, it is possible that this market
discount may increase and the Fund may suffer realized or unrealized capital
losses due to further decline in the market price of the securities of such
closed-end funds, thereby adversely affecting the net asset value of that funds'
shares. Similarly, there can be no assurance that the common shares of
closed-end funds which trade at a premium will continue to trade at a premium or
that the premium will not decrease subsequent to a purchase of such shares by
the Fund. The Fund may also invest in preferred shares of closed-end funds.
HEDGING AND DEFENSIVE INVESTING. There is no guarantee that a shareholder
will receive the full amount of his investment upon the redemption of shares.
The Fund does, however, seek to minimize the risk of loss through, at times, the
use of hedging techniques and defensive investment strategies. Hedging involves
risks which are not present in some other mutual funds with similar objectives
(See "Hedging Strategies").
LEVERAGE AND CONCENTRATION. Although the Fund will normally invest in a
number of underlying mutual funds, this practice will not eliminate investment
risk. To the extent that the Fund invests in underlying funds which leverage
investments or concentrate investments in one industry, an investment in the
Fund will indirectly entail the additional risks associated with these
practices. Leveraged mutual funds may have higher volatility than the over-all
market or other mutual funds. This may result in greater gains or losses than
the over-all market or other non-leveraged mutual funds. Mutual funds which
concentrate investments in a single industry lack normal diversification and are
exposed to losses stemming from negative industry-wide developments.
HEDGING STRATEGIES. The Fund may engage in hedging transactions in carrying
out their investment policies. A hedging program may be implemented for the
following reasons: (1) To protect the value of specific securities owned or
intended to be purchased while the Manager is implementing a change in a
specific investment position; (2) To protect portfolio values during periods of
extraordinary risk without incurring transaction costs associated with buying or
selling actual securities; and (3) To utilize the "designated hedge" provisions
of Sub-Chapter M of the Internal Revenue Code as a permitted means of avoiding
taxes that would otherwise have to be paid on gains from the sale of portfolio
securities.
<PAGE>
In hedging the Fund's portfolio assets, the Fund may, subject to certain
restrictions, purchase and sell (write): (a) options on stocks and stock
indices, stock index futures and options thereon, (b) options on U.S. Government
Securities, futures contracts on U.S. Government Securities and options on
futures contracts on commodities indices, currencies and currency indices. Any
options written by the Fund must be fully "covered" options. In addition, in
hedging the Fund's portfolio assets, the Fund may invest in mutual funds that
the Manager expects to perform inversely to the market.
Derivatives are financial instruments whose performance is derived, at
least in part, from the performance of an underlying asset, security or index.
Accordingly, these financial futures contracts or related options used by the
Fund to implement its hedging strategies are considered derivatives. The value
of derivatives can be affected significantly by even small market movements,
sometimes in unpredictable ways. They do not necessarily increase risk, and may
in fact reduce risk.
Put and call option contracts involve some risk. For example, the total
premium paid for an option contract could be lost if the Fund does not sell the
contract or exercise the contract prior to its expiration date.
The Fund will not engage in transactions in financial futures contracts or
related options for speculation but only as a hedge against changes in the
market value of securities held in its Fund, or which it intends to purchase,
and where the transactions are economically appropriate to the reduction of
risks inherent in the ongoing management of the Fund. For certain regulatory
purposes, the Commodity Futures Trading Commission ("CFTC") limits the types of
futures positions that can be taken in conjunction with the management of a
securities portfolio for mutual funds, such as the Fund. All futures
transactions for the Fund will consequently be subject to the restrictions on
the use of futures contracts established in CFTC rules, such as observation of
the CFTC's definition of "hedging." In addition, whenever the Fund establishes a
long futures position, it will set aside cash or cash equivalents equal to the
underlying commodity value of the long futures contracts held by the Fund.
Although all futures contracts involve leverage by virtue of the margin system
applicable to trading on futures exchanges, the Fund will not, on a net basis,
have leverage exposure on any long futures contracts that it establishes because
of the cash set aside requirement. All futures transactions can produce a gain
or a loss when they are closed, regardless of the purpose for which they have
been established. Unlike short futures contracts positions established to
protect against the risk of a decline in value of existing securities holdings,
the long futures positions established by the Fund to protect against
reinvestment risk are intended to protect the Fund against the risks of
reinvesting Fund assets that arise during periods when the assets are not fully
invested in securities.
The Fund may not purchase or sell financial futures or purchase related
options if immediately thereafter the sum of the amount of margin deposits on
the Fund's existing futures positions and premiums paid for related options
would exceed 5% of the market value of the Fund's total assets.
<PAGE>
The Fund expects that any gain or loss on hedging transactions will be
substantially offset by any gain or loss on the securities underlying the
contracts or being considered for purchase. There can be no guarantee that the
Fund will be able to realize this objective.
PORTFOLIO TURNOVER
Because the Manager may employ flexible defensive investment strategies
when market trends are not considered favorable, the Manager may occasionally
change the entire portfolios of the Fund. High transaction costs could result
when compared with other funds. Trading may also result in realization of net
short-term capital gains upon which shareholders may be taxed at ordinary tax
rates when distributed from a Fund.
The active asset allocation approach of the Fund can produce high
portfolio turnover ratios when calculated in accordance with SEC rules.
The portfolio turnover rate for the Fund for the year ended December 31,
1997 was 1,237%.
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THE TRUST AND ITS MANAGEMENT
- - - --------------------------------------------------------------------------------
The Trust was organized as a Massachusetts business trust on May 3, 1996.
The Fund is a diversified open-end management company. The Trust's offices are
at 500 Chesterfield Center, Suite 250, Chesterfield, MO 63017. The business and
affairs of the Trust are under the direction of its Board of Trustees.
The Fund has retained the services of PROACTIVE Money Management, Inc. as
investment adviser (the "Manager"). The Manager has been an investment adviser
to individuals, trusts and corporations for over twelve years. The Manager has
managed the Fund for approximately a year and a half. The Manager serves the
Fund pursuant to an Investment Advisory Contract under the terms of which it has
agreed to provide an investment program within the limitations of the Fund's
investment policies and restrictions, and to furnish all executive,
administrative, and clerical services required for the transaction of Fund
business, other than accounting services and services which are provided by the
Fund's custodian, transfer agent, independent accountants and legal counsel.
The Manager was incorporated in January 1990 and maintains its offices at
500 Chesterfield Center, Suite 250, Chesterfield, MO 63017. As of December 31,
1997, the Manager held discretionary investment authority over approximately
$110 million of assets. The Manager and the Distributor are wholly-owned
subsidiaries of Security Research Associates, Inc. Security Research Associates,
Inc. is controlled by C. Martin Unterreiner and Janice B. Unterreiner through
ownership of voting common stock. C. Martin Unterreiner, a director, Vice
President and Secretary of the Manager, is a Trustee of the Trust. Jeffrey J.
Unterreiner, a director and President of the Manager, is a Trustee, Chairman and
President of the Trust. The Manager is an affiliate of the Distributor.
<PAGE>
The Manager earns an annual fee, payable in monthly installments, from the
Fund at the rate of 0.75% of the Fund's first $500,000,000 in average net assets
and 0.65% of the Fund's average net assets in excess of $500,000,000. This fee
may be higher than the fee charged to most other investment companies.
Accounting, stock transfer, and dividend disbursing services are provided
to the Fund by Mutual Funds Service Co., 6000 Memorial Drive, Dublin, Ohio
43017. Mutual Funds Service Co. also serves as Administrator to the Fund
pursuant to an Administration Services Agreement. Services provided to the Fund
include coordinating and monitoring any third party services to the Fund;
providing the necessary personnel to perform administrative functions for the
Fund; assisting in the preparation, filing and distribution of proxy materials,
periodic reports to Trustees and shareholders, registration statements and other
necessary documents. The Fund incurs an annual fee, payable monthly, of .05% of
the Fund's average net assets, subject to a minimum annual fee of $30,000. These
fees are reviewed annually by the Trustees of the Trust.
A broker-dealer, including the Distributor, may use a portion of the
commissions paid by the Fund to reduce the Fund's expenses. The Manager may take
into account sales of shares of the Fund in selecting broker-dealers to effect
portfolio transactions on behalf of the Fund.
OPTI-FLEX(R) is a registered trademark owned and used by C. Martin
Unterreiner, the portfolio manager for the Fund, since 1984 to identify the
various OPTImum-FLEXible money management strategies for which he has ultimate
responsibility. He reserves the right to withdraw from the Fund the use of the
"OPTI-FLEX(R)" name in the event of termination of the Investment Advisory
Contract between the Manager and the Trust.
Information concerning the Trustees and officers of the Trust appears in
the Statement of Additional Information.
PORTFOLIO MANAGERS
C. Martin Unterreiner, Portfolio Manager, is primarily responsible for the
day to day management of the Fund. Mr. Unterreiner has managed the Fund since
its inception in 1996.
C. Martin Unterreiner, a Trustee and Vice President of the Trust, has been
a director of the Manager since its incorporation in January, 1980 and served as
President of the Manager from its inception through June 30, 1997. He has also
been a director, Vice President and Secretary of the Distributor since July 1,
1997. Mr. Unterreiner controls the Manager and the Distributor through ownership
of voting common stock of their parent company, Security Research Associates,
Inc. He is a graduate of St. Louis University where he earned a Bachelor of
Science degree in Commerce with a concentration in Economics and a master's
degree in Education with a minor in Finance.
<PAGE>
DISTRIBUTOR
PROACTIVE Financial Services, Inc. (the "Distributor"), 500 Chesterfield
Center, Suite 250, Chesterfield, Missouri 63017 serves as the distributor of the
shares of the Fund. Jeffrey J. Unterreiner, a Trustee, Chairman and President of
the Trust, is a director and the President of the Distributor. The Distributor
is an affiliate of the Manager.
The Manager may select the Distributor to execute transactions for the
Fund, provided that the commissions, fees or other remuneration received by the
Distributor are reasonable and fair compared to those paid to other brokers in
connection with comparable transactions.
TRANSFER AGENT
Mutual Funds Service Co. ("MFSCO"), 6000 Memorial Drive, Dublin, Ohio 43017
is a corporation organized under the laws of the State of Ohio and provides
stock transfer, dividend disbursing and accounting and administrative services
to the Fund.
- - - --------------------------------------------------------------------------------
HOW TO BUY SHARES
- - - --------------------------------------------------------------------------------
MINIMUM INVESTMENT -- The minimum investment to open an account is $5,000,
except an Individual Retirement Account (IRA) which has a $4,000 minimum.
Subsequent investments in any account may be made in amounts of at least $100.
Investors making the minimum investment and all investors having an account
value of less than $10,000, on the first trading day of the Fund after April 30
of each year, will pay an annual maintenance fee. See "Annual Maintenance Fee"
below.
ANNUAL MAINTENANCE FEE -- The Fund reserves the right to deduct an annual
maintenance fee of $10.00 from each account with a value of less than $10,000.
It is expected that accounts will be valued on the first trading day of the Fund
following April 30. The fee, which is payable to the transfer agent, is designed
to offset in part the relatively higher costs of servicing smaller accounts.
You may open an account and make an investment by purchasing shares through
securities dealers having sales agreements with the Distributor. A minimum
investment of $5,000 ($4,000 for an IRA) is required to establish an account in
the Fund. The minimum for subsequent investments in the Fund is $100.
Direct purchase orders may be made by submitting a check. In the case of a
new account, fill out the New Account Application accompanying this Prospectus.
A check payable to the Fund must accompany the New Account Application. Payments
may be made by check or Federal Reserve Draft payable to the Fund and should be
mailed to the following address: THE OPTI-FLEX(R) DYNAMIC FUND, C/O MUTUAL FUNDS
SERVICE CO., P. O. BOX 7177, DUBLIN, OHIO 43017.
<PAGE>
Should an order to purchase shares be canceled because your check does not
clear, you will be responsible for any resulting losses or fees incurred in the
transaction. All orders for the purchase of shares are subject to acceptance or
rejection by the Fund or by the Distributor. Direct purchase orders received by
MFSCO by 4:00 p.m., Eastern time, are confirmed at that day's public offering
price. Direct purchase orders received by MFSCO after 4:00 p.m., Eastern time,
are confirmed at the public offering price on the following business day.
Wire orders for shares of the Fund received by dealers prior to 4:00 p.m.,
Eastern time, and received by MFSCO before 5:00 p.m., Eastern time, on the same
day are confirmed at that day's public offering price. Orders received by
dealers after 4:00 p.m., Eastern time, are confirmed at the public offering
price on the following business day. It is the dealer's obligation to place the
order with MFSCO before 5:00 p.m., Eastern time, and to forward payment to Star
Bank, N.A., the Custodian for the Fund.
If the wire order is for a new account, you must telephone the Fund prior
to making your initial investment. Call 1-888-587-3539, or (614) 798-3149.
Advise the Fund of the amount you wish to invest and obtain an account number
and instructions. Have your bank wire federal funds to:
STAR BANK, N.A. CINTI/TRUST
ABA #: 042-00001-3
ATTENTION: THE PROACTIVE ASSET ALLOCATION FUNDS
CREDIT ACCOUNT NUMBER (account number for Fund as follows):
OPTI-FLEX(R) DYNAMIC FUND-- Account Number 485776991
ACCOUNT NAME (your name)
YOUR OPTI-FLEX(R) DYNAMIC FUND ACCOUNT NUMBER
Direct purchase orders received by MFSCO by 4:00 p.m., Eastern time, are
confirmed at that day's net asset value. Direct investments received by MFSCO
after 4:00 p.m. and orders received by dealers after 5:00 p.m. are confirmed at
the net asset value next determined on the following business day.
No stock certificates will be issued. Instead, an account with MFSCO is
established for each investor and all shares purchased or received, including
those acquired through the reinvestment of dividends and distributions, are
registered on the books of the Fund and credited to such account.
The Fund will not permit redemptions until it receives the New Account
Application in good order.
SUBSEQUENT INVESTMENTS -- Subsequent investments in an existing account in
the Fund may be made by mailing a check payable to OPTI-FLEX(R) Dynamic Fund.
PLEASE INCLUDE YOUR ACCOUNT NUMBER ON THE CHECK AND MAIL AS FOLLOWS:
<PAGE>
THE PROACTIVE ASSET ALLOCATION FUNDS
C/O MUTUAL FUNDS SERVICE CO.
P. O. BOX 7177
DUBLIN, OHIO 43017
Subsequent investments may also be made by bank wire as described above. It
is necessary to notify the Fund prior to each wire purchase. Wires sent without
notifying the Fund will result in a delay of the effective date of your
purchase.
PURCHASING SHARES: The shares have no initial sales charge but are subject
to a contingent deferred sales charge if held for less than one year. Contingent
deferred sales charges and fees are set forth in the "Synopsis of Financial
Information" on page 3 of this Prospectus.
The shares are sold at net asset value without an initial sales charge but
if redeemed within one year of purchase (the "CDSC Period") a contingent
deferred sales charge ("CDSC") equal to 1.00% of the lesser of the current
market value or the cost of the shares being redeemed will apply. No CDSC will
be imposed on shares acquired by reinvestment of distributions. In determining
whether a CDSC is applicable, it will be assumed that a redemption is made first
of shares derived from reinvestment of distributions and second of shares
purchased during the CDSC Period. The shares bear an asset based service fee of
0.25% and a Rule 12b-1 fee of 0.75%. The shares provide the benefit of putting
all of an investor's dollars to work from the time the investment is made. All
CDSC's imposed on redemptions are paid to the Distributor.
SALES CHARGE WAIVERS: The Fund may waive the CDSC on redemption following
the death of a shareholder, or if a shareholder becomes unable to engage in any
substantial gainful activity by reason of a medically determinable physical or
mental impairment which can be expected to result in death or be of
long-continued and indefinite duration; and when the total amount of redemptions
do not exceed 10% of purchases. See "Other Shareholder Services - Systematic
Withdrawal Program" and the Statement of Additional Information.
The Fund may waive the CDSC on the redemption of shares owned by banks,
bank trust departments, savings and loan associations, federal and state credit
unions, trust companies, and broker-dealers, either in their fiduciary
capacities or for their own accounts, that have been purchased pursuant to a
special agreement with the Distributor. These financial institutions and
broker-dealers may charge fees to clients for purchases of shares for which the
CDSC has been waived.
- - - --------------------------------------------------------------------------------
HOW TO MAKE WITHDRAWALS (REDEMPTIONS)
- - - --------------------------------------------------------------------------------
Shares are redeemed and funds withdrawn at net asset value per share, less
any applicable contingent deferred sales charge, and there are no redemption
fees. (See "How Net Asset Value Is Determined.")
<PAGE>
BY MAIL -- A shareholder may redeem shares by mailing a written request to
The PROACTIVE Asset Allocation Funds, c/o Mutual Funds Service Co., P. O. Box
7177, Dublin, OH 43017. The request must be signed by the shareholder(s). To
protect you and the Fund against fraud, your signature on a redemption request
for more than $2,500 must have a signature guarantee from an eligible guarantor
institution (a bank, broker-dealer, credit union, securities exchange, clearing
agency or savings association). Further documentation may be required as to the
authority of the person requesting redemption of shares held of record in the
name of corporations or trustees, and other fiduciaries.
Amounts withdrawn are mailed without charge to the address printed on your
account statement.
BY TELEPHONE/BANK WIRE -- A shareholder may redeem up to $50,000 worth of
shares by telephone or by placing a wire redemption through a securities dealer.
Amounts redeemed by bank wire will be wired to the bank account shown on your
account application. Amounts redeemed by check will be mailed to the address of
record. Wire redemptions must be in excess of $1,000. Wire redemption requests
received by dealers prior to 4:00 p.m., Eastern time, and received by MFSCO
before 5:00 p.m., Eastern time on the same day, are confirmed at that day's net
asset value per share. Direct wire redemption requests must be received by 4:00
p.m. to be confirmed at that day's net asset value.
Neither the Fund nor Mutual Funds Service Co. will be responsible for any
loss, expense, or cost arising from any telephone redemption request made
according to the authorization set forth in the New Account Application if they
reasonably believe such request to be genuine and follow reasonable procedures
designed to verify the identity of the person requesting the redemption. If
Mutual Funds Service Co. fails to follow reasonable procedures, Mutual Funds
Service Co. or the Fund may be liable for losses due to unauthorized or
fraudulent transactions. Mutual Funds Service Co. will provide each investor
seeking telephone redemption privileges with a personalized security code which,
along with other information, will be required of the caller upon request of a
telephone redemption. Other information may also be required and calls may be
recorded.
WHEN REDEMPTIONS ARE EFFECTIVE -- Redemptions are made at the net asset
value per share next determined after receipt of a redemption request in good
order. (See "How Net Asset Value Is Determined.")
WHEN PAYMENTS ARE MADE -- Shares are redeemed at their net asset value per
share, less any applicable contingent deferred sales charge, next determined
after receipt by MFSCO of the redemption request in the form described above,
less, any applicable contingent deferred sales charge. Payment is normally made
within five business days after the redemption request, provided that payment in
redemption of shares purchased by check will be effected only after the check
has been collected, which may take up to fifteen (15) days from the purchase
date. Those who wish to eliminate this delay may purchase shares of the Fund by
certified check or wire.
<PAGE>
Any redemptions in kind shall be of readily marketable securities. If
shares are redeemed in kind, the redeeming shareholder may incur brokerage costs
in converting the assets to cash.
- - - --------------------------------------------------------------------------------
OTHER SHAREHOLDER SERVICES
- - - --------------------------------------------------------------------------------
AUTOMATIC ACCOUNT BUILDER: Regular investments in the Fund of $100 or more
will be deducted from a shareholder's checking or savings account and invested
in shares of the Fund. A shareholder's bank must be a member of the Automated
Clearing House (ACH). Shareholders wishing to add to their investment account
must complete the Automatic Account Builder section of the New Account
Application. There is no additional charge for this service.
SYSTEMATIC WITHDRAWAL PROGRAM: A Systematic Withdrawal Program is offered
for any investor who wishes to receive regular distributions of $100 or more
from his account. The investor must either own or purchase shares having a value
of at least $10,000 and advise the Fund in writing of the amount to be
distributed and the desired frequency, i.e., monthly, quarterly or annually.
This option may be exercised by completing the appropriate section of the New
Account Application. The investor should realize that if withdrawals exceed
income dividends, the invested principal may be depleted.
Systematic withdrawals will be subject to the contingent deferred sales
charge except when the total amount of withdrawals does not exceed 10% of the
"initial account value" -- i.e., the value of the Fund account at the time the
shareholder elects to participate in the systematic withdrawal program. The
investor may make additional investments and may change or stop the program at
any time. There is no charge for this program.
- - - --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNTS
- - - --------------------------------------------------------------------------------
The Fund maintains an account for each shareholder in full and fractional
shares. The Fund reserves the right to reject any purchase order, and to waive
minimum purchase requirements.
CONFIRMATION STATEMENT -- All purchase and sale transactions, and dividend
reinvestments, are confirmed promptly after they become effective.
ACCOUNTS BELOW MINIMUM -- The Fund reserves the right to redeem shares in
any account for their then current net asset value and pay the proceeds to the
shareholder if at any time the account has shares valued at less than $2,500
($2,000 for an IRA) as a result of redemptions by the shareholder. Before a
redemption is processed, the shareholder will be allowed 30 days after written
notice from the Fund to make an additional investment sufficient to bring the
value of shares in the account to $2,500 ($2,000 for an IRA).
<PAGE>
- - - --------------------------------------------------------------------------------
DISTRIBUTION PLAN
- - - --------------------------------------------------------------------------------
The Fund has adopted a plan of distribution pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an annual
percentage of 0.75% of the average daily value of the net assets of the shares.
The Fund has adopted a service plan (the "Service Plan"). Under the
provisions of the Service Plan, the Fund makes payments to the Distributor based
on an annual percentage of 0.25% of the average daily value of the net assets of
the shares.
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that may be affiliates of the Distributor) for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance of shareholder
accounts by such dealers. Dealers who have sold shares are eligible for further
reimbursement after the first twelve months during which the shares have been
held of record by such dealer as nominee for its clients (or by such clients
directly). Any service fees received by the Distributor and not allocated to
dealers may be applied by the Distributor in reduction of expenses incurred by
it directly for personal services and the maintenance of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities dealers for selling such shares. Any distribution
fees received by the Distributor and not allocated to dealers may be applied by
the Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by securities
dealers.
The Manager may use its resources to pay expenses associated with the sale
of the Fund's shares. This may include payments to parties such as banks or
broker-dealers that provide shareholder support services or engage in the sale
of the Fund's shares. However, the Fund does not pay the Manager any separate
fees for this service.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which each Fund may incur under the Distribution
Plan and the Service Plan to a total of 1%, of which 0.75% may be used to pay
distribution expenses and 0.25% may be used to pay shareholder service fees. The
NASD rules also limits the aggregate amount which the Fund may pay for such
distribution costs to 6.25% of gross share sales of the Fund since the inception
of any asset-based sales charge plus interest at the prime rate plus 1% on
unpaid amounts thereof (less any contingent deferred sales charge). Such
limitation does not apply to shareholder service fees.
<PAGE>
- - - --------------------------------------------------------------------------------
INCOME DIVIDENDS AND TAXES
- - - --------------------------------------------------------------------------------
It is the policy of the Fund to distribute substantially all of its net
income and net capital gains, if any, to its shareholders annually.
All such dividends of net income and capital gains distribution are
automatically reinvested in additional shares at the net asset value determined
on the payment date. A shareholder may elect to receive such dividend
distributions in cash either by checking the appropriate box on the New Account
Application, or by notifying the Fund in writing.
The Internal Revenue Code of 1986 imposes on the Fund a nondeductible
excise tax unless the Fund distributes annually at least 98% of its net
investment income earned during the calendar year, at least 98% of capital gain
net income realized in the 12 months preceding October 31, and any undistributed
balances from the previous year. In addition, the Tax Reform Act of 1986 (the
"Tax Act") provides that any dividend declared by a Fund in October, November,
or December and paid in January will be deemed to have been paid by the Fund and
to have been received by each shareholder in December. Distribution dates and
the amounts paid, if any, are subject to determination by the Board of Trustees.
Dividends and capital gains distributions are ordinarily taxable to
shareholders in the year distributed. However, under the Tax Act, the Fund is
permitted to make distributions up to February 1 and have them apply to the
previous tax year. The Fund expects to make such a distribution in future years.
A shareholder is taxed on capital gains and income realized by the Fund,
regardless of the length of time he has been a shareholder. Thus a shareholder
may receive capital gains distributions shortly after purchasing shares, and
this will reduce the market value of the shares by the amount of the
distribution. The shareholder will not be able to recognize the resultant loss
in value for tax purposes until the shares are sold at a later date. In the case
of some mutual funds this effect can be substantial. In the case of the Fund,
which is more likely to change its portfolio and therefore tends not to realize
large capital gains accumulated over a long period of time, the effect is not
expected to be substantial.
Dividends and capital gains distributions are taxable to the shareholder
whether received in cash or reinvested in additional shares. Shareholders not
otherwise subject to tax on their income will not be required to pay tax on
amounts distributed to them. Each shareholder will receive a statement annually
informing him of the amount of the income and capital gains which have been
distributed during the calendar year.
The Fund also intends to comply with Subchapter M of the Internal Revenue
Code, which imposes such restrictions as (1) appropriate diversification of its
portfolio of investments and (2) realization of 90% of its annual gross income
from dividends, interest, and gains from the sale of securities. The Fund might
deviate from this policy, and incur a tax liability, if this were necessary to
fully protect shareholder values. The Fund qualified as a "regulated investment
company" for each of the last two fiscal years.
<PAGE>
The foregoing discussion of taxes is limited to federal income taxes.
Distributions, whether in cash or in kind may be subject to state and local
taxes. Shareholders are urged to consult their tax advisers regarding specific
questions relating to federal, state, and local taxes.
The Fund is required to withhold and remit to the federal government 31% of
any reportable payments (which may include dividends, capital gains
distributions, if any, and redemptions) paid to certain shareholders. In order
to avoid this withholding requirement, each shareholder must certify on the New
Account Application that the social security or taxpayer identification number
is correct and that the shareholder is not currently subject to backup
withholding or is exempt from backup withholding.
- - - --------------------------------------------------------------------------------
HOW NET ASSET VALUE IS DETERMINED
- - - --------------------------------------------------------------------------------
Net asset value per share is determined at each closing of the New York
Stock Exchange each day the Exchange is open for business and each other day
during which there is a sufficient degree of trading that the current net asset
value of the Fund's shares might be materially affected by changes in the value
of the securities held by the Fund. Net asset value is obtained by dividing the
value of the Fund's assets, less its liabilities, by the total number of its
shares of beneficial interest outstanding at the time.
- - - --------------------------------------------------------------------------------
PERFORMANCE INFORMATION AND REPORTS
- - - --------------------------------------------------------------------------------
The Fund's performance may be used from time to time in advertisements,
shareholder reports or other communications to shareholders or prospective
shareholders. Performance information may include the Fund's investment results
and/or comparisons of its investment results to the Standard & Poor's 500
Composite Stock Price Index, Dow Jones World Stock Index or other various
unmanaged indices or results of other mutual funds or investment or savings
vehicles. The Fund's investment results as used in such communications will be
calculated on a total rate of return basis in the manner set forth below. From
time to time, fund rankings may be quoted from various sources, such as Lipper
Analytical Services, Inc.
The Fund may provide period and average annualized "total return"
quotations. A Fund's "total return" refers to the change in the value of an
investment in the Fund over a stated period based on any change in net asset
value per share and including the value of any shares purchasable with any
dividends or capital gains distributed during such period. Period total return
may be annualized. Average annual total return smoothes out variations in
performance and takes into account any applicable initial or contingent deferred
sales charges.
<PAGE>
An annualized total return is a compounded total return which assumes that
the period total return is generated over a one-year period, and that all
dividends and capital gain distributions are reinvested. An annualized total
return will be slightly higher than a period total return if the period is
shorter than one year, because of the assumed reinvestment.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the total return of the Fund will vary depending upon
interest rates, the current market value of the securities held by the Fund and
changes in the Fund's expenses. In addition, during certain periods for which
total return quotations may be provided, the Manager may have voluntarily agreed
to waive portions of its fees or reimburse Fund operating expenses on a
month-to-month basis. Such waivers will have the effect of increasing the Fund's
net income (and therefore its total return) during the period such waivers are
in effect.
Shareholders will receive financial reports semi-annually that include the
Fund's financial statements, including listings of investment securities held by
the Fund at those dates. Annual reports are audited by independent accountants.
- - - --------------------------------------------------------------------------------
OTHER INFORMATION
- - - --------------------------------------------------------------------------------
SHARES OF BENEFICIAL INTEREST
The Trust's Declaration of Trust permits the Trust to offer and sell an
unlimited number of full and fractional shares of beneficial interest in each of
the Trust's existing funds and to create additional funds. All shares have a par
value of $.10 per share, are fully paid, non-assessable and fully transferable
when issued. All shares are issued as full or fractional shares.
A fraction of a share has the same rights and privileges as a full share.
Each Fund of the Trust issues its own series of shares of beneficial interest.
The shares of each Fund represent an interest only in the Fund's assets (and
profits or losses) and in the event of liquidation, each share of a particular
Fund would have the same rights to dividends and assets as every other share of
the Fund. The Trust's Board of Trustees may authorize the creation of additional
series under the Declaration of Trust, each of which would invest its assets in
separate, individually managed portfolios.
Each full or fractional share has a proportionate vote. On some issues,
such as the election of Trustees, all shares of the Trust vote together as one
series. On an issue affecting a particular Fund, only its shares vote as a
separate series. An example of such an issue would be a fundamental investment
restriction pertaining to only one Fund. In voting on a Distribution Plan,
approval of the Plan by the shareholders of a particular Fund would make the
Plan effective as to that Fund, whether or not it had been approved by the
shareholders of any other Fund.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
<PAGE>
obligations. However, the risk of a shareholder incurring financial loss as a
result of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Fund itself was unable to meet its
obligations.
When matters are submitted for shareholder vote, shareholders of each Fund
will have one vote for each full share held and proportionate, fractional votes
for fractional shares held. A separate vote of a Fund is required on any matter
affecting the Fund on which shareholders are entitled to vote. Shareholders of
one Fund are not entitled to vote on a matter that does not affect that Fund but
that does require a separate vote of any other Fund. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of Trustees holding office have been elected
by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Any Trustee may be removed
from office upon the vote of shareholders holding at least two-thirds of the
Trust's outstanding shares at a meeting called for that purpose. The Trustees
are required to call such a meeting upon the written request of shareholders
holding at least 10% of the Trust's outstanding shares. Shareholders have under
certain circumstances (e.g., upon application and submission of certain
specified documents to the Trustees of the Fund by a specified number of
shareholders) the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees.
As stated in "Investment Objective and Policies," except as otherwise
expressly provided herein, the Fund's investment objective and policies are not
fundamental and may be changed by the Trustees without shareholder approval. (No
such change would be made, however, without 30 days written notice to
shareholders.)
YEAR 2000
Like other mutual funds and businesses, the Fund could be adversely
affected if the computer systems used by the Manager, transfer agent and other
service providers to the Fund are unable to process and calculate date-related
information and data from and after January 1, 2000. Therefore, the Manager and
the transfer agent are currently taking steps they believe are reasonably
designed to assess any potential Year 2000 problems affecting the computer
systems upon which they or the Fund rely. In addition, the Fund has obtained
reasonable assurances that comparable steps are being taken by its other service
providers. All service providers have informed the Fund that they plan to be
Year 2000 compliant by the end of 1998, and the Fund will continue to monitor
their progress.
<PAGE>
INVESTMENT ADVISER
PROACTIVE Money Management, Inc.
DISTRIBUTOR
PROACTIVE Financial Services, Inc.
ADDRESS OF FUND, ADVISER & DISTRIBUTOR
500 Chesterfield Center, Suite 250
Chesterfield, MO 63017
800-873-3371
314-530-7575
CUSTODIAN
Star Bank, N.A.
Star Bank Center
425 Walnut Street
Cincinnati, OH 45202
TRANSFER AGENT & DIVIDEND
DISBURSING AGENT
Mutual Funds Service Co.
6000 Memorial Drive
Dublin, OH 43017
888-587-3539
614-798-3149 (in Central Ohio)
LEGAL COUNSEL
Armstrong, Teasdale, Schlafly & Davis
One Metropolitan Square
St. Louis, MO 63102-2740
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, OH 43215
No dealer, sales representative, or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer made by this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund or the Distributor. This Prospectus does
not constitute an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
PROACTIVE Asset Allocation Funds
OPTI-FLEX(R) DYNAMIC FUND
500 Chesterfield Center, Suite 250
Chesterfield, MO 63017
888-PROACTIVE
314-530-7575
<PAGE>
<PAGE>
OPTI-FLEX(R) DYNAMIC FUND
A Fund of PROACTIVE ASSET ALLOCATION FUNDS Trust
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL , 1998
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus of OPTI-FLEX(R) Dynamic Fund dated April
____, 1998. A copy of the Prospectus may be obtained from OPTI-FLEX(R) Dynamic
Fund, c/o Mutual FundS Service Co., 6000 Memorial Drive, Dublin, Ohio 43017, or
by calling: 1-800-325-3539. Capitalized terms used and not otherwise defined
herein have the same meanings as defined in the Prospectus.
TABLE OF CONTENTS
PAGE
Investment Policies and Related Matters 2
General 2
The Fund's Portfolio 2
Investment Restrictions 2
Portfolio Turnover 14
Purchase and Sale of Fund Securities 14
Valuation of Portfolio Securities 15
Calculation of Total Return 16
Additional Purchase and Redemption Information 17
Distribution and Taxes 18
Investment Adviser and Manager 19
Officers and Trustees 20
The Distributor 22
Individual Retirement Accounts (IRA) 23
Description of the Trust 27
Principal Holders of Outstanding Shares 28
Financial Statements 29
Appendix
INVESTMENT ADVISER TRANSFER AGENT
PROACTIVE Money Management, Inc. Mutual Funds Service Co.
DISTRIBUTOR
PROACTIVE Financial Services, Inc.
<PAGE>
INVESTMENT POLICIES AND RELATED MATTERS
GENERAL
The investment policies set forth below in this section represent the
Fund's policies as of the date of this Statement of Additional Information. The
investment policies are not fundamental and they may be changed by the Trustees
of the Trust without shareholder approval. (No such change would be made,
however, without 30 days written notice to shareholders.)
Because the Manager intends to employ flexible asset allocation investment
strategies when market trends are not considered favorable, the Manager may
occasionally change the entire portfolio of the Fund. High transaction costs
could result when compared with other funds.
THE FUND'S PORTFOLIO
The Manager will select mutual funds for inclusion in the Fund on the basis
of the industry classifications represented in their portfolios, their specific
portfolio holdings, their performance records, their expense ratios, and the
compatibility of their investment policies and objectives with those of the
Fund.
The Manager utilizes a dynamic asset allocation strategy for deciding when
to invest in mutual funds or alternatively in other investments such as are
described below.
In purchasing shares of other mutual funds, the Fund will agree to vote the
shares in the same proportion as the vote of all other holders of such shares.
The Fund has adopted certain investment restrictions which cannot be
changed except with the vote of a majority of the Fund's issued and outstanding
shares. These restrictions are described elsewhere in this Statement of
Additional Information. The Fund may invest more than 25% of its assets in any
one industry.
The Fund may invest in common stocks based upon the criteria described in
its investment objectives. The Fund may invest in (or enter into repurchase
agreements with banks and broker-dealers with respect to) corporate bonds, U.S.
Government securities, commercial paper, certificates of deposit or other money
market instruments. The Fund may engage in hedging transactions to the extent
and for the purposes set forth in the Fund's Prospectus.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Trust with
respect to the Fund as fundamental policies. Under the Investment Company Act of
1940 (the "Act"), a "fundamental" policy may not be changed without the vote of
a majority of the outstanding voting securities of the Fund which is defined in
the Act as the lesser of (a) 67 percent or more of the shares present at a
shareholder meeting if the holders of more than 50 percent of the outstanding
shares are present or represented by proxy, or (b) more than 50 percent of the
outstanding shares ("Majority Vote"). The percentage limitations contained in
the restrictions listed below apply at the time of the purchase of the
securities. Whenever the Fund is requested to vote on a change in the investment
restrictions, the Trust will hold a meeting of the Fund shareholders and will
cast its votes as instructed by the shareholders.
<PAGE>
The Fund may not:
(1) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(2) borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
33-1/3% of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed this amount will be
reduced within three days (not including Sundays and holidays) to the extent
necessary to comply with the 33 1/3% limitation;
(3) underwrite securities issued by others, except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 in the disposition of restricted securities;
(4) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(5) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities);
(6) invest more than 25% of the value of its total assets in any industry
or group of industries other than open-end investment companies (U.S. Government
Securities are not subject to this limitation); or
(7) lend any security or make any other loan; however, this limitation does
not apply to purchases of debt securities or to repurchase agreements.
The following investment limitations are not fundamental and may be changed
without shareholder approval.
(i) The Fund does not currently intend to sell securities short, unless it
owns or has the right to obtain at no added cost securities identical to the
securities sold short, and provided that transactions in futures contracts and
options are not deemed to constitute selling securities short.
(ii) The Fund does not currently intend to purchase securities on margin,
except that the Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
(iii) The Fund may borrow money only from a bank, or from a registered
investment company or portfolio for which PROACTIVE Money Management, Inc. or an
affiliate serves as investment adviser if an applicable exemptive order has been
granted. The Fund will not purchase any security while borrowings representing
more than 5% of its total assets are outstanding.
<PAGE>
(iv) The Fund does not currently intend to purchase any security if, as a
result, more than 15% of its net assets would be invested in securities that are
deemed to be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued.
(v) The Fund does not currently intend to purchase interests in real estate
investment trusts that are not readily marketable or interests in real estate
limited partnerships that are not listed on an exchange or traded on the NASDAQ
National Market System if, as a result, the sum of such interests and other
investments considered illiquid under limitation (iv) would exceed 15% of the
fund's net assets.
(vi) The Fund does not currently intend to purchase the securities of any
issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.
(vii) The Fund does not currently intend to purchase warrants, valued at
the lower of cost or market, in excess of 5% of the Fund's net assets. Included
in that amount, but not to exceed 2% of the Fund's net assets, may be warrants
that are not listed on the New York Stock Exchange or the American Stock
Exchange. Warrants acquired by the Fund in units or attached to securities are
not subject to these restrictions.
(viii) The Fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
ASSET ALLOCATION. The money market segment includes all types of domestic
and foreign securities. Money market instruments may include corporate debt
securities, such as commercial paper and notes; government securities issued by
U.S. or foreign governments or their agencies or instrumentalities: bank
deposits and other financial institution obligations: repurchase agreements
involving any type of security; and other similar short-term instruments. These
instruments may be denominated in U.S. dollars or foreign currency.
The bond segment includes all varieties of domestic and foreign
fixed-income securities. The Manager will seek to maximize total return within
the bond class by adjusting the Fund's investments in securities with different
credit qualities, maturities, and coupon or dividend rates, and by seeking to
take advantage of yield differentials between securities. Securities in this
class may include bonds, notes, adjustable-rate preferred stocks, convertible
bonds, domestic and foreign government and government agency securities, zero
coupon bonds, and other intermediate and long-term securities. As with the money
market segment, these securities may be denominated in U.S. dollars or foreign
currency. The Fund may also invest in lower quality, high-yielding debt
securities (commonly referred to as "junk bonds").
The stock segment includes domestic and foreign equity securities of all
types. The Manager seeks a high total return within this asset class by actively
allocating assets to industry sectors expected to benefit from major trends, and
to individual stocks that the Manager believes to have superior investment
potential. When the Manager selects equity securities, it considers both growth
<PAGE>
and anticipated dividend income. Securities in the stock class may include
common stocks, fixed-rate preferred stocks (including convertible preferred
stocks), warrants, rights, depository receipts, securities of closed-end
investment companies, and other equity securities issued by companies of any
size, located anywhere in the world.
In making asset allocation decisions, the Manager will evaluate projections
of risk, market conditions, economic conditions, volatility, yields, and
returns. The Manager's management will use database systems to help analyze past
situations and trends, research in each of the asset classes to help in
securities selection, portfolio management professionals to determine asset
allocation and to select mutual funds, closed-end investment companies and
individual securities, and its own credit analysis as well as credit analyses
provided by rating services.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell securities on a
delayed-delivery or when issued basis. These transactions involve a commitment
by the Fund to purchase or sell specific securities at a predetermined price or
yield, with payment and delivery taking place after the customary settlement
period for that type of security. Typically, no interest accrues to the
purchaser until the security is delivered. The Fund may receive fees for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the Fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with the
Fund's other investments. If the Fund remains substantially fully invested at a
time when delayed-delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases are
outstanding, the Fund will set aside appropriate liquid assets in a segregated
custodial account to cover its purchase obligations. When the Fund has sold a
security on a delayed-delivery basis, the Fund does not participate in further
gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, the
Fund could miss a favorable price or yield opportunity, or could suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
EXPOSURE TO FOREIGN MARKETS. The Fund does not have a limitation on the
amount of Fund assets that may be invested in foreign securities. Foreign
securities, foreign currencies, and securities issued by U.S. entities with
substantial foreign operations may involve significant risks in addition to the
risks inherent in U.S. investments. The value of securities denominated in
foreign currencies and of dividends and interest paid with respect to such
securities will fluctuate based on the relative strength of the U.S. dollar.
Foreign investments involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments, and
may be affected by actions of foreign governments adverse to the interests of
U.S. investors. Such actions may include the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There is no assurance that the
Manager will be able to anticipate these potential events or counter their
effects. These risks are magnified for investments in developing countries,
which may have relatively unstable governments, economies based on only a few
industries, and securities markets that trade a small number of securities.
<PAGE>
Economies of particular countries or areas of the world may differ
favorably or unfavorably from the economy of the United States. Foreign markets
may offer less protection to investors than U.S. markets. It is anticipated that
in most cases the best available market for foreign securities will be on an
exchange or in over-the-counter markets located outside of the United States.
Foreign stock markets, while growing in volume and sophistication, are generally
not as developed as those in the United States, and securities of some foreign
issuers (particularly those located in developing countries) may be less liquid
and more volatile than securities of comparable U.S. issuers. Foreign security
trading practices, including those involving securities settlement where Fund
assets may be released prior to receipt of payment, may result in increased risk
in the event of a failed trade or the insolvency of a foreign broker-dealer, and
may involve substantial delays. In addition, the costs of foreign investing,
including withholding taxes, brokerage commissions and custodial costs, are
generally higher than for investing in U.S. securities. In general, there is
less overall governmental supervision and regulation of securities exchanges,
brokers, and listed companies than in the United States. It may also be
difficult to enforce legal rights in foreign countries. Foreign issuers are
generally not bound by uniform accounting, auditing, and financial reporting
requirements and standards of practice comparable to those applicable to U.S.
issuers.
Some foreign securities impose restrictions on transfer within the United
States or to U.S. persons. Although securities subject to such transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
American Depositary Receipts (ADR's) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or elsewhere.
The underlying shares are held in trust by a custodian bank or similar financial
institution in the issuer's home country. The depository bank may not have
physical custody of the underlying securities at all times and may charge fees
for various services, including forwarding dividends and interest and corporate
actions. ADR's are an alternative to directly purchasing the underlying foreign
securities in their national markets and currencies. However, ADR's continue to
be subject to many of the risks associated with investing directly in foreign
securities. These risks include foreign exchange risk as well as the political
and economic risks of the underlying issuer's country.
FOREIGN CURRENCY TRANSACTIONS. The Fund may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward contracts
to purchase or sell foreign currencies at a future date and price. The Fund will
convert currency on a spot basis from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers
generally do not charge a fee for conversion, they do realize a profit based on
the difference between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. Forward contracts are generally traded in an
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. The parties to a forward contract may
agree to offset or terminate the contract before its maturity, or may hold the
contract to maturity and complete the contemplated currency exchange.
<PAGE>
The Fund may use currency forward contracts for any purpose consistent with
its investment objective. The following discussion summarizes the principal
currency management strategies involving forward contracts that could be used by
the Fund. The Fund may also use indexed securities, and options and futures
contracts relating to foreign currencies for the same purposes.
When the Fund agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
security transaction, the Fund will be able to protect itself against an adverse
change in foreign currency values between the date the security is purchased or
sold and the date on which payment is made or received. This technique is
sometimes referred to as a "settlement hedge" or "transaction hedge." The Fund
may also enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by the
Manager.
The Fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if a
fund owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. A fund could also hedge the position by selling another currency
expected to perform similarly to the pound sterling - for example, by entering
into a forward contract to sell Deutschemarks in return for U.S. dollars. This
type of hedge, sometimes referred to as a "proxy hedge," could offer advantages
in terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a simple hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
The Fund may enter into forward contracts to shift its investment exposure
from one currency into another This may include shifting exposure from U.S.
dollars to a foreign currency, or from one foreign currency to another foreign
currency. For example, if a fund held investments denominated in Deutschemarks,
the fund could enter into forward contracts to sell Deutschemarks and purchase
Swiss Francs. This type of strategy, sometimes known as a "cross-hedge," will
tend to reduce or eliminate exposure to the currency that is sold, and increase
exposure to the currency that is purchased, much as if the fund had sold a
security denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause the fund to assume the risk of
fluctuations in the value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, the Fund will segregate assets
to cover currency forward contracts, if any, whose purpose is essentially
speculative. The Fund will not segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
Successful use of currency management strategies will depend on the
Manager's skill in analyzing and predicting currency values. Currency management
strategies may substantially change a fund's investment exposure to changes in
<PAGE>
currency exchange rates, and could result in losses to the Fund if currencies do
not perform as the Manager anticipates. For example, if a currency's value rose
at a time when the Manager had hedged a fund by selling that currency in
exchange for dollars, the Fund would be unable to participate in the currency's
appreciation. If the Manager hedges currency exposure through proxy hedges, the
Fund could realize currency losses from the hedge and the security position at
the same time if the two currencies do not move in tandem. Similarly, if the
Manager increases the Fund's exposure to a foreign currency, and that currency's
value declines, the Fund will realize a loss. There is no assurance that the
Manager's use of currency management strategies will be advantageous to the Fund
or that it will hedge at an appropriate time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will comply with
guidelines established by the Securities and Exchange Commission with respect to
coverage of options and futures strategies by mutual funds, and if the
guidelines so require will set aside appropriate liquid assets in a segregated
custodial account in the amount prescribed. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with other suitable assets. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
COMBINED POSITIONS. The Fund may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of the overall position. For example, the
Fund may purchase a put option and write a call option on the same underlying
instrument in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which they typically invest, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
<PAGE>
FUTURES CONTRACTS. When the Fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When the
Fund sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take place
is fixed when the Fund enters into the contract. Some currently available
futures contracts are based on specific securities, such as U.S. Treasury bonds
or notes, and some are based on indices of securities prices, such as the
Standard & Poor's Composite Index of 500 Stocks (S&P 500). Futures can be held
until their delivery dates, or can be closed out before then if a liquid
secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase the Fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When the Fund sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the contract
is held until the delivery date. However, both the purchaser and seller are
required to deposit "initial margin" with a futures broker, known as a futures
commission merchant (FCM) when the contract is entered into. Initial margin
deposits are typically equal to a percentage of the contract's value. If the
value of either party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in value on a daily
basis. The party that has a gain may be entitled to receive all or a portion of
this amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of the Fund, the
Fund may be entitled to retum of margin owed to it only in proportion to the
amount received by the FCM's other customers, potentially resulting in losses to
the Fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Fund has filed a
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the Commodity Futures Trading Commission (CFTC) and the
National Futures Association which regulate trading in the futures markets. The
Fund intends to comply with Rule 4.5 under the Commodity Exchange Act, which
limits the extent to which the Fund can commit assets to initial margin deposits
and option premiums.
The above limitations on the Fund investments in futures contracts and
options, and the Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information, may be changed
as regulatory agencies permit.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
secondary market will exist for any particular options or futures contract at
any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying instrument's
current price. In addition, exchanges may establish daily price fluctuation
<PAGE>
limits for options and futures contracts, and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible for the Fund to enter into new positions or close
out existing positions. If the secondary market for a contract is not liquid
because of price fluctuation limits or otherwise, it could prevent prompt
liquidation of unfavorable positions, and potentially could require the Fund to
continue to hold a position until delivery or expiration regardless of changes
in its value. As a result, the Fund's access to other assets held to cover its
options or futures positions could also be impaired.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except that they
are traded on exchanges (and have margin requirements) and are standardized as
to contract size and delivery date. Most currency futures contracts call for
payment or delivery in U.S. dollars. The underlying instrument of a currency
option may be a foreign currency, which generally is purchased or delivered in
exchange for U.S. dollars, or may be a futures contract. The purchaser of a
currency call obtains the right to purchase the underlying currency, and the
purchaser of a currency put obtains the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. The Fund may
purchase and sell currency futures and may purchase and write currency options
to increase or decrease their exposure to different foreign currencies. The Fund
may also purchase and write currency options in conjunction with each other or
with currency futures or forward contracts. Currency futures and options values
can be expected to correlate with exchange rates, but may not reflect other
factors that affect the value of a fund's investments. A currency hedge, for
example, should protect a Yen-denominated security from a decline in the Yen,
but will not protect the Fund against a price decline resulting from
deterioration in the issuer's creditworthiness. Because the value of the Fund's
foreign-denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the Fund's investments exactly over time.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of over-the-counter (OTC) options (options not traded on
exchanges) generally are established through negotiation with the other party to
the option contract. While this type of arrangement allows the Fund greater
flexibility to tailor an option to its needs. OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indices
of securities prices, and futures contracts. The Fund may terminate its position
in a put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. The Fund may also terminate a put
option position by closing it out in the secondary market at its current price,
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
<PAGE>
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS. When the Fund writes a put option, it takes
the opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party to the option chooses
to exercise it. When writing an option on a futures contract, the Fund will be
required to make margin payments to an FCM as described above for futures
contracts. The Fund may seek to terminate its position in a put option it writes
before exercise by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for a put option the Fund has
written, however, the Fund must continue to be prepared to pay the strike price
while the option is outstanding, regardless of price changes, and must continue
to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit, because it should be able to close out the option at a lower price.
If security prices fall, the put writer would expect to suffer a loss. This loss
should be less than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should mitigate the
effects of the decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument. in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Board of Trustees, the Manager determines
the liquidity of the Fund's investments and, through reports from the Manager,
the Board monitors investments in illiquid instruments. In determining the
liquidity of the Fund's investments, the Manager may consider various factors,
including (1) the frequency of trades and quotations, (2) the number of dealers
and prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the Fund's rights and obligations relating to the
investment).
Investments currently considered by the Fund to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days, and over-the-counter options. Also, the Manager may
<PAGE>
determine some restricted securities, and emerging market securities to be
illiquid. However, with respect to over-the-counter options the Fund writes, all
or a portion of the value of the underlying instrument may be illiquid depending
on the assets held to cover the option and the nature and terms of any agreement
the Fund may have to close out the option before expiration.
In the absence of market quotations, illiquid investments are priced at
fair value as determined in good faith by the Board of Trustees. If through a
change in values, net assets, or other circumstances, the Fund were in a
position where more than 15% of its net assets was invested in illiquid
securities, it would seek to take appropriate steps to protect liquidity.
INDEXED SECURITIES. The Fund may purchase securities whose prices are
indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies. The Manager will use its judgment in determining whether
indexed securities should be treated as money market instruments, bonds, stocks,
or as a separate asset class for purposes of the Fund's investment allocations,
depending on the individual characteristics of the securities. Indexed
securities may be more volatile than the underlying instruments.
LOWER-QUALITY DEBT SECURITIES. The market for lower-quality debt securities
may be thinner and less active than that for higher-quality debt securities,
which can adversely affect the prices at which the former are sold. If market
quotations are not available, lower-quality debt securities will be valued in
accordance with procedures established by the Board of Trustees, including the
use of outside pricing services. Judgment plays a greater role in valuing
high-yield corporate debt securities than is the case for securities for which
more external sources for quotations and last-sale information are available.
Adverse publicity and changing investor perceptions may affect the ability of
outside pricing services to value lower-quality debt securities and the Fund's
ability to dispose of these securities.
Since the risk of default is higher for lower-quality debt securities, the
Manager's research and credit analysis are an especially important part of
managing securities of this type held by the Fund. In considering investments
for the Fund, the Manager will attempt to identify those issuers of
<PAGE>
high-yielding securities whose financial condition is adequate to meet future
obligations, has improved, or is expected to improve in the future. The
Manager's analysis focuses on relative values based on such factors as interest
or dividend coverage, asset coverage, earnings prospects, and the experience and
managerial strength of the issuer.
The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be in
the best interest of the Fund's shareholders.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases a
security and simultaneously commits to sell that security back to the original
seller at an agreed-upon price. The resale price reflects the purchase price
plus an agreed-upon incremental amount which is unrelated to the coupon rate or
maturity of the purchased security. The securities purchased by the Fund are
used to collateralize the repurchase obligation. As such, they are held in an
account of the Fund at a bank, marked-to-market daily, and maintained at a value
at least equal to the sale price plus the accrued incremental amount. While it
does not presently appear possible to eliminate all risks from these
transactions (particularly the possibility that the value of the underlying
security will be less than the resale price, as well as delays and costs to a
fund in connection with bankruptcy proceedings), it is the Fund's current policy
to engage in repurchase agreement transactions with parties whose
creditworthiness has been reviewed and found satisfactory by the Manager.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is required,
the Fund may be obligated to pay all or part of the registration expense and a
considerable period may elapse between the time it decides to seek registration
and the time it may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to seek registration of the security.
SHORT SALES. The Fund may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if the Manager
anticipates a decline in the price of the stock underlying a convertible
security the Fund holds, it may sell the stock short. If the stock price
subsequently declines, the proceeds of the short sale could be expected to
offset all or a portion of the effect of the stock's decline on the value of the
convertible security. The Fund currently intends to hedge no more than 15% of
its total assets with short sales on equity securities underlying its
convertible security holdings under normal circumstances.
When the Fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to hold
them aside while the short sale is outstanding. The Fund will incur transaction
costs, including interest expense, in connection with opening, maintaining, and
closing short sales.
ZERO COUPON BONDS. Zero coupon bonds do not make interest payments;
instead, they are sold at a deep discount from their face value and are redeemed
at face value when they mature. Because zero coupon bonds do not pay current
income, their prices can be very volatile when interest rates change. In
calculating its dividends, the Fund takes into account as income a portion of
the difference between a zero coupon bond's purchase price and its face value.
<PAGE>
PORTFOLIO TURNOVER
Turnover rates are primarily a function of the Manager's response to market
conditions. The portfolio turnover rate for the year ended December 31, 1997 was
1,237% (19% for the period October 1, 1996 through December 31, 1996). The
turnover rate for the Fund increased significantly in 1997 because of (1)
rapidly changing market conditions during the year and (2) the necessity of
redeeming and purchasing underlying mutual funds toward the end of the year to
capture year-end dividends to comply with the 30% short-short rule provided in
Subchapter M of the Internal Revenue Code of 1986, as amended (which rule no
longer applies to the Fund).
In the Manager's opinion, it may be in the best interest of the Fund to
change its portfolio to a fully or partially defensive position at various times
during the year. This defensive investment strategy can produce high portfolio
turnover ratios when calculated in accordance with SEC rules.
PURCHASE AND SALE OF PORTFOLIO SECURITIES
The Manager is authorized to place orders for the purchase and sale of
portfolio securities, and will do so in accordance with the policies described
below. The Manager is also responsible for the placement of transaction orders
for other accounts for which it or its affiliates act as investment adviser. In
selecting broker-dealers, subject to applicable limitations of the federal
securities laws, the Manager considers various relevant factors, including, but
not limited to: the size and type of the transaction; the nature and character
of the markets for the security to be purchased or sold; the execution
efficiency, settlement capability, and financial condition of the broker-dealer
firm; the broker-dealer's execution services rendered on a continuing basis; the
reasonableness of any commissions; and arrangements for payment of Fund
expenses. Generally, commissions for investments traded on foreign exchanges
will be higher than for investments traded on U.S. exchanges and may not be
subject to negotiation.
The Fund may execute portfolio transactions with broker-dealers who provide
research and execution services to the Fund or other accounts over which the
Manager or its affiliates exercise investment discretion. Such services may
include advice concerning the value of securities; the advisability of investing
in, purchasing, or selling securities; and the availability of securities or the
purchasers or sellers of securities. In addition, such broker-dealers may
furnish analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and performance of accounts;
effect securities transactions, and perform functions incidental thereto (such
as clearance and settlement).
The receipt of research from broker-dealers that execute transactions on
behalf of the Fund may be useful to the Manager in rendering investment
management services to the Fund or its other clients, and conversely, such
research provided by broker-dealers who have executed transaction orders on
behalf of other clients may be useful to the Manager in carrying out its
obligations to the Fund. The receipt of such research has not reduced the
Manager's normal independent research activities; however, it enables the
Manager to avoid the additional expenses that could be incurred if the Manager
tried to develop comparable information through its own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
<PAGE>
recognition of their research and execution services. In order to cause the Fund
to pay such higher commissions, the Manager must determine in good faith that
such commissions are reasonable in relation to the value of the brokerage and
research services provided by such executing broker-dealers, viewed in terms of
a particular transaction or the Manager's overall responsibilities to the Fund
and its other clients. In reaching this determination, the Manager will not
attempt to place a specific dollar value on the brokerage and research services
provided, or to determine what position of the compensation should be related to
those services.
The Manager is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the Fund to the extent permitted by law. The Manager
may use research services provided by and place agency transactions with the
Distributor, if the commissions are fair, reasonable, and comparable to
commissions charged by non-affiliated, qualified brokerage firms for similar
services.
The Manager may allocate brokerage transactions to broker-dealers who have
entered into arrangements with the Manager under which the broker-dealer
allocates a portion of the commissions paid by the Fund toward payment of the
Fund's expenses, such as transfer agent fees or custodian fees. The transaction
quality must, however, be comparable to those of other qualified broker-dealers.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members of
national securities exchanges from executing exchange transactions for accounts
which they or their affiliates manage, unless certain requirements are
satisfied. Pursuant to such requirements, the Board of Trustees has authorized
the Manager to execute portfolio transactions on national securities exchanges
in accordance with approved procedures and applicable SEC rules.
The Fund's Trustees periodically review the Manager's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the commissions paid by the Fund over
representative periods of time to determine if they are reasonable in relation
to the benefits to the Fund.
From time to time, the Trustees will review whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
The Fund seeks to recapture soliciting broker-dealer fees on the tender of
portfolio securities, but at present no other recapture arrangements are in
effect. The Trustees intend to continue to review whether recapture
opportunities are available and are legally permissible and, if so, to determine
in the exercise of their business judgment whether it would be advisable for
each fund to seek such recapture.
During the year ended December 31, 1997, the Fund paid total commissions of
$18,043 on the purchase and sale of securities ($3,150 in total commissions for
the period from October 1, 1996 through December 31, 1996).
VALUATION OF PORTFOLIO SECURITIES
Securities owned by the Fund and listed or traded on any national
securities exchange are valued at each closing of the New York Stock Exchange on
the basis of the last sale on such exchange each day that the exchange is open
for business. If there is no sale on that day, or if the security is not listed,
<PAGE>
it is valued at its last bid quotation on the exchange or, in the case of
unlisted securities, as obtained from an established market maker. The assets of
the Fund consist primarily of underlying funds, which are valued at their
respective published net asset values at the end of the day. Futures contracts
are valued on the basis of the cost of closing out the liability; i.e., at the
settlement price of a closing contract or at the asked quotation for such a
contract if there is no sale. Money market instruments (certificates of deposit,
commercial paper, etc.) in the Fund are valued either at amortized cost or at
original cost plus accrued interest, both of which approximate current value.
Fixed income securities are priced at the current quoted bid price. However,
U.S. Government Securities and other fixed income securities may be valued on
the basis of prices provided by an independent pricing service when such prices
are believed to reflect the fair market value of such securities. The prices
provided by a pricing service are determined without regard to bid or last sale
prices but take into account securities prices, yields, maturities, call
features, ratings, institutional size trading in similar groups of securities
and developments related to specific securities. Portfolio securities for which
market quotations are not readily available are to be valued by the Manager in
good faith at its own expense under the direction of the Trustees.
Other assets, which include cash, prepaid and accrued items and amounts
receivable as income on investments and from the sale of portfolio securities,
are carried at book value, as are all liabilities. Liabilities include accrued
expenses, sums owed for securities purchased, and dividends payable.
CALCULATION OF TOTAL RETURN
From time to time, the Fund may advertise its average annual total returns
for various periods of time. When applicable, the periods of time shown will be
for a one-year period; a five-year period (or relevant portion thereof) and
since inception. The calculation assumes the reinvestment of all dividends and
distributions. Examples of the total return calculation for the Fund will assume
a hypothetical investment of $1,000 at the beginning of each period.
It is computed by finding the average annual compounded rates of return
over the length of the base periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P (1+T)n = ERV
P = initial investment of $1,000
T = average annual total return
n = Number of years
ERV = ending redeemable value at the end of the base period
OPTI-FLEX(R) DYNAMIC FUND:
TOTAL RETURN
1 Year Period 1 Year Period 1 Year Period
Since Inception Ended Ended
(For the Period December 31, 1997 December 31, 1997
October 1, 1996 (Does not Reflect (Reflects Contingent
through Contingent Deferred Deferred
DECEMBER 31, 1997) SALES CHARGE) SALES CHARGE)
------------------ ------------- -------------
Value of Account
At end of Period $1,084.00 $1,050.19 $1,040.56
Value of Account
At beginning of Period 1,000.00 1,000.00 1,000.00
--------- ---------- ----------
Base Period Return $ 84.00 $ 50.19 $ 40.56
Average Total Return 6.67% 5.02% 4.06%
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
All redemptions in kind shall be of readily marketable securities. If
shares are redeemed in kind, the redeeming shareholder may incur brokerage costs
in converting the assets to cash.
AUTOMATIC ACCOUNT BUILDER. An investor may arrange to have a fixed amount
of $100 or more automatically invested in shares of the Fund monthly by
authorizing his or her bank account to be debited to invest specified dollar
amounts in shares of the Fund. The investor's bank must be a member of the
Automatic Clearing House System. Stock certificates are not issued to Automatic
Account Builder participants.
Further information about these programs and an application form can be
obtained from the Distributor.
SYSTEMATIC WITHDRAWAL PROGRAM. A systematic withdrawal plan is available
for shareholders having shares of the Fund with a minimum value of $10,000,
based upon the offering price. The plan provides for monthly, quarterly or
annual checks in any amount, but not less than $100 (which amount is not
necessarily recommended). Except as otherwise provided in the Prospectus, to the
extent such withdrawals exceed the current net asset value of reinvested
dividends, they may be subject to the contingent deferred sales charge. See "How
to Buy Shares" and "Other Shareholder Services" in the Prospectus.
Dividends and/or distributions on shares held under this plan are invested
in additional full and fractional shares at net asset value. The Transfer Agent
acts as agent for the shareholder in redeeming sufficient full and fractional
shares to provide the amount of the periodic withdrawal payment. The plan may be
terminated at any time.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the applicable sales charges to the withdrawal of the
Fund's shares. Each shareholder should consult his or her own tax adviser with
regard to the tax consequences of the plan, particularly if used in connection
with a retirement plan.
<PAGE>
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. If you request to have distributions mailed to you and the
U.S. Postal Service cannot deliver your checks, or if your checks remain
uncashed for six months, the Manager may reinvest your distributions at the
then-current NAV. All subsequent distributions will then be reinvested until you
provide the Manager with alternate instructions.
DIVIDENDS. A portion of the Fund's income may qualify for the
dividends-received deduction available to corporate shareholders to the extent
that the Fund's income is derived from qualifying dividends. Because the Fund
may earn other types of income, such as non-qualifying dividends and short-term
capital gains, the percentage of dividends from the Fund that qualifies for the
deduction generally will be less than 100%. The Fund will make available to
corporate shareholders annually the percentage of Fund dividends that qualifies
for the dividends-received deduction. A portion of the Fund's dividends derived
from certain U.S. government obligations may be exempt from state and local
taxation. The Fund will send each shareholder a notice in January describing the
tax status of dividends and capital gain distributions for the prior year.
CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains earned by the Fund on
the sale of securities and distributed to shareholders of the Fund are federally
taxable as long-term capital gains regardless of the length of time shareholders
have held their shares. If a shareholder receives a long-term capital gain
distribution on shares of the Fund and such shares are held six months or less
and are sold at a loss, the portion of the loss equal to the amount of the
long-term capital gain distribution will be considered a long-term loss for tax
purposes.
Short-term capital gains distributed by the Fund are taxable to
shareholders as dividends, not as capital gains. Distributions from short-term
capital gains do not qualify for the dividends-received deduction.
FOREIGN TAXES. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. Because the Fund does not
currently anticipate that securities of foreign issuers will constitute more
than 25% of its total assets at the end of its fiscal year, shareholders should
not expect to claim a foreign tax credit or deduction on their federal income
tax returns with respect to foreign taxes withheld.
TAX STATUS OF THE FUND. The Fund intends to qualify each year as a
"regulated investment company" for tax purposes so that it will not be liable
for federal tax on income and capital gains distributed to shareholders. In
order to qualify as a regulated investment company and avoid being subject to
federal income or excise taxes at the Fund level, the Fund intends to distribute
substantially all of its net investment income (consisting of the income it
earns from its investment in the Portfolio, less expenses) and net realized
capital gains within each calendar year as well as on a fiscal year basis. The
Fund intends to comply with other tax rules applicable to regulated investment
companies.
The Fund has qualified as a "regulated investment company" for each of its
last two fiscal years.
OTHER TAX INFORMATION. The information above is only a summary of some of
the tax consequences generally affecting the Fund and its shareholders, and no
attempt has been made to discuss individual tax consequences. In addition to
<PAGE>
federal income taxes, shareholders may be subject to state and local taxes on
Fund distributions. Investors should consult their tax advisers to determine
whether the Fund is suitable to their particular tax situation.
INVESTMENT ADVISER AND MANAGER
PROACTIVE Money Management, Inc. (the "Manager") is the investment adviser
and manager for, and has an Investment Advisory Contract with, the Fund.
Pursuant to the Investment Advisory Contract with the Fund, the Manager,
subject to the supervision of the Fund's Board of Trustees and in conformity
with the stated objective and policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, the Manager is obligated to keep certain books and records of the
Fund. The Manager also administers the Fund's corporate affairs, and in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by Star Bank, N.A., the Portfolio's custodian and Mutual Funds Service Co., the
Fund's transfer and disbursing agent. The management services of the Manager are
not exclusive under the terms of the Investment Advisory Agreement and the
Manager is free to, and does, render management services to others.
The Manager and the Distributor have entered into a marketing agreement
under which the Manager pays the Distributor an amount equal to one-third of the
investment advisory fees received by the Manager from the Fund in consideration
for the Distributor furnishing marketing services on behalf of the Fund.
The Investment Advisory Contract for the Fund was separately approved by a
vote of a majority of the Trustees, including a majority of those Trustees who
are not "interested persons" (as defined in the Investment Company Act of 1940)
of the Fund. The Investment Advisory Contract is to remain in force so long as
renewal thereof is specifically approved at least annually by a majority of the
Trustees or by vote of a majority of the issued and outstanding shares of the
Fund, and in either case by vote of a majority of the Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940) at a
meeting called for the purpose of voting on such renewal.
The Investment Advisory Contract provides that the Manager will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which the Investment Advisory
Contract relates except for a loss resulting from willful misfeasance, bad
faith, gross negligence or reckless disregard of duty. The Investment Advisory
Contract will terminate automatically if assigned and may be terminated without
penalty at any time upon 60 days' prior written notice by Majority Vote of the
Fund, by the Trustees of the Fund, or by the Manager.
The Fund pays: the fees of the Trust's independent auditors, legal counsel,
custodian, transfer agent and accountants; insurance premiums; the fees and
expenses of Trustees who do not receive compensation from the Manager;
association dues; the cost of printing and mailing confirmations, prospectuses,
proxies, proxy statements, notices and reports to existing shareholders; state
registration fees; distribution expenses within the percentage limitations of
the shares' distribution and service plan, including the cost of printing and
mailing of prospectuses and other materials incident to soliciting new accounts;
and other miscellaneous expenses.
<PAGE>
Expenses of the Fund also include all fees under its Accounting and
Administrative Service Agreement; the expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Fund's custodian for all services to the Fund, including safekeeping of funds
and securities and maintaining required books and accounts; expenses of
preparing and mailing reports to investors and to governmental offices and
commissions; expenses of meetings of investors and Trustees; the advisory fees
payable to the Manager under the Investment Advisory Contract and other
miscellaneous expenses.
The Manager earns an annual fee, payable in monthly installments, from the
Fund at the rate of 0.75% of the Fund's first $500,000,000 in average net assets
and 0.65% of the Fund's average net assets in excess of $500,000,000.
For the year ended December 31, 1997, management fees were earned by
Manager totaling $83,620; however, the Manager voluntarily agreed to waive these
fees in order to assist the Fund in achieving its over-all expense objectives.
PROACTIVE Money Management, Inc. was incorporated in January, 1980 and
maintains its principal offices at 500 Chesterfield Center, Suite 250,
Chesterfield, MO 63017. The Manager is a wholly owned subsidiary of Security
Research Associates, Inc., which is controlled by C. Martin Unterreiner and
Janice B. Unterreiner through the ownership of voting common stock. The
Manager's officers and directors, and the principal offices are as set forth as
follows: Jeffrey J. Unterreiner, President and a Director; C. Martin
Unterreiner, Vice President, Secretary and a Director; and Tonjua G. Donnelly,
Treasurer and a Director. Jeffrey J. Unterreiner is Chairman, President and a
Trustee of the Trust. C. Martin Unterreiner is Vice President and a Trustee of
the Trust. Tonjua G. Donnelly is the Treasurer of the Trust.
OFFICERS AND TRUSTEES
The Trustees and executive officers of the Trust are listed below. Except
as indicated, each individual has held the office shown or other offices in the
same company for the last five years. Unless otherwise noted, the business
address of each Trustee and officer is 500 Chesterfield Center, Suite 250,
Chesterfield, MO 63017, which is also the address of the Manager. Those Trustees
who are "interested persons" (as defined in the Investment Company Act of 1940)
by virtue of their affiliation with either the Portfolio, the Trust or the
Manager are indicated by an asterisk (*).
The Trust is managed by its Trustees and officers. Their names, positions
and principal occupations during the past five years are listed below:
Position Principal
Name and Address and Age Held Occupation
- - - ------------------------ ---- ----------
Jeffrey J. Unterreiner*+, 28 Trustee/Chairman President, PROACTIVE
and President Financial Services, Inc.
since October, 1994;
President, PROACTIVE Money
Management, Inc. since July
1, 1997; Registered
Representative, FFP,
Securities, Inc., a broker-
dealer, from May, 1990 to
October, 1994.
<PAGE>
C. Martin Unterreiner*+, 58 Trustee/ Vice President and Chairman
Vice President of the Board, PROACTIVE Money
Management, Inc. since
January 1980; Vice President
of PROACTIVE Financial
Services, Inc. since July 1,
1997.
Henry J. Bingham, 67 Trustee Executive Managing Director,
Van Eck Global Funds Van Eck Associates Corp., an
99 Park Avenue investment adviser, since
New York, NY 10016 1984.
Patricia A. Houtz, 47 Trustee President, Jupiter Group,
Jupiter Group, Inc. Inc., a market timing/mutual
120 Country Club Drive fund switching subscription
Incline Village, NV 89450 advisory service, from 1992
to present; Principal, First
Affiliated Securities, a
broker-dealer, from 1990 to
1992.
Raymond E. Doerr, 75 Trustee Retired, formerly Engineer-
534 Fairways Circle ing Director for Monsanto
St. Louis, MO 63141 Company, a chemical company.
Retired November, 1982.
Patrick L. Durbin, 51 Trustee Chief Executive Officer,
7320 N. Mopac, Suite 312 Plan View, Inc., a computer
Austin, TX 78731 software company, since
1988.
Tonjua G. Donnelly*+, 28 Treasurer Executive Administrator,
PROACTIVE Financial
Services, Inc., since
November, 1994; Clerk, Magna
Group, from June, 1992 to
November, 1994; student,
University of Missouri, from
1988 to June, 1992.
Christian D. Tompras*+, 38 Secretary Compliance Officer, PROACTIVE
Money Management, Inc., and
PROACTIVE Financial Services,
Inc., since September 1997;
Internal Research Consultant,
First Financial Planners,
Inc., October 1995 to March
1996; Associate Vice
President, Prudential
Securities, February 1994 to
August 1995; Investment
Executive, Stifel, Nicolaus &
Company, February 1991 to
January 1994.
*"Interested Person" of the Trust (as defined in the Investment Company Act of
1940).
+500 Chesterfield Center, Suite 250, Chesterfield, MO 63017.
C. Martin Unterreiner is Jeffrey J. Unterreiner's father.
<PAGE>
The following table shows the compensation paid by the Fund to the Trustees
of the Fund during the fiscal year ended December 31, 1997:
COMPENSATION TABLE
Total
Pension or Compensation
Retirement Estimated from
Benefits Annual Registrant
Aggregate Accrued as Benefits and Fund
Compensation Part of Upon Complex Paid
TRUSTEE FROM THE FUND FUND EXPENSES RETIREMENT TO TRUSTEES
- - - ------- ------------- ------------- ---------- -----------
Jeffrey J. Unterreiner None None None None
C. Martin Unterreiner None None None None
Katherine R. Kearins None None None None
Peter J. Krussel None None None None
Henry J. Bingham $5,250 None None $5,250
Raymond E. Doerr $5,250 None None $5,250
Patrick L. Durbin $3,000 None None $3,000
Patricia A. Houtz $4,000 None None $4,000
Peter B. Mauthe $5,250 None None $5,250
The Trust pays each Trustee who is not an "interested person" an annual fee
of $2,000, plus $500 for each meeting of the Board of Trustees attended. Messrs.
Doerr and Bingham comprise the Audit Committee for the Trust. Each member of the
Audit Committee is paid $250 per quarter and $250 for each meeting of the Audit
Committee attended. Trustee fees for the OPTI-FLEX(R) Dynamic Fund totaled
$26,750 for the year ended December 31, 1997 ($9,000 for the period from October
1, 1996 through December 31, 1996). Audit Committee meeting fees totaled $3,750
for the year ended December 31, 1997 ($750 for the period from October 1, 1996
through December 31, 1996). All other officers and Trustees serve without
compensation from the Trust.
THE DISTRIBUTOR
PROACTIVE Financial Services, Inc. (the "Distributor"), 500 Chesterfield
Center, Suite 250, Chesterfield, MO 63017, acts as the distributor of the shares
of the Fund.
Pursuant to a plan of distribution (the "Plan") adopted by the Fund under
Rule 12b-1 under the 1940 Act and an underwriting agreement (the Underwriting
Agreement), the Distributor incurs the expenses of distributing the Fund's
shares. See "Distribution Plan" in the Prospectus.
On May 3, 1996, the Board of Trustees, including a majority of the Trustees
who are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Plan or in any agreement related to
the Plan (the Rule 12b-1 Trustees), at a meeting called for the purpose of
voting on the Plan, adopted a plan of distribution for the shares of the Fund.
<PAGE>
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of shares. See "How to Buy
Shares" in the Prospectus.
The Plan continues in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Trustees,
including a majority vote of the Rule 12b-1 Trustees, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated at any time, without penalty, by the vote of a majority of the
Trustees who are not interested persons or by the vote of the holders of a
majority of the outstanding shares of the Fund. The Plan may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders, and all material amendments are required
to be approved by the Board of Trustees in the manner described above. The Fund
will not be contractually obligated to pay expenses incurred under the Plan if
it is terminated or not continued.
Pursuant to the Plan, the Board of Trustees will review at least quarterly
a written report of the distribution expenses incurred on behalf of the shares
of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plan remains in effect, the selection and nomination of Trustees who
are not interested persons of the Fund shall be committed to the Trustees who
are not interested persons of the Fund.
Pursuant to the Underwriting Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933 and the Investment Company Act of
1940. The Underwriting Agreement was approved by the Board of Trustees,
including a majority of the Rule 12b-1 Trustees, on May 3, 1996. Total payments
made by the Fund to the distributor for the year ended December 31, 1997
amounted to $83,620 ($3,671 for the period from October 1, 1996 through December
31, 1996). A portion of the payments were used to offset part of initial
commissions paid to securities dealers for the sale of Fund shares.
The Distributor for the Fund is an affiliated person of the Manager and
the Fund and received the following commissions and other compensation from the
Trust during the fiscal year ended December 31, 1997.
NET UNDERWRITING COMPENSATION
NAME OF PRINCIPAL DISCOUNTS AND ON REDEMPTIONS BROKERAGE OTHER
UNDERWRITER COMMISSIONS AND REPURCHASES COMMISSIONS COMPENSATION
- - - ----------- ----------- --------------- ----------- ------------
Proactive Financial
Services, Inc. $63,224 $8,937 $0 $0
INDIVIDUAL RETIREMENT ACCOUNTS (IRA)
IRA accounts have a $4,000 minimum purchase requirement. Information
concerning contribution limitations for IRA accounts are described below.
INDIVIDUAL RETIREMENT ACCOUNTS (IRA):
DEDUCTIBLE CONTRIBUTIONS
All contributions (other than certain rollover contributions) must be made
in cash and are subject to the following limitations:
REGULAR. Contributions to an IRA (except for rollovers or employer
contributions under a simplified employee pension) may not exceed the amount of
compensation includible in gross income for the tax year or $2,000, whichever is
less. If neither you nor your spouse is an active participant in an employer
plan, you may make a contribution up to this limit and take a deduction for the
entire amount contributed. If you or your spouse is an active participant and
your adjusted gross income (AGI) is below a certain level you may also make a
contribution and take a deduction for the entire amount contributed. However, if
you or your spouse is an active participant and your AGI is above the specified
level, the dollar limit of the deductible contribution you make to your IRA may
be reduced or eliminated.
<PAGE>
Regular contributions are not allowed for the year in which you attain age
70-1/2 or for any year thereafter. You do not have to file an itemized federal
tax return to take an IRA deduction. Deductions are not allowed for any
contribution in excess of the deduction limit. Contributions for a year may be
made during such year or by the tax return filing date for such year (not
including extensions), if irrevocably designated for such year, in writing, when
such contribution is made.
If you and your spouse each receive compensation during the year and are
otherwise eligible, each of you may establish your own IRA. The contribution
limits apply separately to the compensation of each of you, without regard to
the community property laws of your state, if any.
SPOUSAL. You may make spousal IRA contributions for a year, if: 1) your
spouse has "compensation" that is includible in gross income for such year; 2)
you have less compensation than your spouse for such year; 3) you do not reach
age 70-1/2 by the end of such year; and 4) you file a joint federal income tax
return for such year.
If you are the compensated (or higher compensated) spouse, your
contribution must be made in accordance with the regular contribution rules
above. If you are the noncompensated (or lower compensated) spouse, your
contribution may not exceed the lesser of $2,000 or 100% of the combined
compensation of you and your spouse, reduced by the amount of your spouse's IRA
contribution.
Contributions for your spouse must be made to a separate IRA established by
your spouse as the depositor or grantor of his or her own IRA and your spouse
becomes subject to all of the privileges, rules, and restrictions generally
applicable to IRAs. This includes conditions of eligibility for distribution;
penalties for premature distribution, excess accumulation (failure to take a
required distribution) and prohibited transaction; designation of beneficiaries
and distribution in the event of your spouse's death; income and estate tax
treatment of withdrawals and distributions.
ADJUSTED GROSS INCOME (AGI). If you are an active participant or are
considered an active participant, the amount of your AGI for the year (if you
and your spouse file a joint tax return, your combined AGI) will be used to
determine if you can make a deductible IRA contribution. The instructions for
your tax return will show you how to calculate your AGI for this purpose. If you
are at or below a certain AGI level, called the Threshold Level, you can make a
deductible contribution under the same rules as a person who is not an active
participant. This AGI level may change each year. The instructions for your tax
return will show you the AGI level in effect for that year.
For example, if you are single, or treated as being single, your AGI
Threshold Level is $30,000 for 1998. If you are married and file a joint tax
return, your AGI Threshold Level is $50,000 for 1998. If you are not an active
participant, but you file a joint tax return with your spouse who is an active
participant, your AGI Threshold Level is $150,000. If you are married, file a
separate tax return, and live with your spouse for any part of the year, your
AGI Threshold Level is $0.
If your AGI is less than $10,000* above your AGI Threshold Level, you will
still be able to make a deductible contribution, but it will be limited in
amount. The amount by which your AGI exceeds your AGI Threshold Level (AGI minus
<PAGE>
AGI Threshold Level) is called your Excess AGI. The Maximum Allowable Deduction
is $2,000 per individual. You may determine your Deduction Limit by using the
following formula:
($10,000* - EXCESS AGI ) Maximum Allowable Deduction
--------------------- X Deduction = Limit
$10,000*
Round the result up to the next higher multiple of $10 (the next higher
whole dollar amount that ends in zero). If the final result is below $200, but
above zero, your Deduction Limit is $200. Your Deduction Limit cannot exceed
100% of your compensation.
*For years after 2006, $20,000 if you are married, filing jointly.
NONDEDUCTIBLE CONTRIBUTIONS
Eligibility - Even if your deduction limit is less than $2,000, you may
still contribute using the rules in the "Deductible Contributions" section
above. The portion of your IRA contribution that is not deductible will be a
nondeductible contribution. You may choose to make a nondeductible IRA
contribution even if you could have deducted part or all of the contribution.
Generally, interest or other earnings on your IRA contribution, whether from
deductible or nondeductible contributions, will not be taxed until distributed
from your IRA.
Rollover Contributions - Individuals who receive certain lump-sum
distributions from employer-sponsored retirement plans may make rollover
contributions to an IRA and by doing so defer taxes on the distribution and
shelter any investment earnings.
ROTH INDIVIDUAL RETIREMENT ACCOUNTS (ROTH IRA):
CONTRIBUTIONS:
All contributions must be made in cash and are subject to the following
limitations:
REGULAR. Contributions to a Roth IRA (except for rollovers) cannot exceed
the amount of compensation includible in gross income for the tax year or
$2,000, whichever is less. If our adjusted gross income (AGI) is below a certain
level, you may contribute the maximum amount. However, if your AGI is above a
specified level, the dollar limit of the contribution you make to your Roth IRA
may be reduced or eliminated.
If you are single, and your adjusted gross income (AGI) is $95,000 or less
($150,000 or less if married and filing jointly, or $0 or less if married and
filing separately) you are eligible to contribute the full amount to a Roth IRA.
Contributions to a Roth IRA are aggregated with Traditional IRA
contributions for the purpose of the annual contribution limit. Therefore, you
may contribute up to the lesser of $2,000 or 100% of earned income per year to a
Traditional IRA and a Roth IRA combined.
<PAGE>
SPOUSAL. You may make spousal Roth IRA contributions for a year, if: 1)
your spouse has "compensation" that is includible in gross income for such year;
2) you have less compensation than your spouse for such year; and 3) you file a
joint federal income tax return for such year.
If you are the higher compensated spouse, your contribution must be made in
accordance with the regular contribution rules above. If you are the
noncompensated (or lower compensated) spouse, your contribution may not exceed
the lesser of $2,000 or 100% of the combined compensation of you and your
spouse, reduced by the amount of your spouse's Roth IRA contribution.
Contributions for your spouse must be made to a separate Roth IRA
established by your spouse as the depositor or grantor of his or her own Roth
IRA and your spouse becomes subject to all of the privileges, rules, and
restrictions generally applicable to Roth IRAs. This includes conditions of
eligibility for distribution; designation of beneficiaries and distribution in
the event of your spouse's death; tax treatment of withdrawals and
distributions. This form may be used to establish such Roth IRA.
NO MAXIMUM AGE LIMIT. There is no maximum age limit for making a Roth IRA
contribution. Attainment of age 70 1/2 does not prevent you from contributing to
a Roth IRA.
APRIL 15 FUNDING DEADLINE. Contributions to a Roth IRA for the previous tax
year must be made by the tax-filing deadline (not including extensions) for
filing your federal income tax return. If you are a calendar-year taxpayer, your
deadline is usually April 15. If April 15 falls on a Saturday, Sunday, or legal
holiday, the deadline is the following business day.
LOWER CONTRIBUTION LIMITS. To determine the maximum contribution to a Roth
IRA if your AGI is between $95,000 and $110,000 (between $150,000 and $160,000
if married, filing jointly or between $0 and $10,000 if married, filing
separately), the following steps must be taken:
(a) Subtract your AGI from $110,000 ($160,000 if married, filing jointly;
$10,000 if married, filing separately).
(b) Multiply the result in Step `a' by .1333 (.20 if married).
(c) If the result in Step `b' is not a multiple of $10, round up to the
next multiple of $10.
(d) The result in Step `c' is your allowable contribution limit. If it is
more than $0, but less that $200, your allowable contribution limit is
$200.
INDIVIDUALS NOT ELIGIBLE TO MAKE CONTRIBUTIONS. If you are a single
taxpayer and your AGI is $110,000 or above ($160,000 or above if married and
filing jointly, or $10,000 or above if married and filing separately), you are
not permitted to make a Roth IRA contribution for the year. For this purpose, a
deductible Traditional IRA contribution is not allowed as a deduction in
computing AGI, and any amount of a rollover-conversion from a Traditional IRA to
a Roth IRA is not taken into account. Whether an individual, or his spouse, is
an active participant in an employer retirement plan is irrelevant for
determining whether he may make a Roth contribution.
<PAGE>
EXCESS ROTH CONTRIBUTIONS. Excess contributions to a Roth IRA are subject
to a 6% penalty tax unless removed (along with attributable earnings) by your
tax-filing deadline (plus extensions). An excess contribution could occur for
many reasons including, for example, if you contribute more than $2,000 or 100%
of earned income, or if you are not permitted to make a Roth contribution
because your AGI is too high.
CONVERSION OF TRADITIONAL CONTRIBUTIONS TO ROTH CONTRIBUTIONS. Generally,
if you make a contribution to a Traditional IRA, you may transfer the
contribution plus attributable earnings to a Roth IRA by your tax-filing
deadline (not including extensions). The transferred contribution amount is not
taxable if no deduction was allowed for the contribution. Such a contribution is
treated as a Roth IRA contribution.
ROLLING OVER/CONVERTING TRADITIONAL IRAS TO ROTH IRAS
You are allowed to roll over, transfer, or "convert" your Traditional IRAs
to Roth IRAs beginning in 1998. Regardless of whether a Traditional IRA is
rolled over/converted to a Roth IRA in 1998 or afterwards, the
rollover/conversion amount is subject to federal income taxation (but no 10%
penalty tax).
$100,000 AGI LIMIT FOR ROLLOVER. If you are a single taxpayer, or a married
individual who files jointly, you may roll over, transfer, or convert your
Traditional IRAs to Roth IRAs if your AGI is $100,000 or less. If you are a
single taxpayer (or a married individual who files jointly) with AGI of more
than $100,000 you may not roll over, transfer, or convert your Traditional IRAs
to Roth IRAs. Also, if you are a taxpayer who is married, but files separately,
you may not roll over, transfer, or convert your Traditional IRAs to Roth IRAs
regardless of AGI.
ROLLOVER/CONVERSION IN 1998. If you roll over a Traditional IRA
distribution received after 1998 to a Roth IRA, the taxable portion of the
Traditional IRA distribution is included in your income ratably over a four-year
period starting with 1998 (i.e., the amount included in gross income is spread
evenly over four years beginning with 1998), but the amount is not subject to
the IRS 10% early distribution penalty.
ROLLOVER/CONVERSION AFTER 1998. If you roll over a Traditional IRA
distribution received after 1998, to a Roth IRA the taxable portion of the
Traditional IRA distribution is included in your income for the year in which
the Traditional IRA distribution is received, but the amount is not subject to
the IRS 10% early distribution penalty. No special tax treatments apply.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. The assets of the Trust received for the issue or sale
of the shares of the Fund and all income, earnings, profits, and proceeds
thereof, subject only to the rights of creditors, are especially allocated to
the Fund and constitute the underlying assets of the Fund.
SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except for
<PAGE>
the payment of the purchase price of shares and requires that each agreement,
obligation, or instrument entered into or executed by the Trust or the Trustees
include a provision limiting the obligations created thereby to the Trust and
its assets.
The Declaration of Trust provides for indemnification out of the Fund's
property of any shareholder held personally liable for the obligations of the
Fund. The Declaration of Trust also provides that each Fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. The Manager believes that, in view of the above, the risk of
personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing, but
nothing in the Declaration of Trust protects Trustees against any liability to
which they would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of their office.
VOTING RIGHTS. The Fund's capital consists of shares of beneficial
interest. As a shareholder, you receive one vote for each share you own. The
shares have no preemptive or conversion rights; the voting and dividend rights,
and the right of redemption, are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under the heading "Shareholder and
Trustee Liability" above. Shareholders representing 10% or more of the Trust or
the Fund may, as set forth in the Declaration of Trust, call meetings of the
Trust or the Fund for any purpose related to the Trust or Fund, as the case may
be, including, in the case of a meeting of the entire Trust, the purpose of
voting on removal of one or more Trustees. The Trust or the Fund may be
terminated upon the sale of its assets to another open-end management investment
company if approved by vote of the holders of a majority of the Trust or the
Fund (when such sale is recommended by the Trustees). The Trust or the Fund may
be terminated upon liquidation and distribution of its assets if approved by the
Trustees or by vote of the holders of a majority of the Trust or the Fund. If
not so terminated, the Trust and the Fund will continue indefinitely.
CUSTODIAN. Star Bank, N.A., 425 Walnut Street, Cincinnati, OH 45202, is
custodian of the assets of the Fund. The custodian is responsible for the
safekeeping of the Fund's assets and the appointment of subcustodian banks and
clearing agencies. The custodian takes no part in determining the investment
policies of the Fund or in deciding which securities are purchased or sold by
the Fund. The Fund may, however, invest in obligations of the custodian and may
purchase or sell securities from or to the custodian.
AUDITORS. KPMG Peat Marwick LLP, Two Nationwide Plaza, Columbus, Ohio
43215, serves as the Trust's independent auditors. The auditors audit financial
statements for the Fund and provide other assurance, tax, and related services.
PRINCIPAL HOLDERS OF OUTSTANDING SHARES
As of April 17, 1998, the following persons owned 5% or more of the
OPTI-FLEX(R) DYNAMIC FUND outstanding shares of beneficial interest:
<PAGE>
Name and Address Number of Record Percent (%)
OF BENEFICIAL OWNER AND BENEFICIAL (SHARES) OF CLASS
- - - ------------------- ----------------------- --------
C. Martin Unterreiner 109,368.210 8.6
Janice B. Unterreiner JTWROS
500 Chesterfield Center
Chesterfield, MO 63017
C. Martin Unterreiner IRA 110,212.599 8.7
500 Chesterfield Center
Chesterfield, MO 63017
C. Martin Unterreiner is an officer and Trustee of the Trust. C. Martin
Unterreiner and Janice B. Unterreiner purchased such shares for investment
purposes only.
As of April 17, 1998, securities of the OPTI-FLEX(R) Dynamic Fund owned by
all officers and trustees as a group represent 17.6% of the outstanding shares
of the Fund.
FINANCIAL STATEMENTS
Financial Statements for the Fund are presented on the following pages.
<PAGE>
- - - --------------------------------------------------------------------------------
THE OPTI-FLEX(R) DYNAMIC FUND
- - - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1997
Shares Value
------ -----
MUTUAL FUNDS - 100%
American Century Utilities Fund 92,924 $ 1,323,231
Caldwell & Orkin Market Opportunity Fund 219,948 3,926,066
Franklin Utilities Fund 118,721 1,321,370
Invesco Strategic Utilities Fund 52,855 711,955
Invesco U.S. Government Securities Bond Fund 156,370 1,204,047
Montgomery Short-Duration Government Bond Fund 118,572 1,197,572
Oppenheimer U.S. Government Fund 122,565 1,183,980
Robertson Stephens Partners Fund 95 1,570
Star Treasury Fund 1,897,564 1,897,564
--------------
TOTAL MUTUAL FUNDS
(Cost $12,834,440) 12,767,355
--------------
TOTAL INVESTMENTS - 100%
(Cost $12,834,440) $ 12,767,355
==============
See accompanying notes to financial statements.
<PAGE>
- - - --------------------------------------------------------------------------------
THE OPTI-FLEX(R) DYNAMIC FUND
- - - --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
Assets:
Investments, at market value (cost $12,834,440) $ 12,767,355
Cash 729,029
Receivable for capital stock sold 306,171
Interest receivable 9,962
Dividends receivable 7,444
Unamortized organization costs 56,207
Prepaid expense and other assets 21,253
----------------
Total Assets 13.897,421
----------------
Liabilities:
Payable for capital stock redeemed 229,681
Dividends payable 29,649
12b-1 fees payable 15,328
Organizational costs due to advisor 56,217
Shareholder services fees payable 15,545
Other accrued liabilities 21,478
----------------
Total Liabilities 367,898
----------------
Net Assets $ 13,529,523
=============
Components of Net Assets:
Capital $ 14,209,278
Accumulated undistributed net investment income 5,935
Accumulated undistributed net realized losses from
investment transactions (618,605)
Net unrealized depreciation of investments (67,085)
---------------
Total Net Assets $ 13,529,523
=============
Capital Stock Outstanding 1,387,354
=============
Net Asset Value - Offering and Redemption Price Per Share $ 9.75
=============
See accompanying notes to financial statements.
<PAGE>
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THE OPTI-FLEX(R) DYNAMIC FUND
- - - --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
Investment Income:
Interest $ 46,313
Dividends 252,121
---------------
Total Investment Income 298,434
---------------
Fund Expenses:
Investment advisory fees 83,620
Audit fees 12,002
Custodian fees 11,352
Trustee fees 31,706
Legal fees 1,225
Amortization of organization costs 14,987
Registration and filing fees 33,561
Insurance expense 8,380
Administrative fees 30,278
Printing and postage expense 1,760
Distribution expense 83,620
Shareholder service fees 27,873
Transfer agent and accounting fees 28,323
Other expenses 3,082
---------------
Total expenses 371,769
---------------
Expenses voluntarily waived by advisor (107,697)
12b-1 expenses reduced (1,443)
---------------
Net Expenses 262,629
---------------
---------------
Net investment income 35,805
---------------
Realized and Unrealized Gains (Losses) from investments:
Net realized gains from investment transactions 476,703
Net change in net unrealized depreciation of investments (64,715)
---------------
Net Realized and Unrealized Gains from Investments 411,988
---------------
Net Increase in Net Assets Resulting from Operations $ 447,793
===============
See accompanying notes to financial statements.
<PAGE>
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THE OPTI-FLEX(R) DYNAMIC FUND
- - - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Year Ended 10/1/96 (1)
December 31, through
1997 12/31/96
Increase (Decrease) in Net Assets:
Operations:
Net investment income $ 35,805 $ 59,356
Net realized gains from investment
transactions 476,703 65,717
Net change in unrealized depreciation
of investments (64,715) (2,370)
----------- -----------
Net Increase in Net Assets Resulting
from Operations 447,793 122,703
----------- -----------
Dividends and Distributions to Shareholders:
From net investment income (29,870) (59,356)
From net realized gains (476,703) (65,717)
In excess of net realized gains (618,605) --
----------- -----------
Net Decrease in Net Assets Resulting from
Dividends and Distributions to Shareholders (1,125,178) (125,073)
----------- -----------
Capital Transactions:
Proceeds from shares subscribed 8,429,617 6,694,304
Reinvestment of dividends 1,095,529 124,978
Cost of shares redeemed (2,124,308) (10,842)
----------- -----------
Net Increase in Net Assets Resulting from
Capital Transactions 7,400,838 6,808,440
----------- -----------
Total Increase in Net Assets 6,723,453 6,806,070
Net Assets - Beginning of Period 6,806,070 --
----------- -----------
Net Assets - End of Period $ 13,529,523 $ 6,806,070
=========== ===========
Share Transactions:
Subscribed 802,295 660,748
Reinvested 112,362 12,338
Redeemed (199,325) (1,064)
------------ -----------
Net Increase in Shares Outstanding 715,332 672,022
============ ===========
(1) Date of commencement of operations
See accompanying notes to financial statements.
<PAGE>
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THE OPTI-FLEX(R) DYNAMIC FUND
- - - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended 10/1/96 (1)
December 31, through
1997 12/31/96
Net Asset Value, Beginning of Period $ 10.13 $ 10.00
Investment Operations:
Net investment income 0.03 0.09
Net gains from investments (realized
and unrealized) 0.47 0.23
------------ ------------
Total 0.50 0.32
------------ ------------
Distributions:
From net investment income (0.02) (0.09)
From net realized gains (0.38) (0.10)
In excess of net realized gains (0.48) --
Total (0.88) (0.19)
------------ ------------
Net Asset Value, End of Period $ 9.75 $ 10.13
============ ============
Total Return 4.94% 3.22%(2)
Ratios/Supplemental Data:
Net assets, end of period (000) $ 13,530 $ 6,806
Ratio of expenses to average net assets (5) 2.35% 2.39%(3)
Ratio of net investment income to average
net assets (5) 0.32% 17.25%(3)(4)
Ratio of expenses to average net assets,
before voluntary fee reductions (5) 3.33% 14.61%(3)
Ratio of net investment income (loss) to average
net assets before voluntary fee reductions (5) -0.66% 5.03%(3)
Portfolio turnover rate 1,237.35% 18.77%
Average commission rate paid $ 0.0175 $ 0.0281
(1) Date of commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) This ratio is higher than normal for a fund of this type because it is an
annualized ratio based on the net investment income earned during the
period which included annual dividends from its investment holdings.
(5) These ratios exclude the expenses of the mutual funds in which the Fund
invests.
See accompanying notes to financial statements.
<PAGE>
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THE OPTI-FLEX(R) DYNAMIC FUND
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
The PROACTIVE Asset Allocation Funds was organized in 1996 and is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified, open-end management investment company. The OPTI-FLEX(R)
DYNAMIC Fund (the "Fund") commenced operations on October 1, 1996. The Fund is
authorized to issue an indefinite number of shares of $0.10 par value stock.
2. SIGNIFICANT ACCOUNTING POLICIES
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments - Securities which are traded on stock exchanges are valued at the
last sales price as of the close of business of the New York Stock Exchange on
the day of valuation, or, lacking any sales, at the closing bid prices. Mutual
funds are valued at the daily redemption value determined by the underlying
fund.
Money market securities maturing more than sixty days after the valuation date
are valued at the last sales price as of the close of business on the day of
valuation, or, lacking any sales, at the most recent bid price or yield
equivalent as obtained from dealers that make markets in such securities. When
such securities are valued within sixty days or less to maturity, the difference
between the valuation existing on the sixty-first day before maturity and
maturity value is amortized on a straight-line basis to maturity. Securities
maturing within sixty days from their date of acquisition are valued at
amortized cost.
Repurchase Agreements -- The Fund may engage in repurchase agreement
transactions whereby the Fund takes possession of an underlying debt instrument
subject to an obligation of the seller to repurchase the instrument from the
Fund and an obligation of the Fund to resell the instrument at an agreed upon
price and term. At all times, the Fund maintains the value of collateral,
including accrued interest, at least 100% of the amount of the repurchase
agreement, plus accrued interest. If the seller defaults or the fair value of
the collateral declines, realization of the collateral by the Fund may be
delayed or limited.
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 all of its taxable income to its shareholders. Therefore, no Federal
income tax provision is required.
Dividends and Distributions - The amounts of dividends from net investment
income and of distributions from net realized gains are determined in accordance
with federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the composition of net assets
based on their federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions to shareholders which exceed net
investment income and net realized capital gains for financial reporting
purposes but not for tax purposes are reported as dividends in excess of net
investment income or distributions in excess of net realized gains.
<PAGE>
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THE OPTI-FLEX(R) DYNAMIC FUND
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
To the extent they exceed net investment income and net realized gains for tax
purposes, they are reported as distributions of capital. Under current tax law,
capital losses realized after October 31, 1997 may be deferred and treated as
occurring on the first day of the year ended December 31, 1998 (Post-October
Losses"). The Fund had losses of $1,815,779 which have been deferred. These
Post-October Losses are the primary reason for the $618,605 of dividends in
excess of net realized capital gains.
Organizational Costs -- Costs related to the organization of the Fund have been
deferred and are being amortized on a straight-line basis over a five-year
period.
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
PROACTIVE Money Management, Inc. (the "Advisor") provides the Fund with
investment management research, statistical and advisory services. For such
services the Fund pays monthly a fee based upon the average daily value of the
Fund's net assets at the following annual rates: 0.75% of average net assets up
to $500 million, 0.65% of average net assets exceeding $500 million. During the
year ended December 31, 1997, the Advisor voluntarily reimbursed expenses of the
Fund so that total expenses of the Fund would not exceed 2.40% of average daily
net assets.
During the year ended December 31, 1997 fee waivers and reimbursements of
$109,140 were required to achieve the recorded expense ratios. To the extent the
Fund does not increase net assets, the Fund is reliant upon the ability of the
investment advisor to continue to provide fee waivers and reimbursements. The
investment advisor is dependent upon achieving its own financial goals,
including targeted increases in the Fund's net assets through net sales of fund
shares, in order to provide such support to the Fund.
Pursuant to Rule 12b-1 of the Act, the Fund has adopted a Distribution Plan (the
"Plan") with PROACTIVE Financial Services, Inc. (the "Distributor"). Under the
provisions of the Plan, the Fund pays the Distributor an annual fee, at a
maximum rate of 0.75% of average daily net assets of the Fund, to aid in the
distribution of Fund shares. Additionally, the Fund has adopted a Service Plan
with the Distributor. Under the provisions of the Service Plan, the Fund pays
the Distributor an annual fee, at a maximum rate of 0.25% of average daily net
assets of the Fund, to reimburse securities dealers for personal services or
maintenance of shareholder accounts.
Certain officers and trustees of the Fund are also officers or directors of the
Advisor and the Distributor.
4. PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, excluding short-term investments and U.S.
Government and agency obligations for the year ended December 31, 1997 were as
follows:
PURCHASES SALES
--------- -----
OPTI-FLEX(R)DYNAMIC FUND $137,841,435 $130,606,836
As of December 31, 1997, the aggregate cost of investments and net unrealized
appreciation (depreciation) for Federal income tax purposes was comprised of the
following:
INVESTMENTS UNREALIZED UNREALIZED NET UNREALIZED
AT COST APPRECIATION DEPRECIATION DEPRECIATION
OPTI-FLEX(R)
DYNAMIC FUND $12,886,731 $5,198 ($124,574) ($119,376)
<PAGE>
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THE OPTI-FLEX(R) DYNAMIC FUND
- - - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
The PROACTIVE Asset Allocation Funds --
The OPTI-FLEX(R) DYNAMIC Fund:
We have audited the accompanying statement of assets and liabilities of The
PROACTIVE Asset Allocation Funds - The OPTI-FLEX(R) DYNAMIC Fund (Fund)
including the portfolio of investments as of December 31, 1997, and the related
statement of operations, statements of changes in net assets and the financial
highlights for the periods indicated herein. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
December 31, 1997, by confirmation with the custodian and other appropriate
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
PROACTIVE Asset Allocation Funds - The OPTI-FLEX(R) DYNAMIC Fund at December 31,
1997, the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated herein, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
February 12, 1998
