Rule 497(c)
SEC File No. 333-05208
PROACTIVE ASSET ALLOCATION FUNDS
OPTI-FLEX(R) DYNAMIC FUND
[LOGO]
PROSPECTUS - APRIL 30, 2000
The PROACTIVE Asset Allocation Funds consist of one mutual fund, the
OPTI-FLEX(R) DYNAMIC FUND.
This Prospectus gives you important information about the Fund that you
should know before you invest. Please read this Prospectus carefully and keep it
handy for future reference.
Like all mutual fund shares, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
Prospectus. Any representation to the contrary is a criminal offense.
PROACTIVE Asset Allocation Funds
21 Hawk Ridge Circle
Lake Saint Louis, MO 63367
1-888-PROACTIVE or 314-561-0100
Internet: www.proactive-inc.com
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CONTENTS
- ------------------------------------------------- THE OPTI-FLEX(R) DYNAMIC FUND
A look at investment goals, Investment Goal p.4
strategies, risks, performance Strategies p.4
and expenses Main Risk Factors p.4
Performance p.6
Fees and Expenses p.6
Information on who may want to invest Who May Want to Invest p.5
and who may not want to invest
More information about the Fund More Information about the Fund p.7
you should know before investing Who Manages the Fund? p.10
How is the Trust Organized? p.10
How Does Taxation Affect the
Fund and Its Shareholders? p.11
How to Read the Financial
Highlights Table p.12
- ------------------------------------------------------------ SHAREHOLDER MANUAL
Information about account How to Buy Shares p.14
transactions and services Distribution Fees p.15
How to Make Withdrawals
(Redemptions) p.16
Transaction Policies p.16
Other Shareholder Services p.17
- --------------------------------------------------------------- MORE ABOUT RISK
Investment Practices, Securities
and Related Risks p.18
Risk and Investment Glossary p.18
- ---------------------------------------------------------- FOR MORE INFORMATION
Where to learn more about the Fund Back Cover
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OPTI-FLEX(R) DYNAMIC FUND -- OPTIX
[ICON] INVESTMENT GOAL
The Fund seeks to provide an above average total return over the
long-term consistent with exhibiting less investment risk than a
portfolio consisting only of common stocks.
[ICON] MAIN STRATEGIES
The Fund pursues its investment goal through asset allocation among
four different markets, and through the selection of specific
investments within a given market. At least 65% of the Fund's assets
will be invested in open-end mutual funds.
The Fund allocates its assets primarily through mutual funds among the
following four markets:
o long and short equity positions in domestic and foreign
stocks
o domestic and foreign bonds
o money market instruments and
o gold (including other precious metals and minerals)
The manager may vary the percentage of the Fund's assets allocated to
each of these markets based upon the mix of these markets that the
manager believes will most likely achieve the Fund's investment goal.
In addition, the manager may explore opportunities in various asset
subclasses. There are no limits on the amount of the Fund's assets, if
any, that may be invested in each of these markets.
In an effort to benefit from opportunities in both bull and bear
markets, the manager may supplement the Fund's LONG mutual fund or
equity positions by investing in mutual funds that have sold stocks
SHORT. The Fund itself may sell stocks short or it may assume short
positions by investing in other mutual funds that are permitted to
take such positions. The Fund will buy stocks "long" or invest in
mutual funds that buy stocks "long", that they believe will perform
better than their peers. The Fund will sell stocks "short," or invest
in mutual funds that sell stocks "short", that they believe will
underperform their peers. A "long" position is when the Fund, or a
mutual fund in which the Fund invests, purchases a stock outright. A
"short" position is when the Fund, or a mutual fund in which the Fund
invests, sells a security that it has borrowed. The Fund, or an
underlying mutual fund in which the Fund invests, will realize a
profit or incur a loss from a short position depending on whether the
value of the underlying stock increases or decreases between the time
it is sold and when the Fund, or the underlying mutual fund in which
the Fund invests, replaces the borrowed security.
From time to time, the Fund may concentrate its assets in one or more
underlying mutual funds. As of April 25, 2000, the Fund had 47% of its
assets concentrated in the Montgomery Global Long-Short Fund, which
has as its investment objective to seek capital appreciation by
investing in long and short positions in equity securities worldwide.
[ICON] MAIN RISK FACTORS
Normally, the Fund is exposed to foreign markets through investment in
one or more mutual funds owning foreign securities. By investing in
these mutual funds, the Fund carries additional risks such as
regulatory, political and currency risk. These risks are heightened
for underlying mutual funds that invest in developing countries, which
may lack the established legal, business and social frameworks
necessary to support securities markets.
Because the Fund invests at least 65% of its assets in other mutual
funds, the value of your investment will fluctuate in response to the
performance of the underlying mutual funds.
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When the Fund invests in mutual funds that own stocks, the value of
your investment in the Fund will fluctuate in response to stock market
movements.
When the Fund invests in mutual funds that own bonds, the value of
your investment in the Fund will fluctuate with changes in interest
rates. Typically, a rise in interest rates causes a decline in the
value of bond funds owned by the Fund.
When the Fund invests in mutual funds that invest in gold and other
precious metals and minerals, the value of these underlying mutual
funds can go down because of unpredictable monetary policies and
economic and political developments, such as currency devalutions or
revaluations; increased environmental costs; concentration of the
sources of the supply of gold and these other metals and minerals, and
control over their sale; changes in U.S. or foreign tax, currency or
mining laws; and trade restrictions between countries.
When the Fund invests in mutual funds that use margin, leverage, short
sales and other forms of financial derivatives, such as options and
futures, an investment in the Fund may be more volatile than
investments in other mutual funds. Short sales are speculative
investments and will cause the Fund to lose money if the value of a
security sold short by the Fund, or an underlying fund in which the
Fund invests, does not go down as the managers expect.
Investing through the Fund in an underlying portfolio of mutual funds
involves certain additional expenses and certain tax results that
would not arise if you invested directly in mutual funds that the Fund
owns. By investing indirectly in mutual funds through the Fund, you
will bear not only your proportionate share of the Fund's expenses
(including operating costs and investment advisory and administrative
fees), but also, indirectly, similar expenses and charges of the
underlying mutual funds, including any contingent deferred sales
charges and redemption charges. Finally, you may incur increased tax
liabilities by investing in the Fund rather than directly in the
underlying funds.
If the manager does not accurately predict changing market conditions
and other economic factors, the Fund's assets might be allocated in a
manner that is disadvantageous, resulting in a decrease in the value
of the Fund's shares.
The underlying money market funds in which the Fund may invest are not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other governmental agency. Although these underlying money market
funds seek to preserve the value of the Fund's investment in them at
$1.00 per share, it is possible for the Fund to lose money by
investing in these underlying money market funds.
Loss of money is a risk of investing in the Fund. Please read "More
About Risk" carefully before investing.
[ICON] WHO MAY WANT TO INVEST
The Fund may be appropriate for investors who:
o are seeking long-term growth potential but are concerned
about moderating the risks associated with being invested in
stocks at all times
o are seeking to diversify their portfolio
o are investing with a long-term horizon
o are willing to accept higher short-term risk
o are seeking access to markets that can be less accessible to
individual investors
The Fund may not be appropriate for investors who:
o are investing to meet short-term financial goals
o are seeking to maximize returns from an aggressive growth
strategy that is invested in stocks at all times
o are unwilling to accept an investment that may go down in
value
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PERFORMANCE
The bar chart and accompanying table shown below provide an indication of the
risks of investing in the OPTI-FLEX(R) DYNAMIC FUND by showing changes in the
Fund's performance from year to year since the Fund's inception in 1996, and by
showing how the Fund's average annual returns for one year and since inception
compare with those of a broad measure of market performance and an index of
funds with similar investment objectives. How the Fund has performed in the past
is not necessarily an indication of how the Fund will perform in the future.
ANNUAL TOTAL RETURNS1
[Plot points for Edgar format]:
YEAR ANNUAL TOTAL RETURN
1997 5.02%
1998 7.28%
1999 51.05%
1 Figures do not reflect sales charges. If they did, returns would be lower.
During the period shown in the bar chart, the highest return for a quarter was
37.27% (quarter ending December 31, 1999), and the lowest return for a quarter
was (6.27)% (quarter ending December 31, 1997).
Average Annual Total Returns
(for the periods ending
DECEMBER 31, 1999) PAST ONE YEAR SINCE INCEPTION (10/1/96)
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The OPTI-FLEX(R)DYNAMIC FUND 51.05% 18.95%
Dow Jones World Stock Index(1) 24.50% 19.20%
Morningstar's Average Asset
Allocation Fund(2) 9.40% 12.90%
1 The Dow Jones World Stock Index is a capitalization-weighted index consisting
of companies traded publicly in select countries all over the world. The Dow
Jones World Stock Index does not take into account the deduction of expenses
associated with a mutual fund, such as investment management and accounting
fees.
2 Morningstar, Inc. monitors and rates mutual fund performance. Morningstar's
Average Asset Allocation Fund index measures the performance of mutual funds
categorized by Morningstar as asset allocation funds.
[ICON] FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay
if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on
Purchases None
Maximum Deferred Sales Charge (Load) (as a
percentage of offering price or redemption
proceeds, as applicable) 1.00%1
Redemption Fee None
Exchange fee None
Maximum Annual Account Maintenance Fee
(for accounts under $10,000) $10.00
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ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)
Management Fees 0.75%
Distribution and Service (12b-1) Fees 1.00%
Other Expenses2 1.21%
Total Annual Fund Operating Expenses 2.96%
-----
Expense Reimbursement3 (0.57)%
Net Expenses 2.39%
1 A deferred sales charge applies only if redemption occurs less than
one year from purchase. See "How to Buy Shares" and "How to Make
Withdrawals (Redemptions)."
2 "Other Expenses" are estimated based upon expenses actually incurred
by the Fund for the year ended December 31, 1999.
3 The manager has contractually agreed to reduce its fees and/or
absorb expenses to limit the Fund's total annual operating expenses to
2.40%. The manager may terminate this agreement after December 31,
2000.
EXAMPLE OF HYPOTHETICAL FUND COSTS
The example in the table below is intended to help you compare the
cost of investing in the Fund with the cost of investing in other
mutual funds.
Assuming you
o invest $10,000 in the Fund
o reinvest all dividends and distributions in the Fund o
redeem your shares at the end of the periods shown below o
earn a 5% return each year and o incur the same Fund
operating expenses shown above,
your cost of investing in the Fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$342 $862 $1,507 $3,240
You would pay the following expenses if you did not redeem your
shares:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$242 $862 $1,507 $3,240
Of course, your actual costs may be higher or lower.
MORE INFORMATION ABOUT THE FUND
HOW DOES THE FUND PURSUE ITS INVESTMENT GOAL?
EMPHASIS ON MUTUAL FUNDS. Normally, at least 65% of the Fund's assets will
be invested in mutual funds. In addition, 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 mutual funds and closed-end investment companies, such as
stocks, bonds, and money market instruments and repurchase agreements.
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Generally, the Fund may purchase:
o no-load mutual funds, which are bought and sold without a sales charge
or load
o "institutional funds" that normally have lower expenses and higher
investment minimums and
o load mutual funds, if the load or sales charge is waived on purchases
and sales by the Fund (for certain exceptions to this policy, please
see the Statement of Additional Information)
ASSET ALLOCATION. The manager allocates the Fund's assets among the stock,
bond, money market and gold market segments based upon the anticipated returns
and risks of each of these market segments. Some types of investments, such as
balanced funds which invest in both stocks and bonds, can fall into more than
one of these market segments. The Fund may also make other investments that do
not fall within these market segments.
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 providing you with the
best opportunity for achieving an above average total return consistent with
reduced risk over the long-term. The Fund's portfolio is expected to vary
considerably among the various market segments as changes in economic and market
trends occur. The manager overweights market segments that it believes have
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 mutual fund that invests in only one market segment.
In making asset allocation decisions, the manager will evaluate projections
of risk, market conditions, economic conditions, volatility, yields, and
returns. The manager 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.
ASSET SUBCLASSES. The asset allocation process is not limited to
determining the degree to which the Fund's assets should be invested in these
different market segments. The manager continually explores opportunities in
various subclasses of assets:
o geoeconomic considerations (for example, foreign versus domestic)
o maturities of fixed income securities (for example, "short term"
versus "long term")
o market capitalization (for example, "blue chip" versus small
capitalization)
o sector rotation (for example, "high tech" versus industrial)
SELECTING FUNDS. The manager selects underlying funds in which to invest
based, in part, on their investment goals and strategies, their investment
adviser and portfolio manager, and on the analysis of their past performance
(absolute, relative and risk-adjusted). The manager also considers other factors
in the selection of funds, such as 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 funds in which the Fund invests may not share the same investment
goal and investment limitations as the Fund. Normally, the Fund will invest its
assets in mutual funds from several different mutual funds families, managed by
a variety of investment advisers, and having a variety of different investment
goals and strategies.
TYPES OF FUNDS. Normally, the Fund invests in the following types of 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; long/short funds; U.S. Government securities funds and
high yield bond funds; gold and precious metals funds and money market funds.
For a discussion about the risks of these funds and some of the securities that
they hold, please read "More about Risk."
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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 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.
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 individuals stocks that the manager believes to have superior investment
potential. When the manager selects equity securities, it considers both growth
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.
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 securities
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. The bond segment includes all varieties of domestic and foreign
fixed-income securities. The manager will seek to maximize total return within
the bond segment 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 of foreign currency. The Fund may also invest in lower quality,
high-yielding debt securities (commonly referred to as "junk bonds"). In
general, bond prices rise when interest rates fall, and fall when interest rates
rise. Bonds and other debt securities 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.
MONEY MARKET SEGMENT. The Fund may invest directly in, or in one or more
money market funds owning, money market securities. Money market securities are
high quality securities (rated in one of the two highest rating categories for
short-term debt obligations) and 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. The money
market segment includes all types of domestic and foreign securities. These
securities may be denominated in U.S. dollars or foreign currency.
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.
DEFENSIVE INVESTMENTS. The manager of the Fund, or the underlying funds in
which the Fund invests, may invest in a fully or partially defensive position
when they believe it is appropriate to do so. When this happens, the Fund, or
the underlying funds in which the Fund invests, may increase their investment in
government securities and other short-term securities without regard to the
Fund's, or the underlying funds', investment restrictions, policies or normal
investment emphasis. During such a period, the Fund, or the underlying funds in
which the Fund invests, could be unable to achieve their investment objectives.
In addition, this defensive investment strategy may cause frequent trading and
high portfolio turnover ratios when calculated in accordance with SEC rules.
High transaction costs could result from this frequent trading; however, because
a significant portion of the Fund's assets are invested in no-load mutual funds,
which do not charge commissions upon the purchase or sale of their shares, the
Fund will pay less commissions than many mutual funds of similar size and
portfolio turnover. Trading may also result in realization of net short-term
capital gains upon which you may be taxed at ordinary tax rates when distributed
from the Fund.
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WHO MANAGES THE FUND?
THE BOARD. The board of trustees oversees the management of the Fund, and
elects its officers. The officers are responsible for the Fund's day-to-day
operations. Information concerning the trustees and officers of the PROACTIVE
Asset Allocation Funds (the "Trust") appears in the Statement of Additional
Information.
INVESTMENT ADVISER. PROACTIVE Money Management, Inc. (the "manager") serves
as investment adviser to 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. The manager
has been an investment adviser to individuals, trusts and corporations for over
fourteen years. The manager has managed the Fund since its inception in October,
1996. As of December 31, 1999, the manager held discretionary investment
authority over approximately $110 million of assets. The manager has its
principal offices at 21 Hawk Ridge Circle, Lake Saint Louis, MO 63367.
PORTFOLIO MANAGER. 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 October, 1996.
Mr. 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. 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.
MANAGEMENT FEES. During the calendar year ended December 31, 1999, the Fund
paid management fees to the manager totaling .75% of the average daily net
assets of the Fund. For more information about management fees, please see
"Investment Adviser and Manager" in the Statement of Additional Information.
HOW IS THE TRUST ORGANIZED?
The Fund is an open-end management investment company that is a series of
PROACTIVE Asset Allocation Funds trust.
The Trust is supervised by a board of trustees, an independent body that
has ultimate responsibility for the Fund's activities. The board retains various
companies to carry out the Fund's operations, including the investment adviser,
custodian, transfer agent and others. The board has the right, and the
obligation, to terminate the Fund's relationship with any of these companies and
to retain a different company if the board believes it is in the shareholders'
best interests. At a mutual fund's inception, the initial shareholder (typically
the manager) appoints the Fund's board. Thereafter, the board and the
shareholders determine the board's membership. The board of the Trust may
include individuals who are affiliated with the investment adviser and
distributor.
The Fund does not hold annual shareholder meetings, but may hold special
meetings for such purposes as electing or removing board members, changing
fundamental policies, approving a management contract or approving a 12b-1 plan
(12b-1 fees are explained in "Distribution Fees").
PORTFOLIO TRADES
In placing portfolio trades, the manager may use brokerage firms that
market the Fund's shares, but only when the manager believes no other firm
offers a better combination of quality execution (i.e., timeliness and
completeness) and favorable price. As long as the manager believes a brokerage
firm can provide this combination, it may consider research and related services
when choosing a brokerage firm. Brokerage firms may use a portion of the
commissions paid by the Fund to reduce its expenses.
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INVESTMENT GOALS
None of the Fund's investment goals are fundamental and may be changed
without shareholder approval.
DIVERSIFICATION
The Fund is diversified, which means the Fund may not, with respect to at
least 75% of its assets, invest more than 5% of its assets in the securities of
one company. However, this does not prevent the Fund from investing more than 5%
of its assets in one mutual fund.
HOW DOES TAXATION AFFECT THE FUND AND ITS SHAREHOLDERS?
HOW DOES THE FUND EARN INCOME AND GAINS?
The Fund may earn dividends and interest (the "income") on its investments.
When the Fund sells a security for a price that is higher than it paid, it has a
gain. When the Fund sells a security for a price that is lower than it paid, it
has a loss. If the Fund has held the security for more than one year, the gain
or loss will be a long-term capital gain or loss. If the Fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The Fund's gains and losses are netted together, and, if the Fund
has a net gain (the Fund's "gains"), that gain will generally be distributed to
you.
TAXATION OF THE FUND'S INVESTMENTS
The Fund invests your money in the securities that are described in the
sections "Main Strategies" and "How Does the Fund Pursue Its Investment Goal?"
Special tax rules may apply in determining the income and gains that the Fund
earns on its investments. These rules may, in turn, affect the amount of
distributions that the Fund pays to you. These special tax rules are discussed
in the Statement of Additional Information.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally
pays no federal income tax on the income and gains that it distributes to you.
TAXATION OF SHAREHOLDERS
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the Fund's income and
gains on the Fund's investments in securities. The Fund's income and short-term
capital gains that are paid to you are taxed as ordinary dividends. The Fund's
long-term capital gains that are paid to you are taxed as capital gain
distributions. If the Fund pays you an amount in excess of its income and gains,
this excess will generally be treated as a non-taxable return of capital. These
amounts, taken together, are what we call the Fund's distributions to you. The
Fund pays dividends from its net investment income on an annual basis. The Fund
distributes capital gains, if any, annually.
DISTRIBUTIONS. Distributions from the Fund, whether you receive them in
cash or in additional shares, are generally subject to income tax. Such
distributions may be taxable at different rates depending on the length of time
the Fund holds its assets. The Fund will send you a statement in January of the
current year that reflects the amount of ordinary dividends, capital gain
distributions and non-taxable distributions you received from the Fund in the
prior year. This statement will include distributions declared in December and
paid to you in January of the current year, but which are taxable as if paid on
December 31 of the prior year. The Internal Revenue Service requires you to
report these amounts on your income tax return for the prior year.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you. Special rules apply to payouts from Roth and Education
IRAs.
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DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the Fund.
BUYING A DIVIDEND. Purchasing Fund shares in a taxable account shortly
before a distribution is known as "buying a dividend." In taxable accounts, you
must pay income taxes on the distribution whether you take the distribution in
cash or reinvest it. In addition, you will have to pay taxes on the distribution
whether the value of your investment decreased, increased or remained the same
after you bought the Fund shares. The risk in buying a dividend is that the Fund
may build up taxable gains throughout the period covered by a distribution, as
securities are sold at a profit. We distribute those gains to you, after
subtracting any losses, even if you did not own the shares when the gains
occurred.
DIVIDEND REINVESTMENTS. Most investors have their dividends reinvested in
additional shares of the Fund. If you choose this option, or if you do not
indicate any choice, your dividends will be reinvested on the dividend record
date. Alternatively, you can choose to have a check for your dividends mailed to
you. However, if the check is not deliverable, your dividends will be
reinvested.
REDEMPTIONS
WHAT IS A REDEMPTION?
A redemption is a sale by you to the Fund of some or all of your shares in
the Fund. The price per share you receive when you redeem Fund shares may be
more or less than the price at which you purchased those shares. When you redeem
your shares, you will generally have a gain or loss, depending upon whether the
amount you receive for your shares is more or less than your cost or other basis
in the shares.
If you redeem your shares in the Fund, you will generally have a gain or
loss that the IRS requires you to report on your income tax return. All or a
portion of any loss on the redemption or exchange of your shares will be
disallowed by the IRS if you purchase other shares in the Fund within 30 days
before or after your redemption or exchange.
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends
paid from interest earned on direct obligations of the U.S. Government, subject
to certain restrictions. The Fund will provide you with information at the end
of each calendar year on the amount of any such dividends that may qualify for
exemption from reporting on your individual income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions and gains arising from redemptions or exchanges of
your Fund shares. Fund shares held by the estate of a non-U.S. investor may be
subject to U.S. estate tax. You may wish to contact your tax adviser to
determine the U.S. and non-U.S. tax consequences of your investment in the Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from the Fund, and gains arising from redemptions or exchanges of your
Fund shares will generally by subject to state and local income tax. The holding
of Fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax adviser to determine the state and local tax
consequences of your investment in the Fund.
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began calendar year 1999 with a net asset value (price) of $10.46
per share. During the year, the Fund lost ($0.20) per share from investment
income (interest and dividends less operating expenses) and earned $5.54 per
share from investments that had appreciated in value or that were sold for
higher prices than the Fund paid for them.
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The earnings ($5.34 per share) minus the distributions ($0.00 per share)
resulted in a share price of $15.80 at the end of the year. This was an increase
of $5.34 per share (from $10.46 at the beginning of the year to $15.80 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 51.05% for the year.
As of December 31, 1999, the Fund had $18,745,703 in net assets. For the year,
its expense ratio was 2.39% ($23.90 per $1,000 of net assets); and its net
investment income amounted to (1.69%) of its average net assets. The Fund's
turnover rate, which indicates the lesser of securities it sold or purchased
during 1999 divided by its average monthly net assets, was 1,011.63%.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 4 years. Certain information reflects
financial results for a single fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent auditors, whose report,
along with the Fund's financial statements, is included in the annual report,
which is available upon request.
<TABLE>
<CAPTION>
1999 1998 1997 1996(1)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.46 $ 9.75 $ 10.13 $ 10.00
Investment Operations:
Net investment income (loss) (0.20) (0.06) 0.03 0.09
Net gains from investments (realized 5.54 0.77 0.47 0.23
and unrealized)
Total 5.34 0.71 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 $ 15.80 $ 10.46 $ 9.75 $ 10.13
Total Return (excludes redemption charge): 51.05% 7.28% 5.02% 3.22%(2)
Ratios/Supplemental Data:
Net assets, end of period (000) $ 18,746 $ 12,791 $ 13,530 $ 6,806
Ratio of expenses to average net assets(3) 2.39% 2.35% 2.35% 2.39%(4)
Ratio of net investment income (loss) to -1.69% -0.56% 0.32% 17.25%(4)(5)
averge net assets
Ratio of expenses to average net assets, 2.96% 2.99% 3.33% 14.61%(4)
before voluntary fee reductions(3)
Ratio of net investment income (loss) to -2.26% -1.20% -0.66% 5.03%(4)
average net assets before voluntary
fee reductions
Portfolio turnover rate 1011.63% 1574.17% 1237.35% 18.77%
<FN>
(1) Date of commencement of operations - October 1, 1996.
(2) Not annualized.
(3) Ratios exclude the expenses of the mutual funds in which the Fund invests.
(4) Annualized.
(5) 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.
</FN>
</TABLE>
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information.
13
<PAGE>
SHAREHOLDER MANUAL
HOW TO BUY SHARES
MINIMUM INVESTMENT. The minimum investment to open an account in the Fund is
$1,000, except an Individual Retirement Account (IRA) which has a $500 minimum.
You may make subsequent investments in any account in amounts of at least $100.
ANNUAL MAINTENANCE FEE. The Fund may deduct an annual maintenance fee of $10
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
of each year. The fee, which is payable to the transfer agent, is designed to
offset in part the relatively higher costs of servicing smaller accounts.
OPENING AN ACCOUNT. You may open an account and make an investment by purchasing
shares through brokerage firms having sales agreements with the distributor. A
minimum investment of $1,000 ($500 for an IRA) is required to establish an
account in the Fund. The minimum for subsequent investments in the Fund is $100.
You may also purchase shares directly from the Fund 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 your New Account
Application. You may make payments by check or federal reserve draft payable to
the Fund. Please send your completed application to the following address: THE
OPTI-FLEX(R) DYNAMIC FUND, C/O MUTUal FUNDS SERVICE CO., P. O. BOX 7177, DUBLIN,
OHIO 43017.
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
Mutual Funds Service Company, by 4:00 p.m., Eastern time, are confirmed at that
day's public offering price. Direct purchase orders received by Mutual Funds
Service Company 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 Mutual Funds Service Company 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 Mutual Funds Service Company before 5:00
p.m., Eastern time, and to forward payment to Firstar 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:
FIRSTAR 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
No stock certificates will be issued. Instead, Mutual Funds Service Company
will establish an account 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.
14
<PAGE>
The Fund will not permit purchases until it receives the New Account
Application in good order.
SUBSEQUENT INVESTMENTS. You may make subsequent investments in the Fund by
mailing a check payable to OPTI-FLEX(R) DYNAMIC FUND. Please include your
account number on the check and mail as follows:
PROACTIVE ASSET ALLOCATION FUNDS
C/O MUTUAL FUNDS SERVICE COMPANY
P. O. BOX 7177
DUBLIN, OH 43017
You may also make subsequent investments by bank wire as described above.
You must 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 are sold at net asset value without an
initial sales charge, but if you redeem 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, second of shares purchased, but no longer subject to a CDSC, and
third of shares redeemed within one year of purchase. 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 your dollars to work from the time you make the
investment. All CDSC's imposed on redemptions are paid to the distributor.
SALES CHARGE WAIVERS: The Fund may waive the CDSC on redemption following
your death, or if you become 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 your death or be of long-continued and
indefinite duration. The Fund may also waive the CDSC when the total amount of
your redemptions do not exceed 10% of your purchases. See "Other Shareholder
Services - Systematic Withdrawal Program."
In addition, 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 you for purchases of shares
for which the CDSC has been waived.
DISTRIBUTION FEES
Rule 12b-1 of the Investment Company Act permits mutual funds that adopt a
written plan to pay out of fund assets certain expenses relating to the sale and
distribution of their shares. The Fund has adopted distribution and service
plans. Under its plans, the Fund pays the distributor an annual distribution
(12b-1) fee of 0.75% of Fund assets and an annual service fee of 0.25% of Fund
assets. Because these fees are paid out of the Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
Distribution fees are used primarily to offset initial and ongoing
commissions paid to brokerage firms for selling shares of the Fund. The
distributor may use distribution fees that are not allocated to brokerage firms
to reduce its own sales and marketing expenses. Service fees are used primarily
to reimburse brokerage firms for providing personal services to Fund
shareholders and maintaining shareholder accounts. The distributor may use
service fees that are not allocated to brokerage firms to reduce its own
expenses for providing personal services and maintaining shareholder accounts.
15
<PAGE>
HOW TO MAKE WITHDRAWALS (REDEMPTIONS)
You may redeem shares and withdraw funds at net asset value per share less,
any applicable CDSC. There are no redemption fees. (See "Transaction Policies.")
BY MAIL -- You may redeem shares by mailing a written request to PROACTIVE
Asset Allocation Funds, c/o Mutual Funds Service Co., P. O. Box 7177, Dublin, OH
43017. 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). We may require further documentation if
you are 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 BANK WIRE -- You may redeem up to $50,000 worth of shares by telephone
or by placing a wire redemption through your brokerage firm. Amounts redeemed by
bank wire will be mailed to the address printed on your account statement. 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 Mutual Funds Service
Company 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., Eastern time, to be confirmed at that day's net asset
value.
WHEN REDEMPTIONS ARE EFFECTIVE -- Redemptions are made at the net asset
value per share (less any applicable CDSC) next determined after receipt by
Mutual Funds Service Company of a redemption request in good order. (See
"Transaction Policies.") Payment is normally made within five days after the
redemption request.
TRANSACTION POLICIES
VALUATION OF SHARES. The net asset value per share (NAV) for the Fund is
determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4:00 p.m. Eastern Time) by dividing the Fund's net
assets by the number of its shares outstanding.
The assets of the Fund consist primarily of underlying mutual funds, which
are valued at their respective NAV's. The underlying funds value securities in
their portfolios for which market quotations are readily available at their
current market value (generally the last reported sale price) and all other
securities and assets at fair value pursuant to methods established in good
faith by the board of directors of the underlying fund. Underlying money market
funds with portfolio securities with a remaining maturity of 13 months or less
and a weighted average maturity not exceeding 90 days may use the amortized cost
to value their securities. Securities having 60 days or less remaining to
maturity generally are valued at their amortized cost which approximates market
value.
EXECUTION OF REQUESTS. The Fund is open on those days when the New York
Stock Exchange is open, typically Monday through Friday. Buy and sell requests
are executed at the next NAV to be calculated after your request is received by
the transfer agent.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider sending your request in writing.
In unusual circumstances, the Fund may temporarily suspend the processing
of sell requests, or may postpone payment of proceeds for up to seven days, as
allowed by federal securities laws.
16
<PAGE>
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be
recorded in order to verify their accuracy. In addition, the transfer agent will
take measures to verify the identity of the caller, such as asking for name,
account number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are taken, the transfer agent is not
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Proceeds from telephone transactions can only be mailed to the
address of record.
SALES IN ADVANCE OF PURCHASE PAYMENTS. When you place a request to sell
shares for which the purchase money has not yet been collected, the request will
be executed at the next determined NAV, but the Fund will not release the
proceeds to you until your purchase payment clears. This may take up to fifteen
days after the purchase.
OTHER SHAREHOLDER SERVICES
AUTOMATIC ACCOUNT BUILDER: This program offers you a convenient way for you
to invest in the Fund by automatically transferring money from your checking or
savings account each month to buy shares. Under the program, regular investments
in the Fund of $100 or more will be deducted from your checking or savings
account and invested in shares of the Fund. Your bank must be a member of the
Automated Clearing House (ACH). To sign up, complete the Automatic Account
Builder section of your New Account Application. There is no additional charge
for this service.
SYSTEMATIC WITHDRAWAL PROGRAM: This program allows you to automatically
sell your shares and receive regular distributions of $100 or more from your
account. You 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. To sign up, complete
the appropriate section of your New Account Application. Your should realize
that if withdrawals exceed income dividends, the invested principal may be
depleted.
Withdrawals under this program from your account will be subject to any
CDSC that applies, with the following exception. No CDSC will be charged on an
amount that does not exceed 10% annually of the "initial account value" -- the
value of your account at the time you elect to participate in this program.
You 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 you in full and fractional shares. The
Fund may reject any purchase order and may waive minimum purchase requirements.
CONFIRMATION STATEMENTS -- All purchase and sale transactions, and dividend
reinvestments, are confirmed promptly after they become effective. In addition,
you will receive a quarterly account statement which contains a summary of
transactions for the quarter as well as dividend reinvestment information.
Quarterly statements are mailed promptly after the last business day of the
quarter.
ACCOUNTS WITH LOW BALANCES. The Fund may redeem shares in your account for
their then current net asset value and pay the proceeds to you if at any time
your account has shares valued at less than $1,000 ($500 for an IRA) as a result
of redemptions you have made. The Fund may redeem the shares in your account if
you have opened your account for less than the minimum purchase amount and you
do not purchase additional shares to meet the minimum. Before any shares are
redeemed for these purposes, you will be notified in writing 30 days before any
such redemption to bring the value of shares in your account to $1,000 ($500 for
an IRA).
17
<PAGE>
MORE ABOUT RISK
The Fund's risk profile is largely defined by the Fund's principal
securities and investment practices. You may find the most concise description
of the Fund's risk profile in the Fund summary at the beginning of this
Prospectus.
The Fund is permitted to use - within limits established by the trustees -
certain other securities and investment practices that have higher risks and
opportunities associated with them. Likewise, the Fund is permitted to invest in
other mutual funds that own securities and use investment practices that have
higher risks and opportunities associated with them. To the extent that the
Fund, or the mutual funds in which the Fund invests, use these securities or
practices, the Fund's overall performance may be affected, either positively or
negatively. On the following pages are brief descriptions of these securities
and investment practices, along with the risks associated with them. The Fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the Fund will earn
income or show a positive total return over any period of time - days, months or
years.
RISK AND INVESTMENT GLOSSARY
ASSET-BACKED SECURITIES are securities backed by unsecured debt, such as
credit card debt; these securities are often guaranteed or over-collateralized
to enhance their credit quality. CREDIT AND INTEREST RATE RISKS ARE THE
PRINCIPAL RISKS.
BORROWING AND REVERSE REPURCHASE AGREEMENTS refer to a loan of money from a
bank or other financial institution undertaken by the Fund or underlying funds
in which the Fund invests.
COMMON STOCK is a share of ownership (equity) interest in a company.
COMPANIES WITH LIMITED OPERATING HISTORIES are securities issued by
companies that have been in continuous operation for less than three years.
Sometimes called "unseasoned" issuers. MARKET, LIQUIDITY AND INFORMATION RISKS
ARE THE PRINCIPAL RISKS.
CONVERTIBLE SECURITIES are debt or equity securities which may be converted
on specified terms into stock of the issuer. MARKET, INTEREST RATE, PREPAYMENT
AND CREDIT RISKS ARE THE PRINCIPAL RISKS.
CORRELATION RISK occurs when the Fund, or underlying funds in which the
Fund invests, "hedge" - uses one investment to offset the Fund's, or the
underlying funds', position in another. If the two investments do not behave in
relation to one another the way the manager expects them to, then unexpected
results may occur.
CREDIT RISK means that the issuer of a security or the counterparty to an
investment contract may default or become unable to pay its obligations when
due.
CURRENCY CONTRACTS involve the right or obligation to buy or sell a given
amount of foreign currency at a specified price and future date.
o Hedged. CURRENCY, HEDGED LEVERAGE, CORRELATION, LIQUIDITY, OPPORTUNITY
RISKS ARE THE PRINCIPAL RISKS.
o Speculative. CURRENCY, SPECULATIVE LEVERAGE, LIQUIDITY RISKS ARE THE
PRINCIPAL RISKS.
CURRENCY RISK happens when the Fund, or the underlying funds in which the
Fund invests, buy or sell a security denominated in foreign currency. Foreign
currencies "float" in value against the U.S. dollar. Adverse changes in foreign
currency value can cause investment losses when the Fund's, or the underlying
funds', investments are converted to U.S. dollars.
18
<PAGE>
DEFENSIVE MEASURES may be taken when the manager of the Fund, or the
underlying funds in which the Fund invests, believes it is warranted due to
market conditions. When this happens, the Fund, or the underlying funds in which
the Fund invests, may increase their investment in government securities and
other short-term securities without regard to the Fund's, or the underlying
funds', investment restrictions, policies or normal investment emphasis. As a
result, the Fund, or the underlying funds in which the Fund invests, could be
unable to achieve their investment objectives. OPPORTUNITY RISK IS THE PRINCIPAL
RISK.
DIVERSIFICATION means a diversified fund may not, with respect to at least
75% of its assets, invest more than 5% in the securities of one company. A
non-diversified fund may be more volatile than a diversified fund because it
invests more of its assets in a smaller number of companies and the gains or
losses on a single stock will therefore have a greater impact on the fund's
share price. The Fund is a diversified fund, although it may invest more than 5%
of its assets in one mutual fund. If this underlying mutual fund performs
poorly, this could negatively affect the Fund's share price. The Fund may invest
in non-diversified funds.
EXTENSION RISK means the risk that an unexpected rise in interest rates
will extend the life of a mortgage-backed security beyond the expected
prepayment time, typically reducing the security's value.
FINANCIAL FUTURES AND OPTIONS; SECURITIES AND INDEX OPTIONS are contracts
involving the right or obligation to deliver or receive assets or money
depending on the performance of one or more assets or an economic index.
o Futures and related options. INTEREST RATE, CURRENCY, MARKET, HEDGED
OR SPECULATIVE LEVERAGE, CORRELATION, LIQUIDITY, OPPORTUNITY RISKS ARE
THE PRINCIPAL RISKS.
o Options on securities and indices. INTEREST RATE, CURRENCY, MARKET,
HEDGED OR SPECULATIVE LEVERAGE, CORRELATION, LIQUIDITY, CREDIT,
OPPORTUNITY RISK ARE THE PRINCIPAL RISKS.
FOREIGN SECURITIES are issued by foreign governments or companies located
outside of the United States. The Fund considers a company to be located outside
the United States if the principal securities trading market for its equity
securities is located outside the U.S. or it is organized under the laws of, and
has its principal office in, a country other than the U.S. MARKET, CURRENCY,
TRANSACTION, LIQUIDITY, INFORMATION AND POLITICAL RISKS ARE THE PRINCIPAL RISKS.
FORWARD FOREIGN CURRENCY CONTRACTS are privately negotiated contracts
committing the holder to purchase or sell a specified quantity of a foreign
currency on a predetermined future date. MARKET, OPPORTUNITY AND LEVERAGE RISKS
ARE THE PRINCIPAL RISKS.
HEDGING RISK comes into play when the Fund, or the underlying funds in
which the Fund invests, use a security whose value is based on an underlying
security or index to "offset" the Fund's or the underlying funds' position in
another security or currency. The objective of hedging is to offset potential
losses in one security with gains in the hedge. But a hedge can eliminate or
reduce gains as well as offset losses. (Also see "Correlation Risk.")
ILLIQUID AND RESTRICTED SECURITIES are securities which, by rules of their
issue or by their nature, cannot be sold readily. These include illiquid Rule
144A securities. MARKET, LIQUIDITY AND TRANSACTION RISKS ARE THE PRINCIPAL
RISKS.
INFORMATION RISK means that information about a security or issuer may not
be available, complete, accurate or comparable.
INTEREST RATE RISK is the risk that changes in interest rates will
adversely affect the value of an investor's securities. When interest rates
rise, the value of fixed-income securities will generally fall. Conversely, a
drop in interest rates will generally cause an increase in the value of
fixed-income securities. Longer-term securities are subject to greater interest
rate risk.
19
<PAGE>
LEVERAGE RISK is associated with securities or practices (such as
borrowing) that multiply small index or market movements into large changes in
value. If the Fund invests in underlying funds that use leverage, it will have
the risks arising from the use of leverage.
o HEDGED - when a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position
that the Fund also holds, any loss generated by the derivative should
be offset by gains on the hedged investment, and vice versa. While
hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o SPECULATIVE - To the extent that a derivative is not used as a hedge,
the Fund is directly exposed to the risks of that derivative. Gains or
losses from speculative positions in a derivative may be substantially
greater than the derivative's original cost.
LIQUIDITY RISK occurs when investments cannot be sold readily. The Fund, or
the underlying funds in which the Fund invests, may have to accept a
less-than-desirable price to complete the sale of an illiquid security or may
not be able to sell it at all.
LONG/SHORT FUNDS are mutual funds or closed end investment companies that
can take long and/or short positions in equity and/or debt securities of U.S.
and foreign companies. Long/Short funds buy equity and/or debt securities "long"
that they believe will perform better than their peers. Long/Short funds sell
equity and/or debt securities "short" that they believe will underperform their
peers. A long position is when the Long/Short Fund purchases equity and/or debt
securities outright. A short position is when the Long/Short Fund sells an
equity and/or debt security that it has borrowed with the expectation that the
market price will drop and that the security will be able to be bought back at a
lower price at a later date. MARKET, HEDGED LEVERAGE, SPECULATIVE LEVERAGE,
CORRELATION, LIQUIDITY AND OPPORTUNITY RISKS ARE THE PRINCIPAL RISKS.
MANAGEMENT RISK is the risk that a strategy used by the Fund's management
may fail to produce the intended result. Common to all mutual funds.
MARKET CAPITALIZATION is the total current market value of a company's
outstanding common stock.
MARKET RISK exists in all mutual funds and means the risk that the prices
of securities in a market, a sector, or an industry will fluctuate, and that
such movements might reduce an investment's value.
MORTGAGE-BACKED SECURITIES are securities backed by pools of mortgages,
including pass-through certificates, PACs, TACs and other senior classes of
collateralized mortgage obligations (CMOs). CREDIT, EXTENSION, PREPAYMENT,
LIQUIDITY, INTEREST RATE RISKS ARE THE PRINCIPAL RISKS.
NON-INVESTMENT GRADE DEBT SECURITIES - debt securities rated below BBB/Baa,
sometimes called "junk bonds," generally have more credit risk than higher-rated
securities. Companies issuing lower-rated securities are not as strong
financially as those with higher credit ratings. These companies are more likely
to encounter financial difficulties and are more vulnerable to changes in the
economy, such as a recession or a sustained period of rising interest rates,
that could prevent them from making interest and principal payments. The market
price of lower-rated securities may fluctuate more than higher-rated securities,
and lower-rated securities may be less liquid than higher-rated securities.
CREDIT, MARKET, INTEREST RATE, LIQUIDITY, VALUATION, INFORMATION RISKS ARE THE
PRINCIPAL RISKS.
OPPORTUNITY RISK means missing out on an investment opportunity because the
assets necessary to take advantage of it are committed to less advantageous
investments or strategies.
PARTICIPATION INTERESTS are securities representing an interest in another
security or in bank loans. CREDIT, INTEREST RATE, LIQUIDITY, VALUATION RISKS ARE
THE PRINCIPAL RISKS.
INVESTMENT GRADE BONDS are rated BBB (Standard & Poor's) or Baa (Moody's)
or above. Bonds rated below investment grade are subject to greater credit risk
than investment grade bonds. INTEREST RATE, PREPAYMENT, MARKET AND CREDIT RISKS
ARE THE PRINCIPAL RISKS.
20
<PAGE>
POLITICAL RISK comes into play with investments, particularly foreign
investments, which may be adversely affected by nationalization, taxation, war,
government instability or other economic or political actions or factors.
PREPAYMENT RISK is the risk that, as interest rates fall, borrowers are
more likely to refinance their debts. As a result, the principal on certain
fixed income securities, including mortgage-backed securities, may be paid
earlier than expected, which could cause investment losses and cause prepaid
amounts to have to be reinvested at a relatively lower interest rate.
REPURCHASE AGREEMENTS means the purchase of a security that must later be
sold back to the issuer at the same price plus interest. The Fund may invest up
to 10% of its assets directly in repurchase agreements and may invest in other
funds that own repurchase agreements. CREDIT RISK IS THE PRINCIPAL RISK.
SECTOR FOCUS occurs when a significant portion of the Fund's assets are
invested in a relatively small number of related industries. The Fund will not
concentrate more than 25% of its total assets directly in any one industry.
However, if the Fund invests in underlying funds that concentrate investments in
one or a small number of related industries, the Fund will have the risks
arising from sector focus. Sector focus may increase both market and liquidity
risk.
SHORT SALES means the selling of securities which have been borrowed on the
expectation that the market price will drop and that the securities will be able
to be bought back at a lower price at a later date.
o Hedged. HEDGED LEVERAGE, MARKET, CORRELATION, LIQUIDITY, OPPORTUNITY
RISKS ARE THE PRINCIPAL RISKS.
o Speculative. SPECULATIVE LEVERAGE, MARKET, LIQUIDITY RISKS ARE THE
PRINCIPAL RISKS.
SHORT-TERM TRADING means selling a security soon after purchase. If the
Fund engages in short-term trading, you will have higher turnover and
transaction expenses. Short-term trading may also result in short-term capital
gains. Upon the distribution to you of any net short-term capital gains from the
Fund, you will be taxed at ordinary tax rates. The Fund engages in short-term
trading more than most mutual funds. MARKET RISK IS THE PRINCIPAL RISK.
SECURITIES LENDING means the lending of securities to financial
institutions, which provide cash or government securities as collateral. The
Fund cannot engage in securities lending, but underlying funds in which the Fund
invests may. CREDIT RISK IS THE PRINCIPAL RISK.
SMALL AND MID-SIZED COMPANY SECURITIES are securities issued by small or
mid-sized companies, as measured by their market capitalization. Historically,
smaller company securities have been more volatile in price than larger company
securities, especially over the short-term. Among the reasons for the greater
price volatility are the less certain growth prospects of smaller companies, the
lower degree of liquidity in the markets for such securities, and the greater
sensitivity of smaller companies to changing economic conditions. In general,
the smaller the company, the greater its risks. MARKET, LIQUIDITY AND
INFORMATION RISKS ARE THE PRINCIPAL RISKS.
STRUCTURED SECURITIES means indexed and/or leveraged mortgage-backed and
other debt securities, including principal-only and interest-only securities,
leveraged floating rate securities and others. These securities tend to be
highly sensitive to interest rate movements and their performance may not
correlate to these movements in a conventional fashion. CREDIT, INTEREST RATE,
EXTENSION, PREPAYMENT, MARKET, SPECULATIVE LEVERAGE, LIQUIDITY, VALUATION RISKS
ARE THE PRINCIPAL RISKS.
TRANSACTION RISK means that the Fund, or the underlying funds in which the
Fund invests, may be delayed or unable to settle a transaction or that
commissions and settlement expenses may be higher than usual.
WHEN ISSUED SECURITIES AND FORWARD COMMITMENTS involve the purchase and
sale of securities for delivery at a future date, market value may change before
delivery. MARKET, OPPORTUNITY AND LEVERAGE RISKS ARE THE PRINCIPAL RISKS.
21
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FOR MORE INFORMATION:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the funds. The SAI has
been filed with the Securities and Exchange Commission and is incorporated
by reference in this Prospectus (is legally a part of this Prospectus).
ANNUAL AND SEMIANNUAL REPORTS
These reports include portfolio holdings, financial statements, performance
information, the auditor's report (in the case of the annual report), and a
discussion of the market conditions and investment strategies that
significantly affected the fund's performance during their last fiscal
year.
Information about the funds (including the SAIs) can be reviewed and copied
at the Commission's Public Reference Room in Washington, D.C., and
information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-202-942-8090. Reports and other information
about the funds are available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov, and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the
following E-mail address: [email protected], or by writing the
Commission's Public Reference Section, Washington, D.C. 20549-0102.
To request a free copy of the current annual/semi-annual report or SAI,
request other information about the funds, or make shareholder inquiries,
please write, call or E-mail us at:
PROACTIVE Asset Allocation Funds
21 Hawk Ridge Circle
Lake Saint Louis, MO 63367
1-888-PROACTIVE or 314-561-0100
e-mail: [email protected]
SEC File No.: 811-9156
<PAGE>
12
OPTI-FLEX(R) DYNAMIC FUND
A FUND OF PROACTIVE ASSET ALLOCATION FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 2000
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 30,
2000. 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
Description of the Trust
Investment Policies and Related Matters
General
The Fund's Portfolio
Investment Restrictions
Portfolio Turnover
Purchase and Sale of Fund Securities
Valuation of Portfolio Securities
Calculation of Total Return
Additil Purchase and Redemption Information
Distribution and Taxes
Investment Adviser and Manager
Officers and Trustees
The Distributor
Individual Retirement Accounts (IRA)
Additional Information
Principal Holders of Outstanding Shares
Financial Statements
INVESTMENT ADVISER TRANSFER AGENT
PROACTIVE Money Management, Inc. Mutual Funds Service Co.
DISTRIBUTOR
PROACTIVE Financial Services, Inc.
<PAGE>
DESCRIPTION OF THE TRUST
GENERAL. 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 21 Hawk Ridge Circle, Lake Saint Louis, MO 63367. 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.
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 the Trust's existing fund 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. All shares have certain voting and dividend rights, but do not have
preemptive or conversion rights.
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.
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 Trust 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.
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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.
TRUSTEE LIABILITY. The Declaration of Trust 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.
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 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
3
<PAGE>
market instruments. The Fund may engage in hedging transactions to the extent
and for the purposes set forth in the Fund's Prospectus.
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 diversifies across investment types more than most mutual funds.
However, like any other mutual fund, the Fund does not constitute a complete
investment program. While the Fund invests in stock, bond, money market and gold
mutual funds and other securities in varying proportions, investors should not
construe the 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.
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.
The Fund may not:
(1) issue senior securities, except as permitted under the Investment
Company Act of 1940;
<PAGE>
(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.
(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.
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<PAGE>
(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.
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
Normally, at least 65% of the Fund's assets will be invested in 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
mutual funds and closed-end investment companies, such as stocks, bonds, and
money market instruments and repurchase agreements.Therefore, except as
otherwise expressly provided herein, the following discussion of investment
strategies, risks and limitations pertains to both mutual funds, closed-end
investment companies and direct investments purchased by the Fund; and
securities purchased by underlying funds in which the Fund invests. Any
percentage limitations apply to the Fund and may or may not apply to underlying
funds in which the Fund invests.
INVESTMENT IN OPEN-END INVESTMENT COMPANIES. 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 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; provided,
however, in no event may more than 50% of the Fund's total assets be subject to
such a redemption fee or contingent deferred sales charge. The underlying mutual
funds in which the Fund invests may incur distribution expenses in the form of
12b-1 fees.
6
<PAGE>
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, 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
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.
7
<PAGE>
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 fund's
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.
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.
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 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. 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.
8
<PAGE>
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. 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. 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.
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.
9
<PAGE>
HEDGING STRATEGIES. The Fund may engage in hedging transactions in carrying
out its investment policies. 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. 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, 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.
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 these
hedging strategies will be utilized on a timely basis or that the Fund will be
able to realize this objective.
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.
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
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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
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.
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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.
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
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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 contracts 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.
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 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. However, underlying funds
in which the Fund invests may engage in such transactions for speculative
purposes.
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
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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.
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
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
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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
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.
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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
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
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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. 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.
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
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.
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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.
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, 1999 was
1,012% (1,574% in 1998).
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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. High transaction
costs could result when compared with other funds. However, because a
significant portion of the Fund's assets are invested in no-load mutual funds,
which do not charge commissions upon the purchase or sale of their shares, the
Fund will pay less commissions than many mutual funds of similar size and
portfolio turnover. 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 the Fund.
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
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.
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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, 1999, the Fund paid no commissions on
the purchase and sale of securities ($10,614 in 1998; $18,043 in 1997).
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,
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
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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
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 contingent deferred sales
charges.
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. When applicable, the
periods of time shown will be for a one-year period, a five-year period, a ten
year period (or relevant portion thereof) and since inception.
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.
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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
Since Inception Ended
(For the Period December 31, 1999
October 1, 1996 (Reflects Contingent
through Deferred
DECEMBER 31, 1999) SALES CHARGE)
Value of Account
At end of Period $1,757.66 $1,510.50
Value of Account
At beginning of Period 1,000.00 1,000.00
--------- --------
Base Period Return $ 757.66 $ 510.50
Average Total Return 18.95% 51.05%
Values were computed according to the following formulas:
Since Inception: $1,000 (1 + .1895)3.25 = $1,757.66
1 Year (with CDSC): $1,000 (1 + .5105) = $1,510.50
The Total Return performance data in this hypothetical example represents past
performance and the investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
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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.
DISTRIBUTIONS AND TAXES
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
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<PAGE>
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.
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.
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.
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.
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.
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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 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. By qualifying as a "regulated investment company" for tax purposes,
the Fund 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 might deviate from this
policy, and incur a tax liability, if this were necessary to fully protect
shareholder values.
The Fund has qualified as a "regulated investment company" for each of its
last four 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
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, and disposition 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
Firstar 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.
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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 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.
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.
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.
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<PAGE>
For the year ended December 31, 1999, the Fund paid management fees to the
Manager totaling $101,475. For the years ended December 31, 1998 and December
31, 1997, the Manager earned management fees totaling $96,164 and $83,620,
respectively.
The manager has agreed to reduce its fees and/or absorb expenses to limit
the Fund's total annual operating expenses to 2.40%. The manager may terminate
this agreement after December 31, 2000. For the year ended December 31, 1999,
the Manager reimbursed expenses totaling $75,385 in the Fund ($74,553 in 1998;
$107,697 in 1997).
PROACTIVE Money Management, Inc. was incorporated in January, 1980 and
maintains its principal offices at 21 Hawk Ridge Circle, Lake Saint Louis, MO
63367. 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, Administrative Vice President,
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.
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.
OFFICERS AND TRUSTEES
PROACTIVE Asset Allocation Funds (the "Trust") is supervised by its Board
of Trustees, an independent body that has ultimate responsibility for the Fund's
activities. 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 21 Hawk Ridge Circle, Lake Saint
Louis, MO 63367, 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 Fund, 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:
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Position Principal
NAME AND ADDRESS AND AGE HELD OCCUPATION
Jeffrey J. Unterreiner*+, 30 Trustee/Chairman President, PROACTIVE Financial
and President Services, Inc. since October
1994; President, PROACTIVE
Money Management, Inc. since
July 1997.
C. Martin Unterreiner*+, 60 Trustee/ Vice President and Chairman of
Vice President the Board, PROACTIVE Money
Management, Inc.since January
1980; Vice President of
PROACTIVE Financial Services,
Inc. since July 1997.
Henry J. Bingham, 69 Trustee Executive Managing Director,
Van Eck Global Funds Van Eck Associates Corp., an
99 Park Avenue investment adviser, since 1984.
New York, NY 10016
Patricia A. Houtz, 49 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 since 1992.
Raymond E. Doerr, 77 Trustee Retired since November 1982;
13101 Westin Ct. formerly, Engineering Director
St. Louis, MO 63146 for Monsanto Company, a
chemical company.
Arnold Tennant, 58 Trustee President, Tennant Capital
4505 Charlane Dr. Management, Inc., an invest-
St. Louis, MO 63128 ment adviser, since May 1996;
Registered Representative,
Clearing Services of America,
a broker-dealer, from May
1996 to March, 1999; Executive
Vice President, R.T. Jones
Capital Equities, an
investment adviser and broker-
dealer, September 1987 to
May 1996.
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Tonjua G. Donnelly*+, 30 Treasurer Administrative Vice President,
PROACTIVE Money Management,
Inc. since July 1997;
Executive Administrator,
PROACTIVE Financial Services,
Inc., since November 1994.
Christian D. Tompras*+, 40 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, a financial
services company, February
1994 to August 1995.
Cynthia D. Stowers*+, 29 Assistant Service System Manager,
Secretary PROACTIVE Money Management,
Inc. since August 1993.
*"Interested Person" of the Trust (as defined in the Investment Company Act of
1940).
+21 Hawk Ridge Circle, Lake Saint Louis, MO 63367.
C. Martin Unterreiner is Jeffrey J. Unterreiner's father.
The following table shows the compensation paid by the Fund to the Trustees
of the Fund during the fiscal year ended December 31, 1999:
COMPENSATION TABLE
Pension or
Retirement Estimated Total
Benefits Annual Compensation
Aggregate Accrued as Benefits from Registrant
Complex Compensation Part of Upon and Fund
TRUSTEE FROM THE FUND FUND EXPENSES RETIREMENT PAID TO TRUSTEES
- ------- ------------- ------------- ----------- ----------------
Jeffrey J. Unterreiner None None None None
C. Martin Unterreiner None None None None
Henry J. Bingham $6,000 None None $6,000
Raymond E. Doerr $6,000 None None $6,000
Patricia A. Houtz $3,000 None None $3,000
Arnold Tennant $6,000 None None $6,000
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<PAGE>
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, Bingham and Tennant 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 $21,000 for the year ended December 31, 1999 ($21,000 in 1998; $26,750
in 1997). Audit Committee meeting fees totaled $6,000 for the year ended
December 31, 1999 ($5,000 in 1998; $3,750 in 1997). All other officers and
Trustees serve without compensation from the Trust.
The Fund and the Manager have each adopted a Code of Ethics that permits
personnel subject to the Code to invest in securities, including, under certain
circumstances and subject to certain restrictions, securities that may be
purchased or held by the Fund. However, each such Code restricts personal
investing practices by directors and officers of the Manager and employees of
the Manager with access to information about the purchase or sale of Fund
securities. The Code of Ethics for the Fund also restricts personal investing
practices of trustees of the Fund who have knowledge about recent Fund trades.
Among other provisions, each Code of Ethics requires that such directors and
officers and employees with access to information about the purchase or sale of
Fund securities obtain preclearance before executing personal trades. Each Code
of Ethics prohibits acquisition of securities without preclearance in, among
other events, an initial public offering or a limited offering, as well as
profits derived from the purchase and sale of the same security within 60
calendar days. These provisions are designed to put the interests of Fund
shareholders before the interest of people who manage the Fund.
THE DISTRIBUTOR
PROACTIVE Financial Services, Inc. (the "Distributor"), 21 Hawk Ridge
Circle, Lake Saint Louis, MO 63367, acts 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. C. Martin Unterreiner, Vice
President and a Trustee of the Trust, and Janice B. Unterreiner control the
Distributor through the ownership of voting common stock. The Distributor is an
affiliate of the Manager.
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 Distribution Plan (the Rule 12b-1 Trustees), at a meeting called for the
purpose of voting on the Distribution Plan, adopted a plan of distribution for
the shares of the Fund. 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 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.
Pursuant to a plan of distribution (the "Distribution 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.
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The Distribution 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
Distribution 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 Distribution
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 Distribution Plan if it is terminated or not
continued.
Pursuant to the Distribution 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 Distribution 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.
The Fund has also 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 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.
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.
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<PAGE>
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.
The table below states the amounts paid under the Fund distribution plan
for the year ended December 31, 1999.
DISTRIBUTION PLAN EXPENSES PAID BY THE FUND
TYPE OF EXPENSE AMOUNT PAID
Advertising $0
Printing and Mailing of Prospectuses $0
Compensation to Underwriters $84,239
Compensation to Broker-Dealers $ 8,228
Compensation to Sales Personnel $0
Interest, carrying, or other financial charges $0
---------
Total $92,467
The Distributor for the Fund, an affiliated person of the Manager and the
Fund, received the following commissions and other compensation from the Trust
during the fiscal year ended December 31, 1999.
Name of Net Underwriting Compensation
Principal Discounts and on Redemptions Brokerage Other
UNDERWRITER COMMISSIONS AND REPURCHASES COMMISSIONS COMPENSATION
- ----------- -------------- --------------- ----------- ------------
PROACTIVE Financial $0 $2,681 $0 $0
Services, Inc.
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
32
<PAGE>
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.
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
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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 $32,000 for 1999. If you are married and file a joint tax
return, your AGI Threshold Level is $52,000 for 1999. 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
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:
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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.
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:
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(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.
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.
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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.
ADDITIONAL INFORMATION
TRANSFER AGENT. Mutual Funds Service Co., 6000 Memorial Drive, Dublin, Ohio
43017 provides accounting, stock transfer, and dividend disbursing services to
the Fund. 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.
CUSTODIAN. Firstar 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 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 March 31, 2000, the following persons owned 5% or more of the
OPTI-FLEX(R) Dynamic Fund outstanding shares of beneficial interest:
Name and Address Number of Record Percent (%)
OF BENEFICIAL OWNER AND BENEFICIAL (SHARES) OF CLASS
- ------------------- ----------------------- --------
C. Martin Unterreiner IRA 169,148.0390 13.32%
21 Hawk Ridge Circle
Lake Saint Louis, MO 63367
C. Martin Unterreiner 91,569.4590 7.21%
Janice B. Unterreiner JTWROS
21 Hawk Ridge Circle
Lake Saint Louis, MO 63367
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Rosemarie T. Durbin 63,592.9910 5.01%
6708 Bridgehill Cove
Austin, TX 78746
The shareholders listed above own shares for investment purposes and have
no known intention of exercising any control of the Fund.
As of March 31, 2000, securities of the OPTI-FLEX(R) Dynamic Fund owned by
all officers and trustees as a group represent 24.57% of the outstanding shares
of the Fund.
FINANCIAL STATEMENTS
The financial statements and independent accountants' report required to be
included in this Statement of Additional Information are incorporated herein by
reference to the Trust's Annual Report to Shareholders for the fiscal year ended
December 31, 1999. The Fund will provide the Annual Report without charge at
written request or request by telephone.
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