Fellow shareholder,
I am pleased to present to you our semi-annual report. I am sure that you
will notice the size of the assets within the fund. I have been working very
diligently to align The Optimal Fund with the best of alliances. We have
concluded the association with firms that should be bringing substantial
investments to the fund. We should have a clone of the fund in a line of
Variable Annuities and Variable Universal Life products offered by a major life
insurance company. This will add to the promotion of The Optimal Fund.
Although the assets of the fund have not reached critical mass for the
sponsor of the fund, Leveraged Index Management Company stands ready to continue
subsidizing the funds expenses. I would like to take this opportunity to assure
you that we are making every effort to invest you assets in the spirit in the
prospectus' guideline.
We look forward to the Future and the many Options that the Optimal Fund
will provide for our shareholders.
<PAGE>
THE OPTIMAL FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) OCTOBER 31, 1999
Shares Value
------ -----
COMMON STOCK -- 7.37%
FRANCE -- 2.11%
World Equity Benchmark Securities - France Series 124 $ 2,992
---------
GERMANY -- 3.34%
World Equity Benchmark Securities - Germany Series 215 4,730
---------
UNITED KINGDOM -- 1.92%
World Equity Benchmark Securities - United Kingdom Series 131 2,710
---------
TOTAL COMMON STOCK (COST $10,572) 10,432
---------
Principal
---------
U.S. TREASURY OBLIGATIONS -- 77.61%
U.S. Treasury Bill 4.38%, 11/18/99 (COST $109,786) 110,000 109,786
---------
PURCHASED OPTIONS -- 3.36%
Call option on The Nikkei 225 Future (CME)
Strike Price JPY 18,000 Expire 03/09/2000 (COST $5,664)* 1 4,750
---------
TOTAL INVESTMENTS (COST $126,022) -- 88.34% 124,968
OTHER ASSETS IN EXCESS OF LIABILITIES -- 11.66% 16,490
---------
NET ASSETS -- 100% $ 141,458
=========
* Non-income producing security.
FUTURES CONTRACTS OUTSTANDING - OCTOBER 31, 1999
================================================================================
UNREALIZED
NUMBER OF CONTRACTS TOTAL VALUE APPRECIATION
- ------------------- ----------- ------------
1 S&P 500 INDEX, delivery date 12/17/99 68,812 $ 772
<PAGE>
THE OPTIMAL FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) OCTOBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at market (identified cost $126,022) $ 124,968
Cash 15,245
Receivables:
Variation margin 1,287
Due from advisor 73
---------
Total assets 141,573
---------
LIABILITIES:
Payables:
Accrued distribution fees 115
---------
NET ASSETS $ 141,458
=========
NET ASSETS CONSIST OF:
Common stock $ 143,835
Undistributed net investment income 299
Accumulated realized loss on investments (2,394)
Net unrealized loss on investments (282)
---------
Net Assets (10,000,000 shares of $0.001 par beneficial
interest authorized; 14,492 shares outstanding) $ 141,458
=========
Net Asset Value and redemption price per share $ 9.76
=========
See notes to financial statements.
<PAGE>
THE OPTIMAL FUND
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD ENDED OCTOBER 31, 1999*
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 931
Dividends 260
-------
Total investment income 1,191
-------
EXPENSES:
Investment advisory fees 182
Distribution fees 364
Service fees 346
-------
Total expenses 892
-------
Net investment income 299
-------
REALIZED GAIN ON INVESTMENTS:
Net realized loss on investments (2,394)
Net change in unrealized depreciation on investments (282)
-------
(2,676)
-------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,377)
=======
* The Optimal Fund commenced operations on July 16, 1999.
See notes to financial statements.
<PAGE>
THE OPTIMAL FUND
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
- --------------------------------------------------------------------------------
For the Period
Ended
October 31, 1999*
-----------------
INCREASE IN NET ASSETS
Operations:
Net investment income $ 299
Net realized loss on investments (2,394)
Net change in unrealized depreciation on investments (282)
---------
Net decrease in net assets resulting from operations (2,377)
---------
Increase in net assets from Fund share transactions 143,835
---------
Increase in net assets 141,458
NET ASSETS:
Beginning of period 0
---------
End of period $ 141,458
=========
* The Optimal Fund commenced operations on July 16, 1999.
See notes to financial statements.
<PAGE>
THE OPTIMAL FUND
FINANCIAL HIGHLIGHTS (UNAUDITED)
Per Share Data (For a Share Outstanding from July 16, 1999 through October 31,
1999)
- --------------------------------------------------------------------------------
FOR THE PERIOD
ENDED
OCTOBER 31, 1999*
-----------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
----------
INVESTMENT OPERATIONS:
Net investment gain 0.02
Net realized and unrealized loss on
investments (0.26)
----------
Total from investment operations (0.24)
----------
NET ASSET VALUE, END OF PERIOD $ 9.76
==========
TOTAL RETURN (2.40%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $ 141
Ratio of expenses to average net assets 2.53% 1
Ratio of net investment income
to average net assets 0.85% 1
Portfolio turnover rate 66.28%
1 Annualized
* The Optimal Fund commenced operations on July 16, 1999.
See notes to financial statements.
<PAGE>
THE OPTIMAL FUND
================================================================================
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Optimal Fund (the "Company") was incorporated under the laws of the
state of Maryland on April 27, 1999, and consists solely of The Optimal Fund
(the "Fund"). The Company is registered as a no-load, open-end diversified
management investment company of the series type under the Investment Company
Act of 1940 (the "1940 Act"). The Fund's investment strategy is to emphasize
capital appreciation and safety of principal. The Fund became effective with the
SEC on June 8, 1999 and commenced operations on July 16, 1999.
The costs incurred in connection with the organization, initial
registration and public offering of shares have been paid by Leveraged Index
Management Company (the "Advisor"). Accordingly, no organization costs have been
recorded by the Fund.
The following is a summary of significant accounting policies consistently
followed by the Fund.
a) Investment Valuation--Common stocks and other equity-type securities listed
on a securities exchange are valued at the last quoted sales price on the day of
the valuation. Price information on listed stocks is taken from the exchange
where the security is primarily traded. Securities that are listed on an
exchange but which are not rated on the valuation date are valued at the average
of the most recent bid and asked prices. Other assets and securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Investment manager under the supervision of the Board of
Directors. Short-term instruments (those with remaining maturities of 60 days or
less) are valued at amortized cost, which approximates market value.
b) Federal Income Taxes--No provision for federal income taxes has been made
since the Fund has complied to date with the provision of the Internal Revenue
Code applicable to regulated investment companies and intends to so comply in
the future and to distribute substantially all of its net investment income and
realize capital gains in order to relieve the Fund from all federal income
taxes.
c) Distributions to Shareholders--Dividends from net investment income and
distributions of net realized capital gains, if any, will be declared and paid
at least annually. Income and capital gain distributions are determined in
accordance with income tax regulations that may differ from generally accepted
accounting principles.
d) Equalization-A portion of proceeds from sales and cost of redemptions of Fund
shares is credited or charged to undistributed net investment income so that
income per share available for distribution is not affected by sales or
redemptions of shares.
<PAGE>
THE OPTIMAL FUND
================================================================================
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 31, 1999 (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
e) Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
f) Futures and Options--The Fund may enter into financial futures contracts and
security options. Upon entering into a futures contract, the Fund is required to
deposit with its futures broker, cash or other securities equal to a certain
percentage of the futures contract amount ("initial margin"). During the term of
the futures contract, payments are exchanged between the Fund and the futures
broker equal to the appreciation or depreciation in the value of the futures
contract ("variation margin"). The Fund recognizes gains or losses equal to the
variation margins paid or received. Futures contracts involve market risk in
excess of the amounts recognized in the statement of assets and liabilities.
Additionally, there is risk that the Fund may not be able to enter into a
closing transaction because of an illiquid secondary market. Future contracts
are valued based on their quoted daily settlement prices.
g) Other--Investment and shareholder transactions are recorded on trade date
plus one. The Fund determines the gain or loss realized from the investment
transactions by comparing the original cost of the security lot sold with the
net sales proceeds. Dividend income is recognized on the ex-dividend date or as
soon as information is available to the Fund, and interest income is recognized
on an accrual basis.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the period ended October 31, 1999
were as follows:
SHARES AMOUNT
Sold ................................................ 14,492 $143,835
Redeemed ............................................ -- --
-------- --------
Net Increase ........................................ 14,492 $143,835
-------- --------
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Fund for the period ended October 31, 1999, were as follows:
Purchases $15,711
Sales 5,369
<PAGE>
THE OPTIMAL FUND
================================================================================
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 31, 1999 (CONTINUED)
3. INVESTMENT TRANSACTIONS-(CONTINUED)
At October 31, 1999, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation ............................................. $ 97
(Depreciation) ........................................... (379)
-----
Net depreciation on investments .......................... (282)
At October 31, 1999, the cost of investments for federal income tax
purposes was $126,022.
4. ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
The Fund has entered into a Management Agreement with Leveraged Index
Management Company,(the "Advisor") to provide investment management services to
the Fund. Pursuant to the Advisory Agreement, the Advisor is entitled to receive
a fee, calculated daily and payable monthly at the annual rate of 0.50% as
applied to the Fund's daily net assets. For the period ended October 31, 1999,
the Advisor received advisory fees of $182.
The Fund has entered into an Operating Services Agreement (the "Servicing
Agreement") with the Advisor to provide or arrange for day-to-day operational
services to the Fund. Pursuant to the Servicing Agreement, the Advisor is
entitled to receive a fee, calculated daily and payable monthly at the annual
rate of 0.95% as applied to the Fund's daily net assets. For the period ended
October 31, 1999, the Advisor received Servicing Agreement fees of $364.
The Fund and the Advisor have entered into an Investment Company Services
Agreement (the "ICSA") with Declaration Service Company to provide day-to-day
operational services to the Fund including, but not limited to, accounting,
administrative, transfer agent, dividend disbursing, registrar and recordkeeping
services.
The Fund and the Advisor have entered into a Distribution Agreement with
Declaration Distributors, Inc. to provide distribution services to the Fund.
Declaration Distributors, Inc. serves as underwriter/distributor of the Fund.
<PAGE>
THE OPTIMAL FUND
================================================================================
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 31, 1999 (CONTINUED)
A separate plan of distribution has been adopted under Rule 12b-1 of the
Investment Company Act of 1940. With respect to the shares offered by the Fund,
the plan provides that the Fund may pay a servicing or Rule 12b-1 fee of 1.00%
of the Funds average net assets (1/12 of 1.00% monthly) to persons or
institutions for performing certain servicing functions for the Funds
shareholders. The distribution plan also allows the Fund to pay or reimburse
expenditures in connection with sales and promotional services related to
distribution of the Funds shares, including personal services provided to
prospective and existing shareholders.
Certain directors and officers of the Fund are directors and officers of
the Advisor.
