[Information in brackets is instructional and must be deleted prior to filing.]
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number
811-09485
Choice Funds
(Exact name of registrant as specified in charter)
5299 DTC Boulevard Suite 1150, Greenwood Village, CO 80111
(Address of principal executive offices)
(Zip code)
Choice Investment Management, LLC, 5299 DTC Boulevard Suite 1150, Greenwood Village, CO 80111
(Name and address of agent for service)
Registrant's telephone number, including area code:
(303) 488-2200
Date of fiscal year end:
October 31
Date of reporting period: October 31, 2004
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
A Choice for all Seasons
Choice Focus Fund
Choice Long-Short Fund
Choice Market Neutral Fund
Annual Report – October 31, 2004
A Choice for all Seasons
Choice Focus Fund
Choice Long-Short Fund
Choice Market Neutral Fund
Annual Report – October 31, 2004
Choice Funds
Annual Report
October 31, 2004
Table of Contents
Perspectives from Patrick Adams
2
Growth Chart
Choice Focus Fund
4
Choice Long-Short Fund
5
Choice Market Neutral Fund
6
Top Ten Industries and Investments
7
Schedule of Investments
Choice Focus Fund
8
Choice Long-Short Fund
11
Choice Market Neutral Fund
14
Statements of Assets and Liabilities
20
Statements of Operations
21
Statements of Changes in Net Assets
Choice Focus Fund
22
Choice Long-Short Fund
23
Choice Market Neutral Fund
24
Financial Highlights
Choice Focus Fund Class A
25
Choice Focus Fund Class C
26
Choice Long-Short Fund Class A
27
Choice Long-Short Fund Class C
28
Choice Market Neutral Fund
29
Notes to Financial Statements
30
Report of Independent Certified Public Accountants
34
Expense Table
35
Trustee Table
36
PERSPECTIVES FROM PATRICK ADAMS
The Choice Focus, Long-Short and Market Neutral fund were down for the fiscal year ending October 31, 2004. This compares to the S&P 500 Index which was up 9.42%1 and the Vanguard Total Bond Market Index up 3.43%.2
The market endured a transition for most of 2004, as investors digested the gains made in 2003 and concentrated on the slow down in earnings growth. In the fastest growing areas of the economy where investors monitor the direction of growth, the market was particularly hit hard. The Philadelphia Semiconductor Index (SOX) was hit with a 37.2% decline from its peak in January of 2004 to its trough in September of 20043. This decline was reflected in the Focus Fund which generally has a portion of the portfolio invested in technology and semiconductors.
Investors are focused on growth as demand for personal computers and wireless handsets accelerates going into the holiday season and 2005. In a stronger economic growth environment we are well positioned for a pickup in the market.
In the Choice Focus Fund we generally own 20-30 core positions. For this fund we look for great companies that we believe can become big investments. We look for companies we believe have strong long-term earnings growth potential, strong or improving fundamentals and reasonable valuations.4
The Long-Short and the Market Neutral Funds are less correlated with the market and consequently offer a choice in different markets. Our ability to short securities (borrowing stocks and selling them in hopes that the security declines where by the investors makes money) in these funds enable us to look for securities that are over-valued, have declining fundamentals, or would be impacted by a decline in economic growth.
The Long-Short Fund will actively manage market exposure. We will look for opportunities for market appreciation while hedging undue market risk. The Long-Short Fund is very specialized, and designed for only the most sophisticated and risk-tolerant investors. In pursuing its goals, the Fund’s risk of losses is significant. The techniques used in managing its non-diversified portfolio are highly sophisticated and intensive and the fees to be charged for such management are commensurately high; higher in fact than those charged to manage most other mutual funds.5
1 The performance data represents past performance and does not guarantee future results. The S&P 500 Index is an unmanaged index generally representative of the U.S. Stock Market. Performance numbers are for the period from November 1, 2003 through October 31, 2004 and reflect reinvestment of dividends and other distributions. You cannot invest directly in an index. The Funds will deduct a 2.00% short-term trading fee from the redemption amount for shares held less than 90 days.
2The Vanguard Total Bond Market Index is an index comprised of intermediate-term bonds . Performance numbers reflect reinvestment of dividends and other distributions. You cannot invest directly in an index. The performance data represents past performance and does not guarantee future results.
3The Philadelphia Semiconductor Index is an unmanaged, price-weighted index comprised of companies that are involved in the design, distribution, manufacturing and sale of semiconductors. Performance numbers reflect reinvestment of dividends and other distributions. You cannot invest directly in an index.
4The Focus Fund is non-diversified and therefore more exposed to individual stock volatility and market pressure than a fully diversified fund.
5To attempt to achieve its investment goal, the Fund may use derivatives strategies and other leveraging techniques speculatively. These strategies subject the Fund to greater risks, and its performance may be more volatile than other funds. The Fund may be required to pay a premium to sell a security short. In addition, there is no guarantee that the price of a shorted stock will fall. This Fund is not a complete investment program and investors should consider the Fund for that portion of their investments allocated to higher risk, more aggressive investments. There is no guarantee that the Fund will achieve its stated investment objective.
PERSPECTIVES FROM PATRICK ADAMS
We were disappointed in our performance of the Long-Short and Market Neutral Funds due to several reasons: shorts moving up faster than our longs, a low volatility environment, and the performance of some of our long positions. We will discuss each issue below.
Our short positions had more volatility we believe due to the persistence of momentum investors carrying the value of some of our short positions to ever higher valuations. While we believe that the momentum will cease to continue at some point, we can not determine when that point will be in the future. As the market enters 2005, we believe there are very attractive opportunities on the short side of the market.
Throughout most of the year, the market was impacted by low volatility. The market started with generally lower volatility and continued to decline for most of the year. The Chicago Board of Trade Volatility Index 2006 day moving average began the year at 21 and declined to 16 by October 31, 2004. The lower volatility impacted our pairs trading strategy. Pair trades consist of buying one stock and selling short a similar company in a similar industry. When volatility is low, the dispersion between high valued stocks we like to short and lower value stocks we like to buy long declines, giving us a lower probability of arbitraging (capturing the difference in value between two assets) the difference in two investments. We do not believe we are in a protracted period of low volatility.
Some of our long positions performed poorly and in particular some of our small capitalization securities. We have made an effort to reduce our exposure to small cap in favor of higher dividend paying high quality stocks.
We continue to manage the Market Neutral Fund with the goal of positive returns on a consistent basis while limiting the volatility and correlation to the overall market. Our strategy remains to combine our core fundamental research with our quantitative analysis to determine which pair trades present an attractive opportunity. In this low interest rate environment we are also searching for income producing investments for our core long investments that will complement our pairs trading strategy in the Market Neutral Fund through 2005. That way if volatility remains low, we believe a more stable component of income producing investments in this market environment is required.7
A couple of examples of the pairs we traded are Maxim Integrated Products (long) and Linear Technology (short), Cisco Systems (long) and F5 Networks (short). We usually buy what we consider high quality or inexpensive stocks and short low quality or expensive stocks. Our goal is to make money on the pair trade regardless of which way the market is moving.
Sincerely,
Patrick Adams
Patrick Adams, CFA
6The CBOE Volatility Index is calculated by taking a weighted average of the implied volatility from eight calls and puts on the S&P 100 Index and measures the volatility of the US equity markets. You cannot invest directly in an index.
7The Market Neutral Fund is also very specialized and designed for only the most sophisticated and risk-tolerant investors. In pursuing its goals, like the Long-Short Fund, this Fund’s risk of losses is significant. The techniques used in managing its non-diversified portfolio are highly sophisticated and intensive and the fees to be charged for such management are commensurately higher than those charged to manage most other mutual funds.
CHOICE FOCUS FUND
INVESTMENT RETURNS TABLE*
One Year Ended
Average Annual
Since Inception
9-30-04
10-31-04
9-30-04
10-31-04
Choice Focus Class A (inception date 11-1-99)
Fund With Sales Load Effect
-10.29%
-12.40%
-16.79%
-16.37%
Fund Without Sales Load Effect
-5.11%
-7.31%
-15.83%
-15.42%
Choice Focus Class C (inception date 3-2-04)
Fund With Sales Load Effect
NA
NA
-17.27%+
-16.50%+
Fund Without Sales Load Effect
NA
NA
-16.44%+
-15.65%+
S&P 500® Stock Index (inception date 11-1-99)
13.87%
9.42%
-2.55%
-2.22%
Performance is historical and does not represent future results, current performance may be higher or lower than performance data quoted. Investment returns and principal will fluctuate so that shares, when redeemed, may be worth more or less than their original investment. For Class A shares, total return figures include an upfront maximum applicable sales charge of 5.50%. Class C shareholders are subject to a contingent deferred sales charge of 1% (as a percentage of original purchase price or redemption proceeds, whichever is lower) on shares sold within one year of purchase. A Fund’s performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. Fund prices change daily and performance may change significantly during periods of market volatility. Visit our website at www.choicefunds.net f or current fund performance information. The Fund is non-diversified; therefore, it is more exposed to individual stock volatility and market pressure than funds investing in a larger number of securities. The Fund has invested a substantial portion of its assets in technology-related companies, and thus is more susceptible to any economic, business or other developments that generally affect those types of companies.
+Not annualized
GROWTH OF AN ASSUMED $10,000 INVESTMENT*
This chart assumes an initial investment of $10,000 made on 11-1-99. Total return is based on net change in N.A.V. assuming reinvestment of distributions. Returns shown on this page include the reinvestment of all dividends and other distributions. Performance figures reflect fee waivers in effect, represent past performance, which is no guarantee of future results, and will fluctuate. In the absence of fee waivers, total return as reflected in the graph for the months of November, 1999 through September, 2000 would be reduced.
It is not possible to make a direct investment in the S&P 500® Stock Index.
*The Investment Returns Table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
CHOICE FOCUS FUND
Objective
The Choice Focus Fund seeks capital appreciation by investing primarily in 20-30 securities of companies that the portfolio manager believes have superior potential for earnings growth.
Strategy
The portfolio manager looks for reasonably priced securities of companies that occupy a dominant position in a market due to size, products or services, and whose growth potential is not yet fully reflected in the company’s stock price.
CHOICE LONG-SHORT FUND
INVESTMENT RETURNS TABLE*
One Year Ended
Average Annual
Since Inception
9-30-04
10-31-04
9-30-04
10-31-04
Choice Long-Short Class A (inception date 2-1-01)
Fund With Sales Load Effect
-22.67%
-22.94%
-14.08%
-13.75%
Fund Without Sales Load Effect
-18.19%
-18.50%
-12.75%
-12.44%
Choice Long-Short Class C (inception date 2-1-01)
Fund With Sales Load Effect
-19.78%
-20.01%
-14.48%
-14.18%
Fund Without Sales Load Effect
-18.97%
-19.20%
-14.48%
-14.18%
S&P 500® Stock Index (inception date 2-1-01)
13.87%
9.42%
-4.00%
-3.52%
Performance is historical and does not represent future results, current performance maybe higher or lower than performance data quoted. Investment returns and principal will fluctuate so that shares, when redeemed, may be worth more or less than their original investment. For Class A shares, total return figures include an upfront maximum applicable sales charge of 5.50%. Class C shareholders are subject to a contingent deferred sales charge of 1% (as a percentage of original purchase price or redemption proceeds, whichever is lower) on shares sold within one year of purchase. The Fund’s performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. Fund prices change daily and performance may change significantly during periods of market volatility. Visit our website at www.choicefunds.net for current fund performance information. The Fund is non-diversified; therefore, it is more exposed to individual stock volatility and market pressure than funds investing in a larger number of securities. The Fund has invested a substantial portion of its assets in technology-related companies, and thus is more susceptible to any economic, business or other developments that generally affect those types of companies.
GROWTH OF AN ASSUMED $10,000 INVESTMENT*
This chart assumes an initial investment of $10,000 made on 2-1-01. Total return is based on net change in N.A.V. assuming reinvestment of distributions. Returns shown on this page include the reinvestment of all dividends and other distributions. Performance figures represent past performance, which is no guarantee of future results, and will fluctuate.
It is not possible to make a direct investment in the S&P 500® Stock Index.
*The Investment Returns Table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
CHOICE LONG-SHORT FUND
Objective
The Fund’s investment objective is to seek long-term growth of capital through all market conditions.
Strategy
The Fund will invest primarily in a non-diversified portfolio of common stocks of companies of all sizes that have been analyzed intensely by the portfolio manager. The Fund will use various strategies, such as buying long and short sales.
5
CHOICE MARKET NEUTRAL FUND
INVESTMENT RETURNS TABLE*
One Year Ended
Average Annual
Since Inception
9-30-04
10-31-04
9-30-04
10-31-04
Choice Market Neutral Class A (inception date 3-31-03)
Fund With Sales Load Effect
-21.85%
-23.08%
-12.28%
-13.34%
Fund Without Sales Load Effect
-17.32%
-18.63%
-8.93%
-10.21%
Choice Market Neutral Class C (inception date 3-31-03)
Fund With Sales Load Effect
-19.06%
-20.40%
-9.84%
-11.15%
Fund Without Sales Load Effect
-18.24%
-19.59%
-9.84%
-11.15%
S&P 500® Stock Index (inception date 3-31-03)
13.87%
9.42%
20.57%
20.51%
Performance is historical and does not represent future results, current performance maybe higher or lower than performance data quoted. Investment returns and principal will fluctuate so that shares, when redeemed, may be worth more or less than their original investment. For Class A shares, total return figures include an upfront maximum applicable sales charge of 5.50%. Class C shareholders are subject to a contingent deferred sales charge of 1% (as a percentage of original purchase price or redemption proceeds, whichever is lower) on shares sold within one year of purchase. The Fund’s performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. Fund prices change daily and performance may change significantly during periods of market volatility. Visit our website at www.choicefunds.net for current fund performance information. The Fund is non-diversified; therefore, it is more exposed to individual stock volatility and market pressure than funds investing in a larger number of securities.
GROWTH OF AN ASSUMED $10,000 INVESTMENT*
This chart assumes an initial investment of $10,000 made on 3-31-03. Total return is based on net change in N.A.V. assuming reinvestment of distributions. Returns shown on this page include the reinvestment of all dividends and other distributions. Performance figures represent past performance, which is no guarantee of future results, and will fluctuate.
It is not possible to make a direct investment in the S&P 500® Stock Index.
*The Investment Returns Table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
CHOICE MARKET NEUTRAL FUND
Objective
The Fund seeks to produce positive returns while remaining market neutral by investing actively long and short in a portfolio of equity securities. “Remaining market neutral” means that a Fund will generally maintain a balance of long and short positions. The Fund has a secondary goal of preservation of capital.
Strategy
The Portfolio Manager will use pair trading to attempt to capture the “alpha” and minimize the market and sector risks. He will also attempt to preserve capital and enhance returns by utilizing an aggressive risk management and trading process. (See the prospectus for additional information).
CHOICE TOP TEN INDUSTRIES AND INVESTMENTS
Focus Fund
Top Ten Industries
as of October 31, 2004
% of
Net Assets
Top Ten Holdings
as of October 31, 2004
% of
Net Assets
Short-Term Investments
49.6
Cisco Systems, Inc.
5.8
Telecommunications-Equipment
13.2
3Com Corp.
4.2
Pharmaceuticals
7.7
SPDR Trust Series I
4.1
Computers-Software
6.0
Eli Lilly & Co.
3.7
Retail-Department / Discount
5.3
J.C Penney Company, Inc.
3.4
Electronic-Semiconductor Manufact.
4.9
Pfizer, Inc.
2.9
Beverages
4.7
U.S. Bancorp
2.8
Index Tracking Stocks
4.1
Microsoft Corp.
2.5
Medical-Biotechnology
3.1
PepsiCo, Inc.
2.4
Retail-Home Specialty
2.8
Coca-Cola Co.
2.3
Long-Short Fund
Top Ten Industries
as of October 31, 2004
% of
Net Assets
Top Ten Holdings
as of October 31, 2004
% of
Net Assets
Short-Term Investments
Index Tracking Stocks
Oil/Gas Producers & Services
Electronics-Semiconductors Manufact.
Banking
Computers-Software
Personal/Professional Services
Insurance
Advertising
Medical-Biotechnology
55.0
14.9
5.9
5.6
3.4
2.7
1.9
1.7
1.2
1.2
iShares Russell 2000
SPDR Mid Cap Trust Series I
Software HOLDRs Trust DR
iShares MSCI EAFE Index
iShares MSCI Emerging Markets Index
Omnicom Group, Inc.
Cooper Companies, Inc.
Cree, Inc.
Teradyne, Inc.
Advanced Micro Devices, Inc.
5.8
2.6
1.8
1.7
1.6
1.3
1.2
1.0
1.0
0.9
Market Neutral Fund
Top Ten Industries
as of October 31, 2004
% of
Net Assets
Top Ten Holdings
as of October 31, 2004
% of
Net Assets
Short-Term Investments
Electronics-Semiconductor Manufact.
Retail-Home/Speciality
Telecommunications-Equipment
Index Tracking Stocks
Diversified Financial Services
Medical-Biotechnology
Retail-Department/Discount
Computers-Software
Beverages
37.6
7.7
7.4
7.2
6.0
5.7
5.7
5.3
3.6
3.3
SPDR Trust Series I
Morgan Stanley
PepsiCo, Inc.
J.C. Penney Company, Inc.
SonicWALL, Inc.
Cisco Systems, Inc.
3Com Corp.
Microsoft Corp.
Eli Lilly & Co.
Motorola, Inc.
3.7
3.6
3.3
2.8
2.1
1.9
1.8
1.7
1.6
1.5
CHOICE FOCUS FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
COMMON STOCKS
59.9%
Banking
2.8%
4,300
U.S. Bancorp
$ 123,023
Beverages
4.7%
2,500
Coca-Cola Co.
101,650
2,100
PepsiCo, Inc.
104,118
205,768
Computers-Software
6.0%
13,300
Maxtor Corp. *
39,368
4,000
Microsoft Corp.
111,960
2,700
Seagate Technology
34,128
146,732
Validian Corp.*
80,703
27,778
Validian Corp., Warrants 3/8/2009*
-
266,159
Electronics-Semiconductor Manufacturing
4.9%
5,900
Applied Materials, Inc.*
94,990
4,400
Flextronics International Ltd.*
53,020
2,500
Integrated Device Technology, Inc.*
29,550
13,900
Vitesse Semiconductor Corp.*
37,808
215,368
Index Tracking Stocks
4.1%
1,600
SPDR Trust Series I
181,120
Insurance
2.2%
1,600
American International Group, Inc.
97,136
Medical-Biotechnology
3.1%
106,200
GlycoGenesys, Inc. *
42,480
8,000
La Jolla Pharmaceutical Co. *
9,040
2,000
Stryker Corp.
86,180
137,700
Personal & Household Products
2.0%
2,100
Gillette Co.
87,108
CHOICE FOCUS FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
Pharmaceuticals
7.7%
2,000
Bristol-Myers Squibb Co.
$ 46,860
3,000
Eli Lilly & Co.
164,730
4,400
Pfizer, Inc.
127,380
338,970
Retail-Apparel / Shoes
1.1%
2,500
Gap, Inc.
49,950
Retail-Department / Discount
5.3%
4,500
Dollar General Corp.
86,625
4,300
J. C. Penney Company, Inc.
148,737
235,362
Retail-Home Specialty
2.8%
1,500
Kohls Corp.*
76,140
2,000
Linens 'n Things, Inc. *
48,160
124,300
Telecommunications-Equipment
13.2%
44,600
3Com Corp. *
184,644
13,400
Cisco Systems, Inc.*
257,414
3,600
Motorola, Inc.
62,136
16,400
SonicWALL, Inc.*
82,000
586,194
Total Common Stocks (Cost $2,726,137)
2,648,158
Principal/Shares
SHORT-TERM INVESTMENTS
49.6%
203,595
UMB Bank Money Market Fiduciary,
Variable Rate Demand Deposit, 1.66% **
203,595
2,000,000
U.S. Treasury Bill, 1.75%, 1/13/2005
1,993,032
Total Short-Term Investments (Cost $2,196,627)
2,196,627
TOTAL INVESTMENTS (Cost $4,922,764)
109.5%
$ 4,844,785
Liabilities less Other Assets
-9.5%
(419,978)
NET ASSETS
100.0%
$ 4,424,807
CHOICE FOCUS FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Contracts
Unrealized Gain
FUTURES CONTRACT PURCHASED
4
S&P 500 Futures Contracts maturing
Dec 2004 (Underlying Face Amount at
Value $1,130,300)
$ 11,750
* Non-income producing securities.
** Variable rate security; the coupon rate shown represents the rate at October 31, 2004.
SPDR - Standard & Poor's Depositary Receipts
CHOICE LONG-SHORT FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
COMMON STOCKS
48.2%
Advertising
1.2%
1,400
Omnicom Group, Inc.
$ 110,460
Banking
3.4%
1,700
Bank of America Corp.
76,143
1,800
Barclays PLC
71,028
1,800
Doral Financial Corp.
75,564
2,700
Wilshire Bancorp, Inc.*
75,141
297,876
Basic Materials
0.9%
8,300
AK Steel Holding Corp.*
79,099
Casino Services
0.9%
2,300
International Game Technology, Inc.
75,992
Computers-Software
2.7%
1,200
CACI International, Inc. *
73,164
8,220
Imageware Systems, Inc., Warrants 6/10/2009 *
-
1,200
Infosys Technologies Limited-ADR
79,800
3,000
Storage Technology Corp. *
81,060
88,889
Validian Corp., Warrants 3/8/2009 *
-
234,024
Construction
0.9%
1,000
M.D.C. Holdings, Inc.
76,750
Education / Schools
0.9%
2,100
ITT Educational Services, Inc. *
79,821
Electronics-Semiconductor Manufacturing
5.6%
4,900
Advanced Micro Devices, Inc. *
82,418
2,600
Cree, Inc. *
89,726
1,700
Kla-Tencor Corp.*
77,401
5,000
Microsemi Corp. *
77,700
4,700
National Semiconductor Corp.
78,490
5,200
Teradyne, Inc. *
86,112
491,847
Entertainment
0.9%
4,000
Regal Entertainment Group
79,640
CHOICE LONG-SHORT FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
Index Tracking Stocks
14.9%
700
Internet HOLDRs Trust Depositary Receipts*
$ 43,246
1,000
iShares MSCI EAFE Index
146,350
800
iShares MSCI Emerging Markets Index
141,928
4,400
iShares Russell 2000
511,236
2,300
Semiconductor HOLDRs Trust Depositary Receipts
74,290
4,200
Software HOLDRs Trust Depositary Receipts
158,550
2,100
SPDR Mid Cap Trust Series I
231,420
1,307,020
Insurance
1.7%
2,500
American Financial Group, Inc.
74,000
1,000
Everest Re Group, Ltd.
79,370
153,370
Medical-Biotechnology
1.2%
1,500
Cooper Companies, Inc.
105,525
25,778
GlycoGenesys, Inc., Warrants 8/13/2008*
-
105,525
Oil / Gas Producers & Services
5.9%
1,100
Anadarko Petroleum Corp.
74,195
900
ConocoPhillips
75,879
8,100
Daugherty Resources, Inc., Warrants 1/13/2008 *
-
650
Eni SpA.-ADR
74,380
20,000
Galaxy Energy Corp., Warrants 1/2008 *
-
2,100
Offshore Logistics
75,936
1,400
PetroChina Company Limited
73,668
1,800
Stone Energy Corp. *
74,106
2,500
Western Gas Resources, Inc.
73,225
521,389
Personal / Professional Services
1.9%
2,700
Pre-Paid Legal Services, Inc. *
75,303
1,900
Resources Connection, Inc. *
79,762
155,065
Recreation
0.9%
1,300
Harley Davidson, Inc.
74,841
Retail Apparel /Shoes
0.9%
3,000
Ross Stores, Inc.
78,810
CHOICE LONG-SHORT FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
Retail-Grocery
0.9%
2,500
Sysco Corp.
$ 80,675
Retail-Home / Specialty
0.8%
1,800
Home Depot, Inc.
73,944
U.S. Governments / Agencies
0.8%
1,100
Federal Home Loan Mortgage Corp.
73,260
Utilities
0.9%
1,800
National Grid Transco-ADR
79,380
Total Common Stocks (Cost $4,078,698)
4,228,788
Principal/Shares
SHORT-TERM INVESTMENTS
55.0%
3,134,835
UMB Bank Money Market Fiduciary,
Variable Rate Demand Deposit, 1.66% **
3,134,835
1,700,000
U.S. Treasury Bill, 1.75%, 01/13/05 #
1,694,077
Total Short-Term Investments (Cost $4,828,912)
4,828,912
TOTAL INVESTMENTS (Cost $8,907,610)
103.2%
$ 9,057,700
Liabilities less Other Assets
-3.2%
(277,788)
NET ASSETS
100.0%
$ 8,779,912
Number of Contracts
Unrealized Loss
FUTURES CONTRACT SOLD SHORT
4
S&P 500 Futures Contracts maturing
Dec 2004 (Underlying Face Amount at
Value $1,130,300)
$ (3,300)
* Non-income producing securities.
** Variable rate security; the coupon rate shown represents the rate at October 31, 2004.
# Portion of security is pledged as collateral for futures contract.
ADR - American Depositary Receipts.
MSCI - Morgan Stanley Capital International
SPDR - Standard & Poor's Depositary Receipts
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
COMMON STOCKS
71.0%
Automotive
2.6%
600
Gentex Corp.
$ 19,806
300
Johnson Controls, Inc.
17,205
500
Navistar International Corp.
17,275
54,286
Beverages
3.3%
1,400
PepsiCo, Inc.
69,412
Business Services
1.6%
800
ARAMARK Corp.
18,040
800
Cendant Corp.
16,472
34,512
Computer Services
2.3%
700
GTECH Holdings Corp.
16,569
700
IMS Health, Inc.
14,826
1,400
Seagate Technology
17,696
49,091
Computers-Software
3.6%
6,027
Imageware Systems, Inc., Warrants 6/10/2009 *
-
1,300
Microsoft Corp.
36,387
1,900
Veritas DGC Inc.
40,090
76,477
Construction Services
0.8%
400
Lennar Corp.
17,992
Diversified Financial Services
5.7%
300
Citigroup Inc.
13,311
1,500
Morgan Stanley
76,635
1,100
U.S. Bancorp
31,471
121,417
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
Electronics-Semiconductor Manufacturing
7.7%
1,000
Applied Materials, Inc. *
$ 16,100
1,200
Broadcom Corp. *
32,460
2,300
Flextronics International Ltd. *
27,715
1,300
Integrated Device Technology, Inc. *
15,366
7,100
Maxtor Corp. *
21,016
1,200
Novellus Systems, Inc. *
31,092
7,400
Vitesse Semiconductor Corp. *
20,128
163,877
Food Processing
0.9%
500
H.J. Heinz Co.
18,175
Forestry
0.6%
200
Weyerhaeuser Co.
12,528
Index Tracking Stocks
6.0%
200
iShares NASDAQ Biotech Index*
13,614
700
SPDR Trust Series I
79,240
600
SPDR Health Care Select Sector
16,890
600
SPDR Financial Select Sector
17,166
126,910
Insurance
1.4%
500
American International Group, Inc.
30,355
Manufacturing
0.8%
500
Honeywell International, Inc.
16,840
Medical-Biotechnology
5.7%
200
Bausch & Lomb Inc.
12,192
500
Boston Scientific Corp. *
17,650
300
C. R. Bard, Inc.
17,040
600
Eli Lilly & Co.
32,946
75,411
GlycoGenesys, Inc. *
30,164
16,111
GlycoGenesys, Inc., Warrants 8/13/2008 *
-
11,568
Large Scale Biology Corp.*
10,990
9,367
Large Scale Biology Corp., Warrants 5/5/2009 *
-
120,982
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
Metal / Mining
0.8%
500
Inco Ltd.*
$ 17,700
Oil & Gas Producers & Services
0.0%
5,700
Daugherty Resources, Inc., Warrants 1/13/2008 *
-
17,000
Galaxy Energy Corp., Warrants 1/2008 *
-
-
Paper / Paper Products
0.8%
300
Kimberly-Clark Corp.
17,901
Personal & Household Products
1.0%
300
Avon Products, Inc.
11,865
200
Procter & Gamble Co.
10,236
22,101
Pharmaceuticals
0.7%
500
Pfizer, Inc.
14,475
Recreation
0.3%
100
Harley Davidson, Inc.
5,757
Restaurants
1.1%
600
Applebee's International, Inc.
13,722
400
Ruby Tuesday, Inc.
9,880
23,602
Retail-Apparel / Shoes
0.9%
700
Claires Stores, Inc.
18,214
Retail-Department / Discount
5.3%
1,000
Dollar General Corp.
19,250
1,700
J. C. Penney Company, Inc.
58,803
400
Sears, Roebuck and Co.
14,000
400
Wal-Mart Stores, Inc.
21,568
113,621
Retail-Drug / Pharmacy
0.7%
500
Caremark Rx, Inc. *
14,985
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
Retail-Grocery
0.8%
200
Whole Foods Market, Inc.
$ 16,286
Retail-Home / Specialty
7.4%
300
Amazon.com, Inc.*
10,239
500
Barnes & Noble, Inc. *
16,635
1,700
Lowe's Companies, Inc.
95,676
400
The Sherwin-Williams Co.
17,088
600
Staples, Inc.
17,844
157,482
Telecommunications-Equipment
7.2%
9,000
3Com Corp. *
37,260
2,100
Cisco Systems, Inc.*
40,341
1,900
Motorola, Inc.
32,794
8,700
SonicWALL, Inc.*
43,500
153,895
U.S. Governments / Agencies
1.0%
300
Fannie Mae
21,045
Total Common Stocks (Cost $1,528,344)
1,509,918
Principal/Shares
SHORT-TERM INVESTMENTS
37.6%
398,809
UMB Bank Money Market Fiduciary,
Variable Rate Demand Deposit, 1.66% **
398,809
400,000
U.S. Treasury Note, 2.00%, 11/30/2004
400,016
Total Short-Term Investments (Cost $799,009)
798,825
TOTAL INVESTMENTS (Cost $2,327,353)
108.6%
$ 2,308,743
Liabilities less Other Assets
-8.6%
(183,687)
NET ASSETS
100.0%
$ 2,125,056
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
SECURITIES SOLD SHORT
1,300
Abbott Laboratories
$ 55,419
1,100
Adobe Systems Inc.
61,633
4,500
Advanced Micro Devices, Inc. *
75,690
300
Alcan, Inc.
13,896
1,400
Alcatel-ADR*
20,454
800
Altera Corp. *
18,184
600
Aztar Corp. *
18,570
800
BMC Software, Inc.*
15,136
400
Bunge Ltd.
19,092
200
Caterpillar, Inc.
16,108
400
Chico's FAS, Inc. *
16,012
300
Coach, Inc. *
13,989
1,200
Cypress Semiconductor Corp.*
12,636
1,400
E*TRADE Financial Corp.
18,060
700
Elan Corp. PLC-ADR
18,060
400
The Estee Lauder Companies Inc.
17,180
1,200
Foundry Networks, Inc. *
14,556
300
Franklin Resources, Inc.
18,186
1,100
The Goldman Sachs Group, Inc.
108,218
400
The Home Depot, Inc.
16,432
300
Kellogg Co.
12,900
300
Laboratory Corporation of America Holdings *
13,740
2,600
Lam Research Corp.*
67,678
900
Limited Brands, Inc.
22,302
2,000
Lowe's Companies, Inc.
112,560
300
Marvell Technology Group Ltd. *
8,571
500
McAfee, Inc.*
12,100
600
McDonald's Co.
17,490
500
Monsanto Co.
21,375
400
O'Reilly Automotive, Inc. *
17,224
200
Parker Hannifin Corp.
14,126
300
Polaris Industries Inc.
17,805
800
Polycom, Inc. *
16,520
300
Royal Caribbean Cruises Ltd.
13,980
800
SPDR Technology Select Sector
15,968
700
Salesforce.com, Inc.*
14,224
600
Semiconductor HOLDRs Trust Depositary Receipts
19,380
800
Shuffle Master, Inc. *
33,672
500
Software HOLDRs Trust Depositary Receipts
18,875
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS
October 31, 2004
Number of Shares
Value
SECURITIES SOLD SHORT (continued)
1,000
Sonic Corp.
27,230
2,300
Starbucks Corp.
121,624
800
Target Corp.
40,016
2,300
Urban Outfitters, Inc. *
94,300
2,100
Veritas DGC Inc.*
44,310
700
Walt Disney Co.
17,654
300
Whirlpool Corp.
17,625
500
XM Satellite Radio Holdings Inc. *
16,160
200
Yahoo! Inc. *
7,238
400
Yum! Brands, Inc.
17,400
200
Zions Bancorporation
13,235
TOTAL SECURITIES SOLD SHORT
(proceeds $1,388,270)
$ 1,454,793
* Non-income producing securities.
** Variable rate security; the coupon rate shown represents the rate at October 31, 2004.
SPDR - Standard & Poor's Depositary Receipts
CHOICE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2004
Long-Short
Market Neutral
Focus Fund
Fund
Fund
ASSETS
Investments in securities, at value
(Cost $4,922,764, $8,907,610, and $2,327,353)
$ 4,844,785
$ 9,057,700
$ 2,308,743
Receivable for Fund shares sold
-
-
245
Deposit at broker
96,000
74,925
1,255,583
Receivable for investments sold
592,944
-
567,977
Due from broker - variation margin
3,180
-
128
Dividends and interest receivable
1,197
1,165
3,863
Due from adviser
18,937
-
30,487
Prepaid expenses and other assets
26,453
28,714
25,589
Total Assets
5,583,496
9,162,504
4,192,615
LIABILITIES
Securitites sold short, at value
(proceeds of $0, $0, and $1,388,270)
-
-
1,454,793
Payable for investments purchased
1,121,899
330,339
435,165
Due to broker - variation margin
-
2,700
-
Fund shares repurchased
12,328
-
148,364
Accrued distribution fee
-
15,180
4,422
Accrued investment advisory fee
-
1,158
-
Accrued expenses and other liabilities
24,462
33,215
24,815
Total Liabilities
1,158,689
382,592
2,067,559
NET ASSETS
$ 4,424,807
$ 8,779,912
$ 2,125,056
NET ASSETS CONSIST OF
Paid in capital
$ 32,256,519
$ 22,974,264
$ 3,047,757
Accumulated net realized loss on investments,
securities sold short, options, and futures contracts
(27,765,483)
(14,341,142)
(837,568)
Net unrealized appreciation (depreciation) on investments
(66,229)
146,790
(85,133)
NET ASSETS
$ 4,424,807
$ 8,779,912
$ 2,125,056
CLASS A SHARES
Net assets
$ 4,424,796
$ 8,558,570
$ 1,130,592
Shares outstanding (no par value, unlimited shares authorized)
1,025,458
1,408,493
134,199
Net Asset Value Per Share (Net Assets/Shares Outstanding)
$ 4.31
$ 6.08
$ 8.43
Maximum Offering Price Per Share (Net Asset Value Plus
5.82% of Net Asset Value or 5.50% of Offering Price)
$ 4.56
$ 6.43
$ 8.92
CLASS C SHARES
Net assets
$ 11
$ 221,342
$ 994,464
Shares outstanding (no par value, unlimited shares authorized)
3
39,217
119,947
Net Asset Value and Offering Price Per Share
(Net Assets/Shares Outstanding)
$ 4.31
$ 5.64
$ 8.29
Net Asset Value Per Share after Maximum Contigent
Deferred Sales Charge
$ 4.27
$ 5.58
$ 8.21
CHOICE FUNDS
STATEMENTS OF OPERATIONS
For the Year Ended October 31, 2004
Long-Short
Market Neutral
Focus Fund
Fund
Fund
INVESTMENT INCOME
Dividends
$ 17,137
$ 26,059
$ 16,548
Interest
12,259
36,316
45,221
Less: Foreign withholding taxes
(274)
(397)
(335)
Total Investment Income
29,122
61,978
61,434
EXPENSES
Investment advisory fees
53,630
234,214
132,291
Distribution fees - Class A
13,407
30,870
20,778
Distribution fees - Class C
-
5,484
20,811
Fund administration and accounting fees
48,053
50,378
48,818
Transfer agent fees and expenses
24,152
29,426
29,228
State registration fees
22,972
44,847
32,998
Professional fees
22,352
35,187
32,737
Custody fees
11,287
19,168
19,624
Reports to shareholders
9,938
11,322
14,437
Insurance expense
4,480
9,433
7,112
Trustees' fees and related expenses
1,275
5,835
5,893
Other
2,920
5,339
4,733
Total expenses before dividends on short sales
214,466
481,503
369,460
Dividends on short positions
-
6,564
22,078
Total expenses
214,466
488,067
391,538
Less:
Fees waived and reimbursed
(80,226)
(76,588)
(74,230)
Expenses paid indirectly
(15,146)
-
(56)
Net Expenses
119,094
411,479
317,252
Net Investment Loss
(89,972)
(349,501)
(255,818)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on:
Investment securities
(106,789)
(94,284)
(256,932)
Short positions
-
(581,416)
(455,300)
Options purchased
-
10,194
-
Futures contracts
32,167
(56,159)
(587)
Net change in unrealized appreciation (depreciation) on
investments, securities sold short and futures contracts
(261,586)
(233,879)
(408,460)
Net Realized and Unrealized Loss
on Investments
(336,208)
(955,544)
(1,121,279)
Net Decrease in Net Assets Resulting
from Operations
$ (426,180)
$ (1,305,045)
$ (1,377,097)
CHOICE FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Year
For the Year
Ended
Ended
October 31, 2004
October 31, 2003
OPERATIONS
Net investment loss
$ (89,972)
$ (175,169)
Net realized gain (loss) on:
Investment securities
(106,789)
1,493,837
Futures contracts
32,167
29,430
Net change in unrealized appreciation (depreciation) on investments
and futures contracts
(261,586)
581,023
Net increase (decrease) in net assets resulting from operations
(426,180)
1,929,121
CAPITAL SHARE TRANSACTIONS
Shares sold:
Class A shares
3,997,168
11,913,415
Class C shares
12
-
Shares redeemed:
Class A shares
(3,266,638)
(12,308,094)
Class C shares
-
-
Net increase (decrease) in net assets from capital share transactions
730,542
(394,679)
Total Increase in Net Assets
304,362
1,534,442
NET ASSETS
Beginning of Year
4,120,445
2,586,003
End of Year*
$ 4,424,807
$ 4,120,445
* Includes accumulated undistributed net investment
income (loss) of:
$ -
$ -
CAPITAL SHARE TRANSACTIONS
Class A shares:
Shares sold
829,301
2,933,668
Shares redeemed
(690,518)
(2,862,802)
Net increase
138,783
70,866
Class C shares (commenced operations on March 2, 2004):
Shares sold
3
-
Shares redeemed
-
-
Net increase
3
-
CHOICE LONG-SHORT FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Year
For the Year
Ended
Ended
October 31, 2004
October 31, 2003
OPERATIONS
Net investment loss
$ (349,501)
$ (351,630)
Net realized gain (loss) on:
Investment securities
(94,284)
4,004,340
Short positions
(581,416)
(1,901,510)
Options purchased
10,194
-
Futures contracts
(56,159)
(340,065)
Net change in unrealized appreciation (depreciation) on investments,
futures contracts, and securites and futures contracts sold short
(233,879)
984,236
Net increase (decrease) in net assets resulting from operations
(1,305,045)
2,395,371
CAPITAL SHARE TRANSACTIONS
Shares sold
Class A shares
11,483,632
10,010,096
Class C shares
5,000
570,329
Shares redeemed
Class A shares
(12,895,870)
(14,993,376)
Class C shares
(477,241)
(424,874)
Redemption fee proceeds
Class A shares
482
-
Class C shares
15
-
Net decrease in net assets from capital share transactions
(1,883,982)
(4,837,825)
Total Decrease in Net Assets
(3,189,027)
(2,442,454)
NET ASSETS
Beginning of Year
11,968,939
14,411,393
End of Year*
$ 8,779,912
$ 11,968,939
* Includes accumulated undistributed net investment
loss of:
$ -
$ (2,697)
CAPITAL SHARE TRANSACTIONS
Class A shares:
Shares sold
1,755,239
1,391,875
Shares redeemed
(1,844,173)
(2,121,719)
Net decrease
(88,934)
(729,844)
Class C shares:
Shares sold
793
85,536
Shares redeemed
(76,152)
(65,424)
Net increase (decrease)
(75,359)
20,112
CHOICE MARKET NEUTRAL FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Year
For the Period
Ended
Ended
October 31, 2004
October 31, 2003 (1)
OPERATIONS
Net investment loss
$ (255,818)
$ (131,031)
Net realized gain (loss) on:
Investment securities
(256,932)
431,271
Short positions
(455,300)
(501,778)
Futures contracts
(587)
(54,242)
Net change in unrealized appreciation (depreciation) on investments
and securities sold short
(408,460)
323,327
Net increase (decrease) in net assets resulting from operations
(1,377,097)
67,547
CAPITAL SHARE TRANSACTIONS
Shares sold
Class A shares
7,012,706
10,809,599
Class C shares
942,441
2,352,086
Shares redeemed
Class A shares
(14,062,400)
(1,724,757)
Class C shares
(1,890,283)
(5,133)
Redemption fee proceeds
Class A shares
181
-
Class C shares
166
-
Net increase (decrease) in net assets from capital share transactions
(7,997,189)
11,431,795
Total Increase (Decrease) in Net Assets
(9,374,286)
11,499,342
NET ASSETS
Beginning of Year
11,499,342
-
End of Year*
$ 2,125,056
$ 11,499,342
* Includes accumulated undistributed net investment
income (loss) of:
$ -
$ -
(1) Commenced operations on March 31, 2003.
CAPITAL SHARE TRANSACTIONS
Class A shares:
Shares sold
681,172
1,047,546
Shares redeemed
(1,429,613)
(164,907)
Net increase (decrease)
(748,441)
882,639
Class C shares:
Shares sold
93,562
228,540
Shares redeemed
(201,664)
(492)
Net increase (decrease)
(108,102)
228,048
CHOICE FOCUS FUND CLASS A
FINANCIAL HIGHLIGHTS
For the Years Ended October 31,
2004
2003
2002
2001
2000
PER SHARE OPERATING PERFORMANCE*
Net Asset Value, Beginning of Year
$ 4.65
$ 3.17
$ 5.52
$ 12.77
$ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment loss
(0.08)
(0.21)
(0.17)
(0.15)
(0.02)
Net realized and unrealized gain (loss)
on investments
(0.26)
1.69
(2.18)
(7.07)
2.80
Total Income (Loss) from Investment Operations
(0.34)
1.48
(2.35)
(7.22)
2.78
LESS DISTRIBUTIONS PAID
From net realized gains on investments
-
-
-
(0.03)
(0.01)
Total Distributions Paid
-
-
-
(0.03)
(0.01)
Net Asset Value, End of Year
$ 4.31
$ 4.65
$ 3.17
$ 5.52
$ 12.77
Total Return (1)
-7.31%
46.69%
-42.75%
-56.63%
27.81%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of year (000s)
$ 4,425
$ 4,120
$ 2,586
$ 10,911
$ 57,802
Ratio of expenses to average net assets,
net of fees waived and paid indirectly
2.22%
3.05%
1.97%
1.88%
2.05%
Ratio of expenses to average net assets,
before fees waived and paid indirectly
4.00%
3.78%
2.61%
1.88%
2.05%
Ratio of net investment loss to average net assets,
net of fees waived and paid indirectly
-1.68%
-2.49%
-1.43%
-0.85%
-0.26%
Ratio of net investment loss to average net assets,
before fees waived and paid indirectly
-3.46%
-3.22%
-2.07
-0.85%
-0.26%
Portfolio turnover rate
1524%
1066%
1454%
1239%
1603%
(1)
The total return does not reflect the 5.50% front-end sales charge.
*
Selected data for a share of capital stock outstanding throughout the period.
CHOICE FOCUS FUND CLASS C
FINANCIAL HIGHLIGHTS
For the Period Ended
October 31, 2004(1)
PER SHARE OPERATING PERFORMANCE*
Net Asset Value, Beginning of Period
$ 5.11
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment loss
(0.08)
Net realized and unrealized gain (loss)
on investments
(0.72)
Total Loss from Investment Operations
(0.80)
LESS DISTRIBUTIONS PAID
From net realized gains on investments
-
Total Distributions Paid
-
Net Asset Value, End of Period
$ 4.31
Total Return (2,3)
-15.65%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period
$ 11
Ratio of expenses to average net assets,
net of fees waived and paid indirectly (4)
2.97%
Ratio of expenses to average net assets,
before fees waived and paid indirectly (4)
4.75%
Ratio of net investment loss to average net assets,
net of fees waived and paid indirectly (4)
-2.43%
Ratio of net investment loss to average net assets,
before fees waived and paid indirectly (4)
-4.21%
Portfolio turnover rate (2)
1524%
(1)
Commenced operations on March 2, 2004.
(2)
Not annualized for periods less than a full year.
(3)
The total return does not reflect the 1.00% deferred sales charge.
(4)
Annualized for periods less than a full year.
*
Selected data for a share of capital stock outstanding throughout the period.
CHOICE LONG-SHORT FUND CLASS A
FINANCIAL HIGHLIGHTS
For the Year
For the Year
For the Year
For the Period
Ended
Ended
Ended
Ended
October 31, 2004
October 31, 2003
October 31, 2002
October 31, 2001 (1)
PER SHARE OPERATING PERFORMANCE*
Net Asset Value, Beginning of Period
$ 7.46
$ 6.22
$ 9.66
$ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment loss
(0.25)
(0.16)
(0.35)
(0.08)
Net realized and unrealized gain (loss)
on investments
(1.13)
1.40
(3.09)
(0.26)
Total Income (Loss) from Investment Operations
(1.38)
1.24
(3.44)
(0.34)
Net Asset Value, End of Period
$ 6.08
$ 7.46
$ 6.22
$ 9.66
Total Return (2,3)
-18.50%
19.94%
-35.82%
-3.40%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period (000s)
$ 8,559
$ 11,169
$ 13,845
$ 54,303
Ratio of expenses to average net assets,
net of fees waived and paid indirectly (4)
4.27%
(5)
3.99%
(5)
3.16%
(5)
3.51%
Ratio of expenses to average net assets, before
fees waived and paid indirectly (4)
5.07%
(5)
4.64%
(5)
3.62%
(5)
3.51%
Ratio of net investment loss to average net assets,
net of fees waived and paid indirectly (4)
-3.68%
-2.39%
-2.21%
-1.14%
Ratio of net investment loss to average net assets,
before fees waived and paid indirectly (4)
-4.48%
-3.04%
-2.67%
-1.14%
Portfolio turnover rate (2)
1863%
1383%
3882%
2469%
(1)
Commenced operations on February 1, 2001.
(2)
Not annualized for periods less than a full year.
(3)
The total return does not reflect the 5.50% front-end sales charge.
(4)
Annualized for periods less than a full year.
(5)
Excludes dividends on short sales. Including dividends on short sales, the ratio of expenses to average net assets, net of fees
waived and paid indirectly and before fees waived and paid indirectly would be 4.34% and 5.14%, 4.14% and 4.79%, 3.34% and 3.80%,
for the Class A shares for the year ended October 31, 2004, October 31, 2003 and October 31, 2002, respectively.
*
Selected data for a share of capital stock outstanding throughout the period.
CHOICE LONG-SHORT FUND CLASS C
FINANCIAL HIGHLIGHTS
For the Year
For the Year
For the Year
For the Period
Ended
Ended
Ended
Ended
October 31, 2004
October 31, 2003
October 31, 2002
October 31, 2001 (1)
PER SHARE OPERATING PERFORMANCE*
Net Asset Value, Beginning of Period
$ 6.98
$ 6.00
$ 9.53
$ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment loss
(0.58)
(0.38)
(0.77)
(0.12)
Net realized and unrealized gain (loss)
on investments
(0.76)
1.36
(2.76)
(0.35)
Total Income (Loss) from Investment Operations
(1.34)
0.98
(3.53)
(0.47)
Net Asset Value, End of Period
$ 5.64
$ 6.98
$ 6.00
$ 9.53
Total Return (2,3)
-19.20%
16.33%
-37.25%
-4.70%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period (000s)
$ 221
$ 800
$ 567
$ 2,614
Ratio of expenses to average net assets,
net of fees waived and paid indirectly (4)
5.21%
(5)
7.25%
(5)
5.02%
(5)
4.70%
Ratio of expenses to average net assets, before
fees waived and paid indirectly (4)
6.32%
(5)
7.90%
(5)
5.40%
(5)
4.70%
Ratio of net investment loss to average net assets,
net of fees waived and paid indirectly (4)
-4.63%
-5.78%
-4.11%
-2.31%
Ratio of net investment loss to average net assets,
before fees waived and paid indirectly (4)
-5.74%
-6.43%
-4.49%
-2.31%
Portfolio turnover rate (2)
1863%
1383%
3882%
2469%
(1)
Commenced operations on February 1, 2001.
(2)
Not annualized for periods less than a full year.
(3)
The total return does not reflect the 1.00% deferred sales charge.
(4)
Annualized for periods less than a full year.
(5)
Excludes dividends on short sales. Including dividends on short sales, the ratio of expenses to average net assets net of fees
waived and and paid indirectly and before fees waived and paid indirectly would be 5.26% and 6.37%, 7.41% and 8.06%, 5.16% and 5.54%,
for the Class C shares for the year ended October 31, 2004, October 31, 2003 and October 31, 2002, respectively.
*
Selected data for a share of capital stock outstanding throughout the period.
CHOICE MARKET NEUTRAL FUND
FINANCIAL HIGHLIGHTS
Class A Shares
Class C Shares
For the Year
For the Period
For the Year
For the Period
Ended
Ended
Ended
Ended
October 31, 2004
October 31, 2003 (1)
October 31, 2004
October 31, 2003 (1)
PER SHARE OPERATING
PERFORMANCE*
Net Asset Value, Beginning of Period
$ 10.36
$ 10.00
$ 10.31
$ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment loss
(0.16)
(0.17)
(0.17)
(0.24)
Net realized and unrealized gain (loss)
on investments
(1.77)
0.53
(1.85)
0.55
Total Income (Loss) from Investment Operations
(1.93)
0.36
(2.02)
0.31
Net Asset Value, End of Period
$ 8.43
$ 10.36
$ 8.29
$ 10.31
Total Return (2,3)
-18.63%
3.60%
-19.59%
3.10%
SUPPLEMENTAL DATA AND
RATIOS
Net assets, end of period (000s)
$ 1,131
$ 9,147
$ 994
$ 2,352
Ratio of expenses to average net assets,
net of fees waived and paid indirectly (4)
3.40%
(5)
3.40%
(5)
4.50%
(6)
4.50%
Ratio of expenses to average net assets, before
fees waived and paid indirectly (4)
4.27%
(5)
4.70%
(5)
5.62%
(6)
5.82%
Ratio of net investment loss to average net assets,
net of fees waived and paid indirectly (4)
-2.93%
-2.84%
-3.97%
-3.94%
Ratio of net investment loss to average net assets,
before fees waived and paid indirectly (4)
-3.79%
-4.12%
-5.09%
-5.24%
Portfolio turnover rate (2)
1635%
1175%
1635%
1175%
(1)
Commenced operations on March 31, 2003.
(2)
Not annualized for periods less than a full year.
(3)
The total return does not reflect the 5.50% front end sales charge and 1.00% deferred sales charge on Class
A and Class C shares, respectively.
(4)
Annualized for periods less than a full year.
(5)
Excludes dividends on short sales. Including dividends on short sales, the ratio of expenses to average net assets, net of
fees waived and paid indirectly and before fees waived and paid indirectly would be 3.66%and 4.53%, 3.59% and 4.88%,
for the Class A shares for the periods ended October 31, 2004 and October 31, 2003, respectively.
(6)
Excludes dividends on short sales. Including dividends on short sales, the ratio of expenses to average net assets net of
fees waived and paid indirectly and before fees waived and paid indirectly would be 4.83% and 5.95%, 4.70% and 6.00%,
for the Class C shares for the periods ended October 31, 2004 and October 31, 2003, respectively.
*
Selected data for a share of capital stock outstanding throughout the period.
CHOICE FUNDS
NOTES TO FINANCIAL STATEMENTS
October, 31, 2004
(1)
Organization
Choice Funds (the “Trust”) was established on July 16, 1999 as a Delaware Statutory Trust and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company issuing its shares in series, each series representing a distinct portfolio with its own investment objectives and policies. The Focus Fund, Long-Short Fund and Market Neutral Fund (each a “Fund” and collectively, the “Funds”) are separate investment portfolios of the Trust. The Focus Fund is a non-diversified fund that seeks capital appreciation by normally investing in a core position of 20-30 common stocks. The Long-Short Fund is a non-diversified fund that seeks to achieve long-term growth of capital in both rising and falling markets by investing in “long” stocks believed to be undervalued and selling “short” stocks believe d to be overvalued. The Market Neutral Fund is a non-diversified fund that seeks to produce positive returns while remaining market neutral by investing actively long and short in a portfolio of equity securities. “Remaining market neutral” means the Market Neutral Fund will generally maintain a balance of long and short positions. The Funds offer two classes of shares (Class A and Class C). Class A shares are subject to a maximum sales charge of 5.50% and the Class C shares are subject to a maximum contingent deferred sales charge of 1.00% on redemptions of shares held less than one year. Each class of shares has equal rights to earnings and assets except that each class bears different distribution and shareholder servicing fees. Each class of shares has exclusive voting rights with respect to matters that affect just that class. Income, and realized and unrealized gains or losses on investments are allocated to each class of shares based on relative net assets.
(2)
Significant Accounting Policies
The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from those estimates.
(a)
Investment Valuation
Securities (other than short-term instruments) for which market quotations are readily available are valued at the last sales price on the national securities exchange on which such securities are primarily traded. NASDAQ traded securities are valued using the NASDAQ Official Closing Price (NOCP). Securities for which there were no sales on a given day or securities not listed on a national securities exchange are valued at the most recent bid prices. Securities maturing within 60 days when purchased are valued by the amortized cost method which approximates fair value. Any securities for which market quotations are not readily available are valued at their fair value pursuant to guidelines established by the Board of Trustees.
(b)
Expenses
The Funds are charged for those expenses that are directly attributable to each Fund, such as advisory and custodian fees. Expenses that are not directly attributable to a Fund are typically allocated among the Funds in proportion to their average net assets. Certain Fund expenses may be reduced by brokerage credits which are shown as Expenses Paid Indirectly in the Statements of Operations. Brokerage credits are generated when a Fund directs portfolio trades to certain brokers.
(c)
Short Positions
When a Fund sells a security short, an amount equal to the sales proceeds is included in the Statement of Assets and Liabilities as an asset and an equal amount as a liability. The amount of the liability is subsequently marked-to-market to reflect the current value of the security sold short. A gain, limited to the price at which the Fund sold the security short, or a loss, unlimited in size, will be recognized upon the termination of a short sale. The Fund is liable for any dividends paid on securities sold short. Dividends on short sales are included as Dividends on Short Positions on the Statements of Operations. The Fund maintains assets consisting of cash or liquid securities at least equal in amount to the liability created by the short sale. These assets are adjusted to reflect changes in the value of the securities sold short.
(d)
Futures Contracts
Each Fund may purchase and sell stock index futures contracts. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the futures commission merchant an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts of payments are known as
CHOICE FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
October, 31, 2004
variation margin and are recorded by the Fund as unrealized gains and losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As collateral for futures contracts, the Fund is required under the 1940 Act to maintain assets consisting of cash or liquid securities. This collateral must equal to a certain percentage of the contract amount (initial margin deposit). All collateral is required to be adjusted daily. The risks inherent in the use of futures contracts include: 1) adverse changes in the value of such instruments; 2) imperfect correlation between the price of the futures contracts and movements in the price of the underlying securities or futures contracts; 3) the possible absence of a liquid secondary market for any particular instrument at any time; 4) the possible need to defer closing out certain positions to avoid adverse tax consequences; and 5) the possible nonperformance by the counterparty under the terms of the contract.
(e)
Option Transactions
For hedging purposes, the Funds may buy or sell put or call options, write covered put or call options on portfolio securities and write over-the-counter options where the completion of the obligation is independent upon the credit standing of another party. The risk in writing a call option is that a Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. A Fund also has the additional risk of not being able to enter into a closing transaction if a liquid secondary market does not exist.
Option contracts are valued daily and unrealized appreciation or depreciation is recorded. A Fund will realize a gain or loss upon expiration or closing of the option transaction. When an option is exercised, the proceeds on sales for a written call option, the purchase cost for a written put option, or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid.
(f)
Federal Income and Excise Taxes
No federal income tax provision has been made since the Funds intend to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all investment company taxable income and net capital gains to shareholders in a manner which results in no tax cost to the Funds.
(g)
Dividends andDistributions to Shareholders
Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on the ex-dividend date. The character of distributions made during the year from net investment income or net realized gain may differ from the characterization for federal income tax purposes due to differences in the recognition of income, expense and gain items for financial statement and tax purposes. Where appropriate, reclassifications between net asset accounts are made for such differences that are permanent in nature.
(h)
Other
Investment transactions are accounted for on the trade date. The Funds determine the gain or loss realized from investment transactions by comparing the original cost of the security lot sold with the net sale proceeds. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis.
(3)
Investment Adviser and Transactions with Affiliates
The Funds have an agreement with Choice Investment Management, LLC (the “Adviser”), with whom certain officers and trustees of the Funds are affiliated, to furnish investment advisory services to the Funds. Under the terms of this agreement, the Funds will pay the Adviser a monthly fee at the annual rate of 1.00%, 2.50% and 1.65% of the Fund’s average daily net assets for the Focus Fund, Long-Short Fund and Market Neutral Fund, respectively. For the year ended October 31, 2004, the Adviser received advisory fees of $53,630, $234,214 and $132,291 for the Focus Fund, Long-Short Fund and Market Neutral Fund, respectively. The Adviser agreed to contractually waive its management fee and/or reimburse the Funds’ operating expenses (exclusive of brokerage commissions, dividends on securities sold short, interest on borrowings, taxes and extraordinary expenses) to ensure that the Funds’ operating expenses do not exc eed 2.50%, 3.25%, 3.40% and 4.50% of the Fund’s average daily net assets for the Focus Fund Class A, Focus Fund Class C, Market Neutral Fund Class A and Market Neutral Fund Class C, respectively, through October 31, 2004. On April 15, 2004, The
CHOICE FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
October, 31, 2004
Adviser extended such contractual waivers and reimbursements through October 31, 2004, and limited operating expenses to 4.00% and 4.65% for the Long-Short Fund Class A and Class C, respectively. The Adviser is entitled to recoup from the Funds amounts waived or reimbursed for a period of up to three years from the date such amounts were waived or reimbursed, provided the Funds’ expenses, including such recouped amounts, do not exceed the stated expense limitations. At October 31, 2004, amounts that are subject to potential recoupment are as follows:
Recoverable Through
Focus Fund
Long-Short Fund
Market Neutral Fund
October 31, 2006
$ 35,545
$ 54,842
$ 60,236
October 31, 2007
$ 80,226
$ 56,588 $ 74,230
During the year ended October 31, 2004, the Focus Fund, Long-Short Fund and Market Neutral Fund paid $128,428, $279,870, and $401,199 in brokerage commissions, respectively, to CIM Securities, LLC (“CIM”) an affiliate of the Adviser, on the purchase and sale of portfolio securities.
(4)
Distribution Plan
CIM, an affiliate of the Adviser, is the distributor of the Funds’ shares. The Funds have adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act. The Plan authorizes payments by the Funds in connection with the distribution of its shares and certain shareholder and related services at an annual rate, as determined from time to time by the Board of Trustees. Under this Plan, the Class A shares and Class C shares of the Focus Fund pay up to 0.25% and 0.75% of each class’s average daily net assets, respectively, for distribution services. The Class A shares and Class C shares of the Long-Short Fund and Market Neutral Fund pay up to 0.35% and 0.75% of each class’s average daily net assets, respectively, for distribution services. The Class C shares pay up to 0.25% of each Fund’s average daily net assets for shareholder related activities. For the year en ded October 31, 2004 the Funds incurred 12b-1 fees of $13,407, $30,870, $5,484, $20,778, and $20,811 for the Focus Fund Class A shares, Long-Short Fund Class A shares, Long-Short Fund Class C shares, Market Neutral Fund Class A shares and Market Neutral Fund Class C shares, respectively. For the year ended October 31, 2004 CIM waived 12b-1 fees of $17,695 and $2,305 for the Long-Short Fund Class A shares and Long-Short Fund Class C shares, respectively.
(5)
Investment Transactions
The aggregate purchases and sales of securities, excluding short-term investments, for the Funds for the year ended October 31, 2004 were as follows:
Focus Fund
Long-Short Fund
Market Neutral Fund
Purchases
$ 48,760,078
$ 79,316,402
$ 95,601,007
Sales
$ 49,466,648
$ 80,422,472
$ 98,521,971
(6)
Federal Income Tax Information
At October 31, 2004, the cost of securities on a tax basis and gross unrealized appreciation (depreciation) on investments for federal income tax purposes were as follows:
Focus Fund
Long-Short Fund
Market Neutral Fund
Cost of Investments
$ 4,962,352
$ 8,920,245
$ 952,219
Gross Unrealized Appreciation
$ 65,508
$ 173,911
$ 27,419
Gross Unrealized (Depreciation)
(171,325)
(33,156)
(125,688)
Net Unrealized Appreciation
(Depreciation) on Investments
$ (105,817)
$ 140,755
$ (98,269)
CHOICE FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
October, 31, 2004
The difference between cost amounts for financial statement and federal income tax purposes is due primarily to timing differences attributable to: deferral of losses on wash sales and the realization for tax purposes of unrealized gains/(losses) on certain derivative instruments.
As of October 31, 2004, the components of accumulated earnings (deficit) on a tax basis were as follows:
Focus Fund
Long-Short Fund
Market Neutral Fund
Undistributed ordinary
Income (loss)
$ -
$ -
$ -
Net realized capital losses
(35,034)
(715,630)
(699,683)
Net Unrealized Appreciation
(Depreciation)
(105,817)
140,755
(98,269)
Total Accumulated Deficit
$ (140,851)
$ (574,875)
$ (797,952)
Federal income tax capital loss carry forwards for the Focus Fund expire as follows: $20,645,351 in 2009, $6,017,459 in 2010 and $85,225 in 2012. Federal income tax capital loss carry forwards for the Long-Short Fund expire as follows: $10,097,960 in 2010 and $1,060,186 in 2012. Federal income tax capital loss carry forwards for the Market Neutral Fund expire as follows: $75,079 in 2011 and $749,353 in 2012. To the extent future gains are offset by capital loss carry forwards, such gains will not be distributed.
(7)
Control Ownership
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a Fund creates presumption of control of the Fund, under Section 2(a)9 of the Investment Company Act of 1940. As of October 31, 2004, McDonald Investment, Inc. held for the benefit of others, in aggregate, approximately 60% of the Focus Fund Class A. As of October 31, 2004, Patrick Adams, an officer of the Fund and President of the Adviser of the Fund, held 100% of the Focus Fund Class C shares. As of October 31, 2004, FTC & Co. held for the benefit of others, in aggregate, approximately 62% of the Long-Short Fund Class A. As of October 31, 2004, National Financial Service Corp. (“NFSC”) held for the benefit of others, in aggregate, approximately 69% of the Long-Short Fund Class C. As of October 31, 2004, NFSC held for the benefit of others, in aggregate, approximately 35% of the M arket Neutral Class C.
(8)
Change In Independent Accountants
On February 6, 2004, McCurdy & Associates CPA’s, Inc. (“McCurdy”) notified the Fund of its intention to resign as the Fund’s independent auditors upon selection of replacement auditors.
On September 20, 2004, the Fund’s Audit Committee and Board of Trustees selected Cohen McCurdy (“Cohen”) to replace McCurdy as the Fund’s auditors for the fiscal year ending October 31, 2004, to be effective upon the resignation of McCurdy.
On September 27, 2004, upon receipt of notice that Cohen was selected as the Fund’s auditor, McCurdy, whose audit practice was acquired by Cohen, resigned as independent auditors to the Funds. McCurdy’s report on the Funds’ financial statement as of November 4, 2003 contained no adverse opinion or disclaimer of opinion nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During the period of November 4, 2003 through the date of engagement of Cohen, there were no disagreements with McCurdy on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of McCurdy would have caused the Adviser to make reference to the subject matter of the disagreements in connection with its reports on the Fund’s financial statements for such periods.
Neither the Funds nor anyone on its behalf consulted with Cohen on items which (i) concerned the application of accounting principles to a specified transaction, either completed or proposed or the type of audit opinion that might be rendered on the Funds’ financial statements as a result of such consultations or (ii) concerned the subject of a disagreement (as defined in paragraph (a)(1)(v) of item 304 of Regulation S-K) or a reportable event (as described in paragraph (a)(1)(v) of said Item 304).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Shareholders and
Board of Trustees
The Choice Funds
We have audited the accompanying statement of assets and liabilities of Choice Focus Fund, Choice Long-Short Fund, and Choice Market Neutral Fund, including the schedule of investments as of October 31, 2004 and the related statements of operations for the year then ended, changes in net assets, and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The statement of changes in net assets for the year ended October 21, 2003 and the financial highlights for the periods indicated prior to October 31, 2004 were audited by McCurdy and Associates CPA’s Inc., whose audit practice was acquired by Cohen McCurdy, Ltd. McCurdy & Associates CPA’s Inc. expressed unqualified opinions on those statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments and cash held as of October 31, 2004 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Choice Focus Fund, Choice Long-Short Fund, and Choice Market Neutral Fund as of October 31, 2004, the results of its operations, the changes in its net assets, and the financial highlights the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Cohen McCurdy, Ltd.
Westlake, Ohio
December 20, 2004
CHOICE FUNDS SUPPLEMENTAL INFORMATION (unaudited)
Shareholders of funds will pay ongoing expenses, such as advisory fees, distribution and services fees (12b-1 fees), and other fund expenses. The following examples are intended to help the shareholder understand the ongoing cost (in dollars) of investing in a fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note, the expenses shown in the tables are meant to highlight ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), or contingent deferred sales charges (CDSCs) on redemptions.
This example is based on an investment of $1,000 invested at the beginning of the period and held for the six-month period from May 1, 2004 through October 31, 2004.
Actual Expenses: The first table provides information about actual account values and actual expenses. The shareholder may use the information in this line, together with the amount invested, to estimate the expenses that paid over the period. Simply divide account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid” to estimate the expenses paid on the account during the period.
Beginning Account Value 3/1/2004
Ending Account Value
8/31/2004
Expense Paid
3/1/2004-8/31/2004*
Expense Ratio
[Annualized]
Actual Expenses – Table 1:
Focus Fund Class A
$1,000.00
$934.93
$10.83
2.22%
Focus Fund Class C
1,000.00
934.93
14.48
2.97
Long-Short Fund Class A
1,000.00
906.11
20.51
4.27
Long-Short Fund Class C
1,000.00
902.40
24.98
5.21
Market Neutral Fund Class A
1,000.00
890.18
16.20
3.40
Market Neutral Fund Class C
1,000.00
884.74
20.28
4.27
Hypothetical Examples for Comparison Purposes: The second table below provides information about hypothetical account values and hypothetical expenses based on the fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses paid for the period. This information may be used to compare the ongoing costs of investing in the fund and other mutual funds. To do so, a shareholder would compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds.
Beginning Account Value 3/1/2004
Ending Account Value
8/31/2004
Expense Paid
3/1/2004-8/31/2004*
Expense Ratio
[Annualized]
Hypothetical [5% Return Before Expenses] – Table 2:
Focus Fund Class A
$1,000.00
$1,014.01
$11.27
2.22%
Focus Fund Class C
1,000.00
1,010.23
15.05
2.97
Long-Short Fund Class A
1,000.00
1,003.68
21.57
4.27
Long-Short Fund Class C
1,000.00
998.94
26.25
5.21
Market Neutral Fund Class A
1,000.00
1,008.07
17.21
3.40
Market Neutral Fund Class C
1,000.00
1,003.68
21.57
4.27
* Expenses are equal to the Portfolio’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the days in reporting period).
CHOICE FUNDS TRUSTEES AND OFFICERS (unaudited)
Interested Trustee
Patrick S. Adams*
Name, Address and Age
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 44
Position(s) Held with Fund
President, CEO, Trustee, Chairman
Term of Office and Length of Time Served
Indefinite, until successor elected.
Served as President/Trustee since 1999
Principal Occupation(s) During Past 5 Years
President and Director, Choice Investment Management, LLC, since August, 1999. Senior Vice President to Berger Associates, Executive Vice President and Portfolio Manager of the Berger 100 Fund, President and Portfolio Manager of the Berger IPT-100 Fund, President and co-Portfolio Manager of the Berger IPT-Growth and Income Fund and Executive Vice President and co-Portfolio Manager of the Berger Growth and Income Fund since February 1997. President and co-Portfolio Manager of the Berger Balanced Fund from August 1997, and President and Portfolio Manager of the Berger Select Fund from December 31, 1997 until April 1999. Senior Vice President from June 1996 to January 1997 with Zurich Kemper Investments (mutual fund). Portfolio Manager from March 1993 to May 1996 with Founders Asset Management, Inc.
Number of Funds in Complex Overseen by Trustee
3
Other Directorships Held by Trustee
None
Independent Trustee
William H. Young
Name, Address and Age
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 54
Position(s) Held with Fund
Trustee (Independent)
Term of Office and Length of Time Served
Indefinite, until successor elected
Served as Trustee since 2003
Principal Occupation(s) During Past 5 Years
Independent Consultant for Financial Services 1996 to present. Consultant-Interim CEO Unified Fund Services, a mutual fund service provider, March 2003 to present. Advisory Board Academy of Financial Services/Precision Marketing, January 1999 to present. Independent trustee Quintara Funds, Open End Mutual Funds, January 2002 through April 2003. Chairman & President, National Investment Service Association, Not for Profit, (NICSA), January 1995 through June 1997.
Number of Funds in Complex Overseen by Trustee
3
Other Directorships Held by Trustee
None
CHOICE FUNDS TRUSTEES AND OFFICERS (unaudited) (continued)
Independent Trustee
Dr. Richard A. Hathaway
Name, Address and Age
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 43
Position(s) Held with Fund
Trustee (Independent)
Term of Office and Length of Time Served
Indefinite, until successor elected
Served as Trustee since 1999
Principal Occupation(s) During Past 5 Years
Physician with Colorado Permanente since 1992. Dr. Hathaway is a Board certified orthopedic surgeon.
Number of Funds in Complex Overseen by Trustee
3
Other Directorships Held by Trustee
None
Interested Trustee
Sharon E. Adams**
Name, Address and Age
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 41
Position(s) Held with Fund
Secretary
Term of Office and Length of Time Served
Indefinite, until successor elected
Served as Secretary since 1999
Principal Occupation(s) During Past 5 Years
Vice President of Choice Investment Management, LLC since August 1999. Full-time homemaker from 1993 until August 1999. Account executive – outside sales for Sprint from 1990 to 1993. Sales manager for Allnet Communications from 1989 to 1990.
*Serves as officer of Choice Investment Management, LLC, the Adviser.
**Sharon E. Adams is the spouse of Patrick S. Adams.
Additional information about the trustees is available in the Statement of Additional Information and is available, without charge, upon request by calling (800) 392-7107.
A Choice for all Seasons
How to Obtain Proxy Voting Information
Information regarding how the Funds voted proxies relating to portfolio securities during the period ended June 30, 2004 as well as a description of the policies and procedures that the Funds use to determine how to vote proxies is available without charge, upon request, by calling 1-800-392-7107 or by referring to the Security and Exchange Commission’s (“SEC”) website at http://www.sec.gov.
How to Obtain 1st and 3rd Fiscal Quarter Portfolio Holdings
Each Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Beginning in July 31, 2004, the Trust’s Form N-Q will be available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC (1-800-SEC-0330). The information on Form N-Q is available without charge, upon request, by calling 1-800-392-7107.
Choice Funds • 5299 DTC Blvd • Suite 1150 • Greenwood Village • CO 80111 • 1-800-392-7107
www.choicefunds.net
Not authorized for distribution unless accompanied or preceded by a current prospectus.
CIM Securities, LLC Distributor
Choice Focus Fund
Choice Long-Short Fund
Choice Market Neutral Fund
Annual Report – October 31, 2004
Item 2. Code of Ethics.
(a)
As of the end of the period covered by this report, the registrant has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. This code is filed as exhibit to the report on Form N-CSR under Item 11(a)(1).
(b)
Amendments: During the period covered by the report, there have not been any amendments to the provisions of the code of ethics.
(c)
Waivers: During the period covered by the report, the registrant has not granted any express or implicit waivers from the provisions of the code of ethics.
Item 3. Audit Committee Financial Expert.
(a)
The registrant’s board of trustees has determined that although none of the members of the Audit Committee meets the technical definition of an audit committee financial expert, the members of the Audit Committee collectively have sufficient financial expertise to address any issues that are likely to come before the Audit Committee.
Item 4. Principal Accountant Fees and Services.
(a)
Audit Fees
Registrant
Advisor
FY 10/31/04
$36,000
N/A
FY 10/31/04
$44,820
N/A
(b)
Audit-Related Fees
Registrant
Advisor
FYE 10/31/04
$0
N/A
FYE 10/31/03
$0
N/A
(c)
Tax Fees
Registrant
Advisor
FYE 10/31/04
$5,625
N/A
FYE 10/31/03
$7,150
N/A
Preparation of Federal & State income tax returns, assistance with calculation of required income, capital gain and excise distributions and preparation of Federal excise tax returns.
(d)
All Other Fees
Registrant
Advisor
FYE 10/31/04
$0
N/A
FYE 10/31/03
$0
N/A
(e)
(1)
Audit Committee’s Pre-Approval Policies
The registrant’s Audit Committee is required to pre-approve all audit services and, when appropriate, any non-audit services (including audit-related, tax and all other services) to the registrant. The registrant’s Audit Committee also is required to pre-approve, when appropriate, any non-audit services (including audit-related, tax and all other services) to its adviser, or any entity controlling, controlled by or under common control with the adviser that provides ongoing services to the registrant, to the extent that the services may be determined to have an impact on the operations or financial reporting of the registrant. Services are reviewed on an engagement by engagement basis by the Audit Committee.
(2)
Percentages of Services Approved by the Audit Committee
Registrant
Advisor
Audit-Related Fees:
0%
N/A
Tax Fees:
0%
N/A
All Other Fees:
0%
N/A
(f)
During the audit of registrant's financial statements for the most recent fiscal year, less than 50 percent of the hours expended on the principal accountant's engagement were attributed to work performed by persons other than the principal accountant's full-time, permanent employees.
(g)
The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant:
Registrant
Advisor
FYE 10/31/2004
$5,625
N/A
FYE 10/31/2003
$7,150
N/A
(h)
The registrant's audit committee has considered whether the provision of non-audit services to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant, that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, is compatible with maintaining the principal accountant's independence.
Item 5. Audit Committee of Listed Companies.
Not applicable.
Item 6. Schedule of Investments.
Schedule of investments in securities of unaffiliated issuers is included in item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Funds.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holder. None.
Item 10. Controls and Procedures.
(a)
Based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this Report, the Registrant's Principal Executive and Financial Officers have concluded that the Registrant's Disclosure Controls and Procedures, which are designed to ensure that information required to be disclosed on Form N-CSR is recorded, processed, summarized and reported on a timely basis, and that information required to be disclosed in the Report is communicated to the Registrant's management, as appropriate, to allow timely decisions regarding required disclosure, are effective.
(b)
There were no significant changes in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal half-year that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 11. Exhibits.
(a)(1)
Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached hereto as EX-99.CODE ETH.
(a)(2)
Certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 (and Item 11(a)(2) of Form N-CSR) are filed and attached hereto as Exhibit 99.CERT.
(a)(3)
Not applicable.
(b)
Certification required by Section 906 of the Sarbanes-Oxley Act of 2002 (and Item 11(b) of Form N-CSR) is filed and attached hereto as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Choice Funds
By:
/s/ Patrick S. Adams
Patrick S. Adams
Chief Executive Officer
Date
December 31, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ Patrick S. Adams
Patrick S. Adams
Chief Executive Officer
Date
December 31, 2004
By:
/s/ Mark Stang
Mark Stang
Chief Financial Officer
Date
December 31, 2004
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