[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, 2003
--------------------
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. ss. 3507.
Item 1. Reports to Stockholders.
IS IT TIME TO GET BACK IN THE GAME?
CHOICE FOCUS FUND
CHOICE BALANCED FUND
ANNUAL REPORT, OCTOBER 31, 2003
CHOICE FUNDS
ANNUAL REPORT
OCTOBER 31, 2003
Table of Contents
Perspectives from Patrick Adams ......................................... 1
Choice Focus Fund ....................................................... 2
Schedule of Investments ............................................... 3
Statement of Assets and Liabilities ................................... 6
Statement of Operations ............................................... 7
Statements of Changes in Net Assets ................................... 8
Financial Highlights .................................................. 9
Choice Balanced Fund .................................................... 10
Schedule of Investments ............................................... 11
Statement of Assets and Liabilities ................................... 14
Statement of Operations ............................................... 15
Statements of Changes in Net Assets ................................... 16
Financial Highlights .................................................. 17
Notes to Financial Statements ........................................... 18
Auditor's Report ........................................................ 22
Trustee and Officer Information ......................................... 23
PERSPECTIVES FROM PATRICK ADAMS...
The Choice Focus Fund was up 46.69%1 for the fiscal year ending October 31,
2003, versus the S&P 500 Index(R)up 20.80%.2 The Fund performed well in a
recovering economy and stock market. The Choice Focus Fund has the potential to
outperform its benchmark in this type of market environment, as it did last
year.
The economy improved and the stock market advanced sharply this year. The market
environment was ripe for a strong advance as the fear of war eased, combined
with tremendous monetary and fiscal stimulus. The Choice Focus Fund will
generally perform best versus its benchmark, S&P 500 Index(R), in a rising
economy and stock market. The Choice Focus Fund is managed using a concentrated
approach with only our best stock ideas going into the fund.3 By having fewer
positions in our Fund we are better able to focus our research, manage the
portfolio on a day-to-day basis and get the most out of our best ideas. The
sectors that performed best for the Fund were Technology,4 followed by Consumer
Stocks. In Technology, the semiconductor and telecommunication sectors performed
strongly. As a consequence of the strong performance in these two sectors of
technology, we have reduced our exposure.
The Choice Balanced Fund was up 23.56%1 for the fiscal year ending October 31,
2003 versus the S&P 500 Index(R) up 20.80%.2 The Balanced Fund takes a bottom up
approach in allocating assets between stocks and bonds. When the stocks that
Choice follows are attractively valued, the Balanced Fund will generally have
more equity exposure than fixed income. Like the Choice Focus Fund, the market
environment was very favorable for equities, and performed well due to the
Fund's exposure in Technology, Consumer and Financial stocks.
Both Funds have significant tax loss carry forwards, therefore the Funds did not
pay a capital gains distribution again this year.
Sincerely,
/s/ Patrick Adams, CFA
- ----------------------
Patrick Adams, CFA
1 Performance Numbers cover a short period of time and are not an indication as
to how the fund will perform in the future.
2 The S&P 500 Stock Index is an unmanaged index generally representative of the
U.S. Stock Market. Performance numbers reflect reinvestment of dividends and
other distributions. You cannot invest directly in an index.
3 The Focus Fund is non-diversified and therefore more exposed to individual
stock volatility and market pressure than a fully diversified fund.
4 The Focus Fund invested a substantial portion of its assets in
technology-related companies, and thus is more susceptible to economic,
business or other developments that generally affect those types of
companies.
Choice Funds | 1
CHOICE FOCUS FUND
INVESTMENT RETURNS TABLE*
Average Annual
One Year Ended Since Inception
9-30-03 10-31-03 9-30-03 10-31-03
- ------------------------------------------------------------------------------------------------------------------------------
Choice Focus Fund (inception date 11-1-99) 61.87% 46.69% (18.36)% (17.33)%
- ------------------------------------------------------------------------------------------------------------------------------
S&P 500(R)Stock Index 24.40% 20.80% (6.35)% (4.93)%
PERFORMANCE IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL INVESTMENT. 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 sig-
nificantly during periods of market volatility. Visit our website at
www.choicefunds.net for current fund performance informa- tion. The Fund is
non-diversified; therefore, it is more exposed to individual stock volatility
and market pressure than funds invest- ing 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*
DATE Focus S&P 500
------------------------------------------------------
11/1/1999 10,000 10,000
1/31/2000 11,680 10,261 2.61%
4/30/2000 12,201 10,719 4.46%
7/31/2000 14,012 10,589 -1.21%
10/31/2000 12,781 10,608 0.18%
1/31/2001 11,810 10,168 -4.15%
4/30/2001 8,707 9,328 -8.26%
7/31/2001 7,773 9,071 -2.75%
10/31/2001 5,543 7,966 -12.19%
1/31/2002 6,357 8,526 7.03%
4/30/2002 5,403 8,150 -4.41%
7/31/2002 3,806 6,928 -14.99%
10/31/2002 3,173 6,762 -2.39%
1/31/2003 3,485 6,563 -2.95%
4/30/2003 3,756 7,065 7.65%
7/31/2003 4,278 7,665 8.49%
10/31/2003 4,670 8,168 6.57%
Since Inception -17.33% -4.93%
- -----------------------------------------------------------------------
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(R) 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.
2 | Choice Focus Fund
CHOICE FOCUS FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
COMMON STOCKS 91.4%
BANKING 0.9%
500 Bank of America Corp. $ 37,865
------------
COMPUTERS-SOFTWARE 22.7%
400 EMC Corp.* 5,536
4,900 First Data Corp. 174,930
28,400 Microsoft Corp. 742,660
900 Oracle Corp.* 10,764
------------
933,890
------------
ELECTRONIC-SEMICONDUCTOR MANUFACTURING 7.1%
20,000 Applied Micro Circuits Corp.* 116,400
5,700 Flextronics International Ltd.* 79,800
3,000 Globespan Virata, Inc.* 18,480
4,400 Integrated Device Technology, Inc.* 69,080
200 Novellus Systems, Inc.* 8,258
------------
292,018
------------
INSURANCE 2.2%
1,500 American International Group, Inc. 91,245
------------
MEDIA 5.7%
2,700 Clear Channel Communications, Inc. 110,214
3,100 Viacom, Inc. Class B 123,597
------------
233,811
------------
MEDICAL-BIOTECHNOLOGY 9.0%
4,000 Abbot Laboratories 170,480
6,000 CancerVax Corp.* 77,220
96,300 GlycoGenesys, Inc.* 123,264
------------
370,964
------------
PHARMACEUTICALS 13.5%
4,000 Express Scripts, Inc. Class A* 219,680
4,200 Johnson & Johnson 211,386
4,000 Pfizer, Inc. 126,400
------------
557,466
------------
RECREATION 1.4%
2,500 The Walt Disney Co. 56,600
------------
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Focus Fund | 3
CHOICE FOCUS FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
REAL ESTATE 2.8%
17,000 MeriStar Hospitality Corp.* $ 116,110
------------
RETAIL-APPAREL/SHOES 2.7%
3,900 Abercrombie & Fitch Co.* 111,150
------------
RETAIL-HOME SPECIALTY 1.5%
1,700 The Home Depot, Inc. 63,019
------------
RETAIL-TOYS 3.1%
6,500 Mattel, Inc. 125,840
------------
TELECOMMUNICATIONS-EQUIPMENT 18.8%
34,300 Finisar Corp.* 106,330
8,500 ICG Communications, Inc.* 62,050
16,000 JDS Uniphase Corp.* 56,800
2,500 NETGEAR, Inc.* 36,047
17,500 New Focus, Inc.* 90,825
2,000 Nokia Corp. ADR 33,980
45,000 Powerwave Technologies, Inc.* 292,950
8,000 RF Micro Devices, Inc.* 93,680
1,380 MCI Group* 304
------------
772,966
------------
TOTAL COMMON STOCKS
(cost $3,567,587) 3,762,944
------------
SEE NOTES TO FINANCIAL STATEMENTS.
4 | Choice Focus Fund
CHOICE FOCUS FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT 13.0%
$ 536,574 UMB Bank Money Market Fiduciary,
Variable Rate Demand Deposit, 0.27% $ 536,574
------------
TOTAL SHORT-TERM INVESTMENT
(cost $536,574) 536,574
------------
TOTAL INVESTMENTS
(cost $4,104,161) 104.4% 4,299,518
Liabilities less Other Assets (4.4)% (179,073)
------------
NET ASSETS 100.0% $ 4,120,445
============
* Non-income producing securities.
ADR - American Depositary Receipt
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Focus Fund | 5
CHOICE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2003
ASSETS
Investments in securities, at value
(cost $3,567,587) $ 3,762,944
Short-Term investments, at amortized cost 536,574
Receivable for investments sold 520,953
Dividends and interest receivable 6,305
Prepaid expenses and other assets 17,300
------------
Total Assets 4,844,076
------------
LIABILITIES
Payable for investments purchased 675,495
Fund shares repurchased 11,050
Due to custodian 3,368
Accrued distribution fee 750
Accrued investment advisory fee 550
Accrued expenses and other liabilities 32,418
------------
Total Liabilities 723,631
------------
NET ASSETS $ 4,120,445
============
NET ASSETS CONSIST OF
Paid in capital $ 31,615,949
Accumulated net realized loss on investments
and futures contracts (27,690,861)
Net unrealized appreciation on investments 195,357
------------
NET ASSETS $ 4,120,445
============
CAPITAL STOCK (NO PAR VALUE)
Issued and outstanding (unlimited shares authorized) 886,675
NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE $ 4.65
============
SEE NOTES TO FINANCIAL STATEMENTS.
6 | Choice Focus Fund
CHOICE FOCUS FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2003
INVESTMENT INCOME
Dividends $ 34,735
Interest 4,718
------------
Total Investment Income 39,453
------------
EXPENSES
Investment advisory fees 70,317
Fund administration and accounting fees 70,663
Transfer agent fees and expenses 34,191
Professional fees 29,153
Distribution fees 17,579
State registration fees 12,999
Custody fees 12,242
Reports to shareholders 10,611
Insurance expense 3,514
Trustees' fees and related expenses 3,149
Other 1,363
Total expenses 265,781
Less:
Advisory fees waived (35,545)
Expenses paid indirectly (15,614)
------------
Net Expenses 214,622
------------
NET INVESTMENT LOSS (175,169)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on:
Investment securities 1,493,837
Futures contracts 29,430
Net change in unrealized appreciation/depreciation on investments 581,023
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,104,290
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,929,121
============
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Focus Fund | 7
CHOICE FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002
- ------------------------------------------------------------------------------------------------
OPERATIONS
Net investment loss $ (175,169) $ (141,787)
Net realized gain (loss) on:
Investment securities 1,493,837 (4,238,345)
Futures contracts 29,430 (70,219)
Net change in unrealized appreciation/depreciation
on investments 581,023 322,963
------------ ------------
Net increase (decrease) in net assets resulting
from operations 1,929,121 (4,127,388)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Shares sold 11,913,415 17,733,273
Shares redeemed (12,308,094) (21,930,671)
------------ ------------
Net decrease in net assets from
capital share transactions (394,679) (4,197,398)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,534,442 (8,324,786)
------------ ------------
NET ASSETS
Beginning of Year 2,586,003 10,910,789
------------ ------------
End of Year $ 4,120,445 $ 2,586,003
============ ============
SEE NOTES TO FINANCIAL STATEMENTS.
8 | Choice Focus Fund
CHOICE FOCUS FUND
FINANCIAL HIGHLIGHTS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCT. 31, 2003 OCT. 31, 2002 OCT. 31, 2001 OCT. 31, 2000
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE*
NET ASSET VALUE, BEGINNING OF PERIOD $ 3.17 $ 5.52 $ 12.77 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment loss (0.21) (0.17) (0.15) (0.02)
Net realized and unrealized gain (loss)
on investments 1.69 (2.18) (7.07) 2.80
------------ ------------ ------------ ------------
Total Income (Loss) from
Investment Operations 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 PERIOD $ 4.65 $ 3.17 $ 5.52 $ 12.77
============ ============ ============ ============
TOTAL RETURN 46.69% (42.75)% (56.63)% 27.81%
SUPPLEMENTAL DATA AND RATIOS
Net assets end of period (000s) $ 4,120 $ 2,586 $ 10,911 $ 57,802
Ratio of expenses to average
net assets net of fees waived
and paid indirectly 3.05% 1.97% 1.88% 2.05%
Ratio of net expenses to average
net assets before fees waived
and paid indirectly 3.78% 2.61% 1.88% 2.05%
Ratio of net investment loss to
average net assets net of fees
waived and paid indirectly (2.49)% (1.43)% (0.85)% (0.26)%
Ratio of net investment loss to
average net assets before fees
waived and paid indirectly (3.22)% (2.07)% (0.85)% (0.26)%
Portfolio turnover rate 1066% 1454% 1239% 1603%
* Selected data for a share of capital stock outstanding throughout the period.
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Focus Fund | 9
CHOICE BALANCED FUND
INVESTMENT RETURNS TABLE*
Average Annual
One Year Ended Since Inception
9-30-03 10-31-03 9-30-03 10-31-03
- ------------------------------------------------------------------------------------------------------------------------
Choice Balanced Fund (inception date 4-1-00) 23.15% 23.56% (8.66)% (7.49)%
S&P 500(R)Stock Index 24.40% 20.80% (9.70)% (8.09)%
PERFORMANCE IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL INVESTMENT. 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 for current fund perform- ance information. The equity
portion of the Fund's portfolio will generally consist of 30-50 securities;
therefore, the Fund 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*
--------------------------------------------------
DATE Balanced S&P 500
--------------------------------------------------
4/1/2000 10,000 10,000
4/30/2000 10,410 9,699 -3.01%
7/31/2000 11,650 9,582 -1.21%
10/31/2000 11,080 9,599 0.18%
1/31/2001 11,019 9,201 -4.15%
4/30/2001 9,918 8,441 -8.26%
7/31/2001 9,670 8,208 -2.75%
10/31/2001 8,571 7,208 -12.19%
1/31/2002 9,323 7,715 7.03%
4/30/2002 8,598 7,374 -4.41%
7/31/2002 6,885 6,269 -14.99%
10/31/2002 6,092 6,119 -2.39%
1/31/2003 6,155 5,939 -2.95%
4/30/2003 6,551 6,393 7.65%
7/31/2003 7,169 6,936 8.49%
10/31/2003 7,566 7,391 6.57%
- ------------------------------------------------------------
Since Inception -7.49% -8.09%
- ------------------------------------------------------------
This chart assumes an initial investment of $10,000 made on 4-1-00. 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 April, 2000 through October, 2000, would be reduced.
It is not possible to make a direct investment in the S&P 500(R) 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 BALANCED FUND
OBJECTIVE
The Choice Balanced Fund seeks capital appreciation and current income by
investing primarily in a diverse group of domestic equity and fixed income
securities.
STRATEGY
The portfolio manager allocates the Balanced Fund's assets between equity and
fixed income securities based upon his assessment of available investment
opportunities and relevant market, economic and financial factors. Normally the
portfolio manager's selection will emphasize equity securities over fixed income
securities. The portfolio manager would typically expect to be invested in 30-50
equity positions.
10 | Choice Balanced Fund
CHOICE BALANCED FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
COMMON STOCKS 49.4%
BANKING 1.3%
400 Bank of America Corp. $ 30,292
------------
BEVERAGES 3.0%
1,500 Coca-Cola Co. 69,600
------------
COMPUTERS-HARDWARE 0.8%
4,500 Sun Microsystems, Inc.* 17,820
------------
COMPUTERS-SOFTWARE 6.1%
900 EMC Corp.* 12,456
2,000 First Data Corp. 71,400
2,200 Microsoft Corp. 57,530
------------
141,386
------------
ELECTRONIC-SEMICONDUCTOR MANUFACTURING 0.8%
1,300 Micron Technology, Inc.* 18,642
------------
INSURANCE 1.6%
600 American International Group, Inc. 36,498
------------
MEDIA 2.6%
800 Clear Channel Communications, Inc. 32,656
700 Viacom, Inc. Class B 27,909
------------
60,565
------------
MEDICAL-BIOTECHNOLOGY 4.4%
1,500 Abbot Laboratories 63,930
3,000 CancerVax Corp.* 38,610
------------
102,540
------------
PHARMACEUTICALS 10.5%
300 Amerisource Bergen Corp. 17,031
400 Baxter International, Inc. 10,632
1,500 Express Scripts, Inc. Class A* 82,380
1,800 Johnson & Johnson 90,594
1,400 Pfizer, Inc. 44,240
------------
244,877
------------
RECREATION 1.4%
1,400 The Walt Disney Co. 31,696
------------
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Balanced Fund | 11
CHOICE BALANCED FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
REAL ESTATE 2.3%
8,200 MeriStar Hospitality Corp.* $ 56,006
------------
RETAIL-APPAREL/SHOES 1.8%
1,500 Abercrombie & Fitch Co.* 42,750
------------
RETAIL-HEALTHCARE 1.0%
700 Walgreen Co. 24,374
------------
RETAIL-HOME SPECIALTY 2.4%
1,500 The Home Depot, Inc. 55,605
------------
RETAIL-TOYS 3.1%
3,700 Mattel, Inc. 71,632
------------
TELECOMMUNICATIONS-EQUIPMENT 6.3%
1,500 Cisco Systems, Inc.* 31,470
2,400 Finisar Corp.* 7,440
8,500 JDS Uniphase Corp.* 30,175
500 NETGEAR, Inc.* 7,210
1,900 Nokia Corp. ADR 32,281
6,000 Powerwave Technologies, Inc.* 39,060
560 MCI Group* 123
------------
147,759
------------
TOTAL COMMON STOCKS
(cost $1,127,138) 1,152,042
------------
SEE NOTES TO FINANCIAL STATEMENTS.
12 | Choice Balanced Fund
CHOICE BALANCED FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 6.1%
BANKING 6.1%
4,000 Irwin Financial Corp., 8.75% $ 142,000
------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $100,000) 142,000
------------
PRINCIPAL AMOUNT
- ----------------
BONDS 27.4%
FINANCIAL 8.8%
$100,000 Home Savings of America 6.50%, 8/15/04 103,112
100,000 Household Finance 6.00%, 5/1/04 102,302
------------
205,414
------------
U.S. GOVERNMENT AND AGENCIES 18.6% U.S. States
Treasury Note:
185,000 1.25%, 5/31/05 184,025
250,000 3.25%, 8/15/08 250,576
------------
434,601
------------
TOTAL BONDS
(cost $629,495) 640,015
------------
SHORT-TERM INVESTMENTS 28.2%
359,751 UMB Bank Money Market Fiduciary,
Variable Rate Demand Deposit, 0.27% 359,751
300,000 U.S. Treasury Bill 0.90%, 11/6/03 299,963
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $659,714) 659,714
------------
TOTAL INVESTMENTS
(cost $2,516,347) 111.1% 2,593,771
Liabilities less Other Assets (11.1)% (256,867)
------------
NET ASSETS 100.0% $ 2,336,904
============
* Non-income producing securities.
ADR - American Depositary Receipt
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Balanced Fund | 13
CHOICE BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2003
ASSETS
Investments in securities, at value
(cost $1,856,633) $ 1,934,057
Short-Term investments, at amortized cost 659,714
Cash 214
Receivable for investments sold 33,405
Dividends and interest receivable 7,520
Due from advisor 4,253
Prepaid expenses and other assets 8,581
------------
Total Assets 2,647,744
------------
LIABILITIES
Payable for investments purchased 286,820
Accrued distribution fee 170
Accrued expenses and other liabilities 23,850
Total Liabilities 310,840
------------
NET ASSETS $ 2,336,904
============
NET ASSETS CONSIST OF
Paid in capital $ 10,658,015
Accumulated net realized loss on investments (8,398,535)
Net unrealized appreciation on investments 77,424
------------
NET ASSETS $ 2,336,904
============
CAPITAL STOCK (NO PAR VALUE)
Issued and outstanding (unlimited shares authorized) 322,903
NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE $ 7.24
============
SEE NOTES TO FINANCIAL STATEMENTS.
14 | Choice Balanced Fund
CHOICE BALANCED FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 20,094
Interest 60,179
------------
Total Investment Income 80,273
------------
EXPENSES
Investment advisory fees 17,559
Fund administration and accounting fees 70,043
Transfer agent fees and expenses 21,497
Professional fees 19,933
State registration fees 12,789
Custody fees 11,421
Distribution fees 5,853
Reports to shareholders 4,249
Insurance expense 3,947
Trustees' fees and related expenses 663
Other 1,298
------------
Total expenses 169,252
Less:
Advisory fees waived/reimbursed (60,236)
Expenses paid indirectly (6,668)
------------
Net Expenses 102,348
------------
NET INVESTMENT LOSS (22,075)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investment securities 422,536
Net change in unrealized appreciation/depreciation on investments 88,902
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 511,438
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 489,363
============
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Balanced Fund | 15
CHOICE BALANCED FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002
------------ ------------
OPERATIONS
Net investment income (loss) $ (22,075) $ 169,964
Net realized gain (loss) on:
Investment securities 422,536 (1,951,453)
Futures contracts -- (77,390)
Net change in unrealized appreciation
(depreciation) on investments 88,902 (568,402)
------------ ------------
Net increase (decrease) in net assets
resulting from operations 489,363 (2,427,281)
------------ ------------
DISTRIBUTIONS PAID
Net investment income (4,167) (246,106)
------------ ------------
Net decrease in net assets
resulting from distributions paid (4,167) (246,106)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Shares sold 54,719 1,538,159
Shares issued to holders in reinvestment
of distributions 4,132 240,366
Shares redeemed (631,118) (12,203,581)
------------ ------------
Net decrease in net assets from capital
share transactions (572,267) (10,425,056)
------------ ------------
TOTAL DECREASE IN NET ASSETS (87,071) (13,098,443)
------------ ------------
NET ASSETS
Beginning of Year 2,423,975 15,522,418
------------ ------------
End of Year* $ 2,336,904 $ 2,423,975
============ ============
* Includes undistributed
net investment income of: $ -- $ 3,886
------------ ------------
SEE NOTES TO FINANCIAL STATEMENTS.
16 | Choice Balanced Fund
CHOICE BALANCED FUND
FINANCIAL HIGHLIGHTS
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
OCT. 31, 2003 OCT. 31, 2002 OCT. 31, 2001 OCT. 31, 2000(1)
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE*
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.87 $ 8.42 $ 11.08 $ 10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment income (loss) (0.06) 0.16 0.14 0.07
Net realized and unrealized gain
(loss) on investments 1.44 (2.52) (2.63) 1.01(2)
----------- ----------- ----------- -----------
Total Income (loss) from
Investment Operations 1.38 (2.36) (2.49) 1.08
----------- ----------- ----------- -----------
LESS DISTRIBUTIONS PAID
From net investment income (0.01) (0.19) (0.17) --
----------- ----------- ----------- -----------
Total Distributions Paid (0.01) (0.19) (0.17) --
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 7.24 $ 5.87 $ 8.42 $ 11.08
=========== =========== =========== ===========
TOTAL RETURN(3) 23.56% (28.92)% (22.65)% 10.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period (000s) $ 2,337 $ 2,424 $ 15,522 $ 26,247
Ratio of expenses to average net assets,
net of fees waived/reimbursed
and paid indirectly(4) 4.37% 1.73% 1.81% 2.00%(5)
Ratio of expenses to average net assets,
before fees waived/reimbursed
and paid indirectly(4) 7.23% 2.29% 1.81% 2.09%(5)
Ratio of net investment income to
average net assets, net of fees
waived/reimbursed and paid indirectly(4) (0.94)% 1.52% 1.46% 1.47%(5)
Ratio of net investment income to
average net assets, before fees
waived/reimbursed and paid indirectly(4) (3.80)% 0.96% 1.46% 1.38%(5)
PORTFOLIO TURNOVER RATE(3) 736% 972% 951% 651%
(1) Commenced operations on April 1, 2000.
(2) The amount shown may not correlate with aggregate gains and losses of
portfolio securities due to timing of sales and redemptions of Fund Shares.
(3) Not annualized for periods less than a full year.
(4) Annualized for periods less than a full year.
* Selected data for a share of capital stock outstanding throughout the period.
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Balanced Fund | 17
Choice Funds
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
(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 and
Balanced Fund (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 Balanced Fund is a diversified fund that seeks
capital appreciation and current income by normally investing in a diverse
group of domestic equity and fixed income securities.
(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 ("GAAP"), 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. 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 portfolio are typically allocated among
the portfolio 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 Statement of Operations. Brokerage
credits are generated when a Fund directs portfolio trades to certain
brokers.
(C) 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 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 the market
value of the purchase obligation for long futures contracts or the
market value of the instrument underlying the contract for the short
futures contracts. All collateral is required to be adjusted daily.
18 | Choice Funds
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.
(D) 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.
(E) DISTRIBUTIONS 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.
(F) 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 the Adviser, with whom certain officers
and directors 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% and 0.75% of the
Fund's average daily net assets for the Focus Fund and the Balanced Fund,
respectively. For the year ended October 31, 2003, the Adviser received
advisory fees of $70,317 and $17,559 for the Focus Fund and Balanced Fund,
respectively. The Adviser agreed to voluntarily waive its management fee
and/or reimburse the Fund's operating expenses on May 1, 2003 (exclusive of
brokerage, interest, taxes and extraordinary expenses) to ensure that the
Fund's operating expenses did not exceed 2.50% and 2.00% of the Fund's
average daily net assets for the Focus Fund and the Balanced Fund,
respectively, through March 1, 2004. 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, 2003, amounts that are subject to potential
recoupment are as follows:
Recoverable Through Focus Fund Balanced Fund
------------------- ---------- -------------
October 31, 2006 $ 35,545 $ 60,236
During the year ended October 31, 2003, the Focus Fund and Balanced Fund
paid $71,242 and $7,713 in brokerage commissions, respectively, to CIM
Securities, LLC, an affiliate of the Adviser, on the purchase and sale of
portfolio securities.
(4) DISTRIBUTION PLAN
The Funds had an agreement with UMB Distribution Services, LLC to furnish
distribution services to the Funds until December 31, 2002. Effective
January 1, 2003, the Funds have an agreement with CIM Securities, LLC to
furnish distribution services to the Funds. 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 at an annual rate, as determined from time to
time by the Board of Trustees of up to 0.25% of each Fund's average daily
net assets. For the year ended October 31, 2003 the Funds incurred 12b-1
fees of $17,579 and $5,853 for the Focus Fund and Balanced Fund,
respectively.
Choice Funds | 19
(5) CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Funds for the year ended October 31, 2003
were as follows:
Focus Fund Balanced Fund
------------ -------------
Shares sold 2,933,668 7,225
Shares issued to holders in
reinvestment of distributions -- 614
Shares redeemed (2,862,802) (98,128)
------------ -------------
Net Increase (Decrease) 70,866 (90,289)
============ =============
Transactions in shares of the Funds for the year ended October 31, 2002
were as follows:
Focus Fund Balanced Fund
------------ -------------
Shares sold 2,868,671 170,942
Shares issued to holders in
reinvestment of distributions -- 28,801
Shares redeemed (4,027,796) (1,630,517)
------------ -------------
Net Decrease (1,159,125) (1,430,774)
============ =============
(6) INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Funds for the year ended October 31, 2003 were as
follows:
Focus Fund Balanced Fund
------------ -------------
Purchases $59,097,734 $15,143,124
Sales $61,144,332 $16,880,243
(7) FEDERAL INCOME TAX INFORMATION
At October 31, 2003, 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 Balanced Fund
------------ -------------
Cost of Investments $ 4,154,352 $ 2,523,706
Gross Unrealized Appreciation $ 267,021 $ 103,967
Gross Unrealized (Depreciation) (21,473) (19,184)
------------ -------------
Net Unrealized Appreciation
on Investments $ 245,548 $ 84,783
============ ============
As of October 31, 2003, the components of accumulated earnings (deficit) on
a tax basis were as follows:
Focus Fund Balanced Fund
------------ -------------
Net realized capital losses (27,640,670) (8,391,176)
Net Unrealized Appreciation 145,166 70,065
------------ -------------
Total Accumulated Deficit $(27,495,504) $ (8,321,111)
The difference between cost amounts for financial statement and federal
income tax purposes is due primarily to timing differences in recognizing
certain gains and losses in security transactions
20 | Choice Funds
Federal income tax capital loss carry forwards for the Focus Fund expire as
follows: $20,645,351 in 2009 and $6,017,459 in 2010. Federal income tax
capital loss carry forwards for the Balanced Fund expire as follows:
$287,388 in 2008, $4,867,551 in 2009 and $2,810,178 in 2010. To the extent
future gains are offset by capital loss carry forwards, such gains will not
be distributed.
The tax character of distributions paid during the fiscal year ended
October 31, 2003 were as follows:
Focus Fund Balanced Fund
---------- ------------
Ordinary Income $ -- $ 4,167
Net Long-Term
Capital Gains $ -- $ --
(8) 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, 2003, Charles Schwab & Co. held for the benefit of others, in
aggregate, more than 27% of the Focus Fund. As of October 31, 2003, Jupiter
& Co. held more than 28% of the Balanced Fund.
(9) CHANGE IN INDEPENDENT ACCOUNTANT
PricewaterhouseCoopers LLP ("PwC") was previously the principal auditors
for the Choice Balanced Fund and The Choice Focus Fund (the "Funds"). A
decision to change auditors was approved by the Board of Trustees at their
meeting held on October 30, 2003 and McCurdy & Associates CPA's, Inc. were
appointed principal auditors. PwC served as principal auditors for the
aforementioned Funds for each of the periods ended October 31, 2000 through
2002. Additionally, the audit reports of PwC on the financial statements of
the aforementioned Funds that were issued for each of the periods ended
October 31, 2000 through 2002 were unqualified. There were no disagreements
between PwC and the management of the portfolios on any auditing and
accounting matters that, if not resolved, would have been referred to in
their audit reports
Choice Funds | 21
INDEPENDENT AUDITOR'S REPORT
To The Shareholders and Board of Trustees The Choice Funds
We have audited the accompanying statement of assets and liabilities of the
Choice Focus Fund and the Choice Balanced Fund (the "Funds") (two of the
portfolios constituting the Choice Funds), including the schedule of portfolio
investments as of October 31, 2003 and the related statement of operations for
the year then ended, changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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, 2003 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 the Choice
Focus Fund and the Choice Balanced Fund as of October 31, 2003, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the periods indicated, in conformity with accounting principles generally
accepted in the United States of America.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
November 4, 2003
22 | Choice Funds
CHOICE FUNDS TRUSTEES AND OFFICERS (UNAUDITED)
INTERESTED TRUSTEE Patrick S. Adams*
NAME, ADDRESS, AND AGE 5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 43
POSITION(S) HELD WITH FUND President, CEO, Trustee, Chairman.
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as President/Trustee since 1999
PRINCIPAL OCCUPATION(S) President and Director, Choice Investment Management, LLC,
since August, 1999.
DURING PAST 5 YEARS 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 4
OVERSEEN BY TRUSTEE
OTHER DIRECTORSHIPS HELD None
BY TRUSTEE
- -------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE William H. Young
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 53
POSITION(S) HELD WITH FUND Trustee (Independent)
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as Trustee since 2003
PRINCIPAL OCCUPATION(S) Independent Consultant for Financial Services 1996 to Consultant-Interim present.
DURING PAST 5 YEARS CEO United 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 4
OVERSEEN BY TRUSTEE
OTHER DIRECTORSHIPS HELD None
BY TRUSTEE
Choice Funds I 23
CHOICE FUNDS TRUSTEES AND OFFICERS (UNAUDITED) (CONTINUED)
NAME, ADDRESS, AND AGE Dr. Richard A. Hathaway
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 42
POSITION(S) HELD WITH FUND Trustee (Independent)
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as Trustee since 1999
PRINCIPAL OCCUPATION(S) Physician with Colorado Permanente since 1992. Dr. Hathaway is a Board certified
DURING PAST 5 YEARS orthopedic surgeon.
NUMBER OF FUNDS IN COMPLEX 4
OVERSEEN BY TRUSTEE
OTHER DIRECTORSHIPS HELD None
BY TRUSTEE
- -------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE Gregory S. Drose
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 39
POSITION(S) HELD WITH FUND Treasurer
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as Treasurer since 2000
PRINCIPAL OCCUPATION(S) Chief Operating Officer of Choice Investment Management, LLC since November
DURING PAST 5 YEARS 1999. Vice President of Marketing/Due Diligence, D.E. Frey & Company, Inc. from
September 1998 to November 1999. Vice
President/Branch Manager for Owen- Joseph
Securities from June 1995 to June 1998.
Director of Student Loans and Accounts, The
Colorado College from November 1993 to May
1995.
- -------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE Sharon E. Adams**
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 40
POSITION(S) HELD WITH FUND Secretary
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as Secretary since 1999
PRINCIPAL OCCUPATION(S) Vice President of Choice Investment Management, LLC since August 1999. Full-time
DURING PAST 5 YEARS 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.
24 | Choice Funds
A CHOICE FOR ALL SEASONS
CHOICE
CHOICE FUNDS o c/o Gemini Fund Services, LLC
4020 South 147th Street o Suite 2 Omaha, NE 68137 o
800-392-7107 WWW.CHOICEFUNDS.NET
CIM SECURITIES, LLC, DISTRIBUTOR
MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS.
CHOICE
THINK OUTSIDE OF THE BOX.
CHOICE LONG-SHORT FUND
ANNUAL REPORT OCTOBER 31, 2003
CHOICE LONG-SHORT FUND
ANNUAL REPORT
OCTOBER 31, 2003
Table of Contents
Perspectives from Patrick Adams ........................................ 1
Choice Long-Short Fund ................................................. 2
Schedule of Investments ................................................ 3
Statement of Assets and Liabilities .................................... 7
Statement of Operations ................................................ 8
Statements of Changes in Net Assets .................................... 9
Financial Highlights ................................................... 10
Notes to Financial Statements .......................................... 12
Report of Independent Accountants ...................................... 17
Choice Funds Trustees and Officers ..................................... 18
PERSPECTIVES FROM PATRICK ADAMS...
The Choice Long-Short Fund had very solid performance, up 19.94% (Class A Shares
without Load)1, in the fiscal year ended October 31, 2003. This compares with
the S&P 500 Index(R) being up 20.80% in the same period. We achieved returns
similar to the S&P 500 Index(R)2 even though we were well hedged throughout most
of the year with little market exposure.
The overall market declined steadily from November through mid-March, before
rallying sharply throughout the remainder of the year. The beginning of the war
with Iraq acted as the major catalyst. As has often happened throughout history,
the stock market discounted the war in the months leading up to it, and then
quickly looked past it as soon as it began.
Economic data improved throughout the year, culminating in a remarkable 8.2% GDP
growth in the third quarter, the strongest growth in nearly twenty years.
Corporate earnings were generally stronger than expected throughout the year,
partly due to better economic conditions and partly due to low expectations
coming out of the downturn. Consumer spending was very strong, helped by tax
cuts and mortgage refinancings, which were brought on by historically low
interest rates. However, corporate spending has only more recently begun showing
signs of picking up, so this is something we'll be monitoring over the coming
months.
Generally speaking, it was a good year for our longs, especially in the
technology3 and retail sectors, which did quite well for us. Earlier in the
year, we were able to find and invest in several companies with historically low
valuations and improving fundamentals. After this year's strong market
performance, those opportunities are harder to come by, although we still see
opportunities. Conversely, it was a tough year for shorts, as a rising tide
lifts all boats, and most stocks rose with the market regardless of business
fundamentals. At this time, while business fundamentals are clearly stronger
than they were over the past few years, we believe many stocks are trading at
valuations which are too high.
We continue to manage the Fund with minimal net market exposure at this time, as
we wouldn't expect the market to continue rising in a straight line, without
more volatility. While the economy should remain strong, it will be difficult to
repeat the third quarter's tremendous strength. However, we believe we are well
positioned to participate if the market does continue to rally. Sincerely,
/s/ Patrick Adams
- ------------------
Patrick Adams, CFA
- --------
1 Performance numbers cover a short period of time and are not an indication as
to how the Fund will perform in the future. To 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 security 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 the Fund will achieve its stated
investment objective.
2 The S&P500 Index Stock Index is an unmanaged index generally representative
of the U.S. Stock Market. Performance numbers reflect reinvestment of
dividends and other distributions. You cannot invest directly in an index.
3 The Fund invested a substantial portion of its assets in technology-related
companies, and thus is more susceptible to economic, business or other
developments that generally affect those types of companies.
CHOICE LONG-SHORT FUND
INVESTMENT RETURNS TABLE*
Average Annual
One Year Ended Since Inception
- -------------------------------------------------------------------------------------------------------
Choice Long-Short Class A (inception date 2-1-01) 9/30/03 10/31/03 9/30/03 10/31/03
Fund With Sales Load Effect 21.24% 13.37% (12.49)% (11.95)%
Fund Without Sales Load Effect 28.37% 19.94% (10.61)% (10.12)%
Choice Long-Short Class C (inception date 2-1-01) 24.29% 16.33% (12.74)% (12.28)%
S&P 500(R)Stock Index 24.40% 20.80% (9.76)% (7.65)%
PERFORMANCE IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. For Class A shares, total return figures
include an up-front 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*
{GRAPH OMITTED}
Choice Long - Short Fund
Plot Points - Annual Report 10/31/03
Class A Class A Class C
DATE No Load Load S&P 500
- --------------------------------------------------------------------------------
2/1/2001 10,000 9,452 10,000 10,000
4/30/2001 10,640 10,057 10,550 9,174 -8.26%
7/31/2001 10,580 10,000 10,420 8,922 -2.75%
10/31/2001 9,660 9,130 9,530 7,834 -12.19%
1/31/2002 9,490 8,970 9,340 8,385 7.03%
4/30/2002 8,490 8,025 8,310 8,015 -4.41%
7/31/2002 7,300 6,900 7,120 6,814 -14.99%
10/31/2002 6,200 5,860 5,980 6,651 -2.39%
1/31/2003 6,620 6,257 6,340 6,455 -2.95%
4/30/2003 6,840 6,465 6,500 6,948 7.65%
7/31/2003 7,230 6,834 6,810 7,538 8.49%
10/31/2003 7,440 7,032 6,960 8,034 6.57%
- --------------------------------------------------------------------------------
Since Inception -10.21% -10.21% -12.37% -7.67%
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(R) 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.
2 | Choice Long-Short Fund
CHOICE LONG-SHORT FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------
COMMON STOCKS 54.5%
BANKING 1.1%
1,800 Bank of America Corp. $ 136,314
------------
COMPUTERS-HARDWARE 0.6%
17,500 Sun Microsystems, Inc.* 69,300
------------
COMPUTERS-SOFTWARE 9.8%
14,400 EMC Corp.* 199,296
4,900 First Data Corp. 174,930
38,000 Intelli-Check, Inc.* 278,540
15,300 Microsoft Corp. 400,095
1,500 VERITAS Software Corp.* 54,225
4,300 Verity, Inc.* 60,415
------------
1,167,501
------------
ELECTRONICS-SEMICONDUCTOR MANUFACTURING 3.7%
4,600 Broadcom Corp.* 146,970
4,300 Flextronics International Ltd.* 60,200
2,000 Globespan Virata, Inc.* 12,320
1,600 Maxim Integrated Products, Inc. 79,536
2,000 Novellus Systems, Inc.* 82,580
10,000 SimpleTech, Inc.* 78,500
------------
460,106
------------
INSURANCE 1.8%
3,500 American International Group, Inc. 212,905
------------
MEDIA 2.9%
3,700 Clear Channel Communications, Inc. 151,034
5,000 Viacom, Inc. Class B 199,350
------------
350,384
------------
MEDICAL-BIOTECHNOLOGY 5.7%
2,500 Abbot Laboratories 106,550
17,000 CancerVax Corp.* 218,790
257,778 GlycoGenesys, Inc.* 329,956
25,778 GlycoGenesys, Inc. Warrants* 28,613
------------
683,909
------------
SEE NOTES TO FINANCIAL STATEMENTS. Choice Long-Short Fund | 3
CHOICE LONG-SHORT FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- -------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
PHARMACEUTICALS 6.2%
2,200 Express Scripts, Inc. Class A* $ 120,824
4,700 Johnson & Johnson 236,551
12,000 Pfizer, Inc. 379,200
------------
736,575
------------
RECREATION 2.8%
14,600 The Walt Disney Co. 330,544
------------
REAL ESTATE 0.4%
8,100 MeriStar Hospitality Corp.* 55,323
------------
RETAIL-APPAREL/SHOES 1.5%
6,200 Abercrombie & Fitch Co.* 176,700
------------
RETAIL-COSMETICS & PERSONAL CARE 0.9%
2,000 Colgate-Palmolive Co. 106,380
------------
RETAIL-HOME SPECIALTY 2.1%
6,700 The Home Depot, Inc. 248,369
------------
RETAIL-TOYS 2.6%
16,400 Mattel, Inc. 317,504
------------
TELECOMMUNICATIONS-EQUIPMENT 12.4%
6,400 Cisco Systems, Inc.* 134,272
66,400 Finisar Corp.* 205,840
6,300 ICG Communications, Inc.* 45,990
44,500 JDS Uniphase Corp.* 157,975
3,500 NETGEAR, Inc.* 50,467
36,300 New Focus, Inc.* 188,397
21,300 Nokia Corp. ADR 361,887
37,800 Powerwave Technologies, Inc.* 246,078
5,200 RF Micro Devices, Inc.* 60,892
65,000 Redback Networks, Inc.* 27,300
1,820 MCI Group* 400
------------
1,479,498
------------
SEE NOTES TO FINANCIAL STATEMENTS.
4 | Choice Long-Short Fund
CHOICE LONG-SHORT FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
TOTAL COMMON STOCKS
(cost $5,865,250) $ 6,531,312
------------
PRINCIPAL AMOUNT
- ----------------
SHORT-TERM INVESTMENTS 38.5%
$3,000,000 U.S. Treasury Bill 0.91%, 11/28/2003 $ 2,997,975
1,604,486 UMB Bank Money Market Fiduciary,
Variable Rate Demand Deposit, 0.27% 1,604,486
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $4,602,461) 4,602,461
------------
TOTAL INVESTMENTS 93.0%
(cost $10,467,711) 11,133,773
Other Assets less Liabilities 7.0% 835,166
------------
NET ASSETS 100.0% $ 11,968,939
============
NUMBER OF SHARES
- ----------------
SECURITIES SOLD SHORT
2,800 3M Corp. $ 220,836
4,300 Affymetrix, Inc.* 110,209
4,000 Altera Corp.* 80,920
4,000 American Eagle Outfitters, Inc.* 63,960
2,000 Antigenics, Inc.* 21,880
2,000 Avon Products, Inc. 135,920
2,000 Biotech Holders Trust Depository Receipts 257,500
1,000 Business Objects SA* 32,860
2,000 Cardinal Health, Inc. 118,680
4,300 Carnival Corp. 150,113
1,600 Cheesecake Factory, Inc.* 63,904
1,300 Ericsson LM ADR* 22,204
2,200 Foundry Networks, Inc.* 51,172
80,100 GlycoGenesys, Inc.* 102,528
4,700 Guidant Corp. 239,747
7,200 Intel Corp. 237,960
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Long-Short Fund | 5
CHOICE LONG-SHORT FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------
SECURITIES SOLD SHORT (CONTINUED)
5,700 Lam Research Corp.* $ 163,818
4,700 Magma Design Automation, Inc.* 113,881
2,000 Maxtor Corp.* 27,340
3,000 NASDAQ 100 Trust 105,540
3,100 Network Appliance, Inc.* 76,508
11,600 Paychex, Inc. 451,472
4,000 PMC-Sierra, Inc.* 72,680
12,100 Quest Software, Inc.* 180,290
3,400 Research in Motion Ltd.* 150,008
2,800 Robert Half International, Inc.* 66,108
5,000 S&P 500 Depositary Receipts 526,650
1,400 SanDisk Corp.* 112,840
9,000 Starbucks Corp.* 284,400
1,900 Whole Foods Market, Inc.* 112,556
------------
TOTAL SECURITIES SOLD SHORT
(proceeds $4,110,116) $ 4,354,484
============
* Non-income producing securities.
ADR - American Depositary Receipt
UNREALIZED
NUMBER OF CONTRACTS LOSS
- -------------------------------------------------------------------------------------------------
FUTURES CONTRACT SOLD SHORT
5 S&P 500 Futures Contracts maturing
December 2003 (Underlying Face Amount at
Value $1,047,500) $ (41,025)
============
SEE NOTES TO FINANCIAL STATEMENTS.
6 | Choice Long-Short Fund
CHOICE LONG-SHORT FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2003
- ---------------------------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost $5,865,250) $ 6,531,312
Short-Term investments, at amortized cost 4,602,461
Cash 3,544
Deposit at broker 4,367,791
Dividends and interest receivable 1,718
Receivable for investments sold 1,592,311
Due from advisor 34,769
Due from broker - variation margin 1,625
Prepaid expenses and other assets 19,275
------------
Total assets 17,154,806
------------
LIABILITIES
Securities sold short, at value (Proceeds of $4,110,116) 4,354,484
Payable for investments purchased 751,713
Fund shares repurchased 1,907
Accrued investment advisory fee 21,130
Accrued distribution fee 14,373
Accrued expenses and other liabilities 42,260
Total liabilities 5,185,867
------------
NET ASSETS $ 11,968,939
============
NET ASSETS CONSIST OF
Paid in capital $ 25,210,444
Accumulated net investment loss (2,697)
Accumulated net realized loss on investments, securities sold short
and futures contracts (13,619,477)
Net unrealized appreciation on investments, securities sold short
and futures contracts 380,669
------------
NET ASSETS $ 11,968,939
============
CLASS A SHARES
Net assets $ 11,168,863
Shares outstanding (no par value, unlimited shares authorized) 1,497,427
NET ASSET VALUE PER SHARE (NET ASSETS/SHARES OUTSTANDING) 7.46
============
MAXIMUM OFFERING PRICE PER SHARE (NET ASSET VALUE PLUS 5.82%
OF NET ASSET VALUE OR 5.50% OF OFFERING PRICE) 7.89
============
CLASS C SHARES
Net assets $ 800,076
Shares outstanding (no par value, unlimited shares authorized) 114,576
NET ASSET VALUE AND OFFERING PER SHARE (NET ASSETS/SHARES OUTSTANDING)* 6.98
============
* Shares are subject to contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS. Choice Long-Short Fund | 7
CHOICE LONG-SHORT FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 61,967
Interest 174,285
------------
Total Investment Income 236,252
------------
EXPENSES
Investment advisory fees 338,741
Fund administration and accounting fees 72,533
Rule 12b-1 fees-Class A shares 44,560
Rule 12b-1 fees-Class C shares 8,183
Transfer agent fees and expenses-Class A shares 34,872
Transfer agent fees and expenses-Class C shares 16,786
Professional fees 50,744
State registration fees 27,438
Custody fees 27,092
Insurance expense 12,966
Reports to shareholders 9,159
Trustees' fees and related expenses 7,308
Other 4,689
------------
Total expenses before dividends on short sales 655,071
Dividends on short positions 20,811
Total expenses 675,882
------------
Less expense paid indirectly (88,000)
Net Expenses 587,882
------------
NET INVESTMENT LOSS (351,630)
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on:
Investment securities 4,004,340
Short positions (1,901,510)
Futures contracts (340,065)
Net change in unrealized appreciation/depreciation on investments,
securities sold short and futures contracts 984,236
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,747,001
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 2,395,371
============
SEE NOTES TO FINANCIAL STATEMENTS.
8 | Choice Long-Short Fund
CHOICE LONG-SHORT FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment loss $ (351,630) $ (843,902)
Net realized gain (loss) on:
Investment securities 4,004,340 (3,786,875)
Short positions (1,901,510) (1,051,631)
Options purchased -- 23,098
Futures contracts (340,065) (5,230,245)
Net change in unrealized appreciation/depreciation on
investments securities sold short and futures contracts 984,236 (2,381,497)
------------ -------------
Net increase (decrease) in net assets resulting
from operations 2,395,371 (13,271,052)
------------ -------------
CAPITAL SHARE TRANSACTIONS
Shares sold
Class A shares 10,010,096 27,712,917
Class C shares 570,329 112,233
Shares redeemed
Class A shares (14,993,376) (55,588,669)
Class C shares (424,874) (1,470,944)
------------ -------------
Net decrease in net assets from capital share transactions (4,837,825) (29,234,463)
------------ -------------
TOTAL DECREASE IN NET ASSETS (2,442,454) (42,505,515)
------------ -------------
NET ASSETS
Beginning of Year 14,411,393 56,916,908
------------ -------------
End of Year* $ 11,968,939 $ 14,411,393
============ =============
* Includes accumulated net investment loss of: $ (2,697) $ (2,697)
------------ -------------
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Long-Short Fund | 9
CHOICE LONG-SHORT FUND
FINANCIAL HIGHLIGHTS
PER SHARE OPERATING PERFORMANCE*
Class A Shares
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2003 2002 2001(1)
------------ ----------- ------------
Net Asset Value, Beginning of Period $ 6.22 $ 9.66 $ 10.00
INCOME (LOSS) FROM
INVESTMENT
OPERATIONS
Net investment loss (0.16) (0.35) (0.08)
Net realized and unrealized gain (loss)
on investments 1.40 (3.09) (0.26)
------------ ----------- ------------
Total Income (Loss) from Investment
Operations 1.24 (3.44) (0.34)
------------ ----------- ------------
Net Asset Value, End of Period $ 7.46 $ 6.22 $ 9.66
============ =========== ============
Total Return(2,3) 19.94% (35.82)% (3.40)%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period (000s) $ 11,169 $ 13,845 $ 54,303
Ratio of expenses to average net assets,
net of fees paid indirectly(4) 3.99%(5) 3.16%(5) 3.51%
Ratio of expenses to average net assets,
before fees paid indirectly(4) 4.64%(5) 3.62%(5) 3.51%
Ratio of net investment loss to average
net assets, net of fees paid indirectly(4) (2.39)% (2.21)% (1.14)%
Ratio of net investment loss to average
net assets, before fees paid indirectly(4) (3.04)% (2.67)% (1.14)%
Portfolio turnover rate(2) 1383% 3882% 2469%
<FN>
(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-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 before fees
paid indirectly would be 4.14% and 4.79%, 3.34% and 3.80%, for the Class A
shares for the years ended October 31, 2003 and October 31, 2002,
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 before fees
paid indirectly would be 7.41% and 8.06%, 5.16% and 5.54%, for the Class C
shares for the years ended October 31, 2003 and October 31,2002,
respectively.
* Selected data for a share outstanding throughout the period
</FN>
SEE NOTES TO FINANCIAL STATEMENTS.
10 | Choice Long-Short Fund
CHOICE LONG-SHORT FUND
- --------------------------------------------------------------------------------
Class C Shares
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2003 2002 2001(1)
- ------------ ----------- ------------
$ 6.00 $ 9.53 $ 10.00
(0.38) (0.77) (0.12)
1.36 (2.76) (0.35)
0.98 (3.53) (0.47)
$ 6.98 $ 6.00 $ 9.53
16.33% (37.25)% (4.70)%
$ 800 $ 567 $ 2,614
7.25%(6) 5.02%(6) 4.70%
7.90%(6) 5.40%(6) 4.70%
(5.78)% (4.11)% (2.31)%
(6.43)% (4.49)% (2.31)%
1383% 3882% 2469%
Choice Long-Short Fund | 11
CHOICE LONG-SHORT FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
(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 Long-Short Fund (the
"Fund") is a non-diversified series of the Trust 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
believed to be overvalued. The Fund offers two classes of shares (Class A
and Class C). Each class of shares has a different combination of sales
charges, fees and eligibility requirements. Class A shares are subject to a
maximum sales charge of 5.5% and the Class C shares are subject to a
maximum contingent deferred sales charge of 1.00% on redemption of shares
held less than one year. Each class of shares has equal rights as 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,
expenses (other than class specific expenses), 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 Fund in the preparation of its financial statements. These
policies are in conformity with accounting principles generally accepted in
the United States of America ("GAAP"), 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 sale price on
the national securities exchange on which such securities are primarily
traded. 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 Fund is charged for those expenses that are directly attributable
to the Fund, such as advisory fees, or to each class such as
distribution fees. Expenses that are not directly attributable to a
portfolio are typically allocated among the series in the Trust in
proportion to their relative net assets. Certain Fund expenses may be
reduced by brokerage credits which are shown as Expenses Paid
Indirectly in the Statement of Operations. Brokerage credits are
generated when a Fund directs portfolio trades to certain brokers.
12 | Choice Long-Short Fund
(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 Statement of
Operations. The Fund maintains assets consisting of cash or liquid
securities equal in amount to the liability created by the short sale.
These assets are adjusted daily to reflect changes in the value of the
securities sold short.
(D) FUTURES CONTRACTS
The 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 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 the market
value of the purchase obligation for long futures contracts or the
market value of the instrument underlying the contract for the short
futures contracts. 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 Fund may buy and sell put and call options,
write covered put and call options on portfolio securities and write
over-the-counter options where the completion of the obligation is
dependent upon the credit standing of another party. The risk in
writing a call option is that a Fund gives up the opportunity for
profit if the market price of the security increases. The risk in
writing a put 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 a 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.
Choice Long-Short Fund | 13
(F) FEDERAL INCOME AND EXCISE TAXES
No federal income tax provision has been made since the Fund intends 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 Fund.
(G) DISTRIBUTIONS 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 gains may differ for financial statement
purposes from their 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 Fund
determines 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 Fund has an agreement with the Adviser, with whom certain officers and
trustees of the Fund are affiliated, to furnish investment advisory
services to the Fund. Under the terms of this agreement, the Fund will pay
the Adviser a monthly fee at the annual rate of 2.50% of the Fund's average
daily net assets. For the year ended October 31, 2003, the Adviser received
advisory fees of $338,741.
During the year ended October 31, 2003, the Long-Short Fund paid $109,084
in brokerage commissions to CIM Securities, LLC, an affiliate of the
Adviser, on the purchase and sales of portfolio securities.
(4) DISTRIBUTION PLAN
The Fund had an agreement with UMB Distribution Services, LLC ("UMB") to
furnish distribution services to the Fund until December 31, 2002.
Effective January 1, 2003, the Fund has an agreement with CIM Securities,
LLC ("CIM") to furnish distribution services to the Fund. The Fund has
adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the
1940 Act. The Plan authorizes payments by the Fund in connection with the
distribution of its shares and certain shareholder related services at an
annual rate, as determined from time to time by the Board of Trustees.
Under this Plan, the Fund's Class A and Class C shares pay up to 0.35% and
0.75% of each class's average daily net assets for shareholder service
related charges. During the year ended October 31, 2003, the Fund incurred
Rule 12b-1 fees of $44,560 and $8,183 for Class A and Class C shares,
respectively. As distributor, UMB received commissions of $99 from the sale
of Class A shares during the two months ended December 31, 2002. CIM
received commissions of $105 from the sale of Class A shares for the ten
months ended October 31, 2003. CIM, as distributor, also received
contingent deferred sales charges on redemption of Class C shares of $100
during the ten months ended October 31, 2003. Sales charges are not an
expense of the Fund and are not included in the financial statements of the
Fund.
14 | Choice Long-Short Fund
(5) CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the year ended October 31, 2003 were
as follows:
Class A Class C
Shares sold 1,391,875 85,536
Shares redeemed (2,121,719) (65,424)
---------- ----------
Net Decrease (729,844) 20,112
========== ==========
Transactions in shares of the Fund for the year ended October 31, 2002 were
as follows:
Class A Class C
Shares sold 3,106,519 14,169
Shares redeemed (6,502,360) (194,085)
---------- ----------
Net Increase (3,395,841) (179,916)
========== ==========
(6) INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Fund for the year ended October 31, 2003 were
$137,645,791 and $151,174,217, respectively.
(7) FEDERAL INCOME TAX INFORMATION
At October 31, 2003, the cost of securities, on a tax basis and gross
unrealized appreciation (depre- ciation) on investments for federal income
tax purposes were as follows:
Long-Short
------------
Cost of Investments $ 6,702,151
------------
Gross Unrealized Appreciation $ 788,090
Gross Unrealized (Depreciation) (407,421)
------------
Net Unrealized Depreciation on Investments $ 380,669
============
As of October 31, 2003, the components of accumulated earnings (deficit) on
a tax basis were as follows:
Long-Short
------------
Undistributed ordinary income (loss) $ (2,697)
------------
Net Realized Capital Losses (13,274,921)
Net Unrealized Appreciation 36,113
------------
Total Accumulated Deficit $(13,241,505)
============
The difference between cost amounts for financial statement and federal
income tax purposes is due primarily to timing differences in recognizing
certain gains and losses in security transactions. Federal income tax
capital loss carry forwards for the Long-Short Fund expire as follows:
$10,097,960 in 2010. To the extent future gains are offset by capital loss
carry forwards, such gains will not be distributed.
Choice Long-Short Fund | 15
(8) CONTROL OWNERSHIP
The beneficial ownership, either directly or indirectly, of more than 25%
of the voting securities of a Fund creates a presumption of control of the
Fund, under Section 2(a)9 of the Investment Company Act of 1940. As of
October 31, 2003, FTC & Co. held more than 34% of Class A shares of the
Fund and UBS PaineWebber held for the benefit of others, in aggregate, more
than 32% of Class C shares of the Fund.
(9) CHANGE IN INDEPENDENT ACCOUNTANT
PricewaterhouseCoopers LLP ("PwC") were previously the principal auditors
for the Choice Long-Short Fund (the "Fund"). A decision to change auditors
was approved by the Board of Trustees in their meeting on October 30, 2003
and McCurdy & Associates CPA's, Inc. were appointed principal auditors. PwC
served as principal auditors for the aforementioned Fund for each of the
periods ended October 31, 2001 through 2002. Additionally, the audit
reports of PwC on the financial statements of the aforementioned Fund that
were issued for each of the periods ended October 31, 2001 through 2002
were unqualified. There were no disagreements between PwC and the
management of the Fund on any auditing and accounting matters that, if not
resolved, would have been referred to in their audit reports.
16 | Choice Long-Short Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of The Choice Funds
We have audited the accompanying statement of assets and liabilities of the
Choice Long-Short Fund (the "Fund") (one of the portfolios constituting the
Choice Funds), including the schedule of portfolio investments as of October 31,
2003 and the related statement of operations for the year then ended, changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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, 2003 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 the
Choice Long-Short Fund as of October 31, 2003, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated, in conformity with accounting principles generally accepted in the
United States of America.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
November 4, 2003
Choice Long-Short Fund | 17
CHOICE FUNDS TRUSTEES AND OFFICERS (UNAUDITED)
INTERESTED TRUSTEE Patrick S. Adams*
NAME, ADDRESS, AND AGE 5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 43
POSITION(S) HELD WITH FUND President, CEO, Trustee, Chairman.
TERM OF OFFICE AND
LENGTH Indefinite, until successor elected
OF TIME SERVED Served as President/Trustee since 1999
PRINCIPAL OCCUPATION(S) President and Director, Choice Investment Management, LLC, since
DURING PAST 5 YEARS 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 4
OVERSEEN BY TRUSTEE
OTHER DIRECTORSHIPS HELD BY None
TRUSTEE
- --------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE William H. Young
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 53
POSITION(S) HELD WITH FUND Trustee (Independent)
TERM OF OFFICE AND LENGTH Indefinite, until successor elected
OF TIME SERVED Served as Trustee since 2003
PRINCIPAL OCCUPATION(S) Independent Consultant for Financial Services 1996 to present.
DURING PAST 5 YEARS Consultant-Interim CEO United 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 4
OVERSEEN BY TRUSTEE
OTHER DIRECTORSHIPS HELD None
BY TRUSTEE
18 | Choice Long-Short Fund
CHOICE FUNDS TRUSTEES AND OFFICERS (UNAUDITED) (CONTINUED)
NAME, ADDRESS, AND AGE Dr. Richard A. Hathaway
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 42
POSITION(S) HELD WITH FUND Trustee (Independent)
TERM OF OFFICE AND LENGTH Indefinite, until successor elected
OF TIME SERVED Served as Trustee since 1999
PRINCIPAL OCCUPATION(S) Physician with Colorado Permanente since 1992. Dr. Hathaway is a
DURING PAST 5 YEARS Board certified orthopedic surgeon.
NUMBER OF FUNDS IN COMPLEX 4
OVERSEEN BY TRUSTEE
OTHER DIRECTORSHIPS HELD BY None
TRUSTEE
- --------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE Gregory S. Drose
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 39
POSITION(S) HELD WITH FUND Treasurer
TERM OF OFFICE AND LENGTH Indefinite, until successor elected
OF TIME SERVED Served as Treasurer since 2000
PRINCIPAL OCCUPATION(S) Chief Operating Officer of Choice Investment Management, LLC since
DURING PAST 5 YEARS November 1999. Vice President of Marketing/Due Diligence, D.E.
Frey & Company, Inc. from September 1998 to November 1999. Vice
President/Branch Manager for Owen-Joseph Securities from June
1995 to June 1998. Director of Student Loans and Accounts, The
Colorado College from November 1993 to May 1995.
- --------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE Sharon E. Adams**
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 40
POSITION(S) HELD WITH FUND Secretary
TERM OF OFFICE AND LENGTH Indefinite, until successor elected
OF TIME SERVED Served as Secretary since 1999
PRINCIPAL OCCUPATION(S) Vice President of Choice Investment Management, LLC since August
DURING PAST 5 YEARS 1999. Full-time homemaker from 1993 until August 1999. Account exec-
utive - outside sales for Sprint from 1990
to 1993. Sales manager for Allnet
Communications from 1989 to 1990.
<FN>
* 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, with- out charge, upon request by
calling (800) 392-7107.
</FN>
Choice Long-Short Fund | 19
This page intentionally left blank.
20 | Choice Long-Short Fund
A CHOICE FOR ALL SEASONS
CHOICE
CHOICE FUNDS o c/o Gemini Fund Services, LLC
4020 South 147th Street o Suite 2 Omaha, NE 68137 o 800-392-7107
WWW.CHOICEFUNDS.NET
CIM SECURITIES, LLC, DISTRIBUTOR
MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS.
WILL WE HAVE A
BULL MARKET?
OR, A BEAR MARKET?
DOES IT MATTER?
CHOICE MARKET NEUTRAL FUND
ANNUAL REPORT, OCTOBER 31, 2003
CHOICE MARKET
NEUTRAL FUND
ANNUAL REPORT
OCTOBER 31, 2003
Table of Contents
Perspectives From Patrick Adams ........................................ 1
Choice Market Neutral Fund ............................................. 2
Schedule of Investments ................................................ 3
Statement of Assets and Liabilities .................................... 7
Statement of Operations ................................................ 8
Statement of Changes in Net Assets ..................................... 9
Financial Highlights ................................................... 10
Notes to Financial Statements .......................................... 11
Report of Independent Accountants ...................................... 14
Choice Funds Trustees and Officers ..................................... 15
PERSPECTIVES FROM PATRICK ADAMS...
The Choice Market Neutral Fund was up 3.60% (Class A Shares without load)1 in
the seven months since its inception on March 31, 2003. This compares to the S&P
500 Index(R) being up 23.88% and the Vanguard Total Bond Market Index(R) up
0.77%2 since the same date. The Fund began shortly after the start of the war in
Iraq, which was the turning point for the stock market, which has been strong
since then. The economy has picked up and corporate earnings have been strong.
As a result, our market neutral approach to investing has under performed the
stock market and outperformed the bond market. However, our goal is to achieve
positive returns regardless of market conditions, which we were able to do.
The Fund's only down month was October, when the strong performance of the
market (especially the Nasdaq) provided a boost to our short positions, which in
lower quality shorts. However, a rising tide lifts all boats, regardless of
quality or valuation, and our shorts rose with the market. One month aside, we
are pleased with the performance of the Fund since inception.
We continue to manage the Fund with the goal of positive returns on a consistent
basis while limiting the volatility and correlation to the overall market. The
Fund achieved these goals this year (on an annualized basis, given that the Fund
had only seven months of operation since inception). We expect that the market
will be more volatile in the year ahead. Therefore, we will continue to focus on
the fund's secondary goal of preservation of capital and our risk management
process of seeking neutral exposure at the market, sector and industry levels.
Our strategy remains to combine our core fundamental research with our
quantitative analysis to determine which pair trades present an attractive
opportunity. Pair trades consist of buying one stock and selling short a similar
company in a similar industry. 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. A few
examples of some successful pairs during the year are Home Depot (long) and
Lowe's (short), Broadcom (long) and Marvell Technology (short), Royal Caribbean
Cruises (long) and Carnival (short), and Pfizer (long) and Wyeth (short).3
Sincerely,
/s/ Patrick Adams, CFA
- ----------------------
Patrick Adams, CFA
- ---------------
1 Performance numbers cover a short period of time and are not an indication as
to how the fund will perform in the future. To 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 security 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 the Fund will achieve its stated
investment objective.
2 The S&P 500 Index Stock Index is an unmanaged index generally representative
of the U.S. Stock Market. Vanguard Total Bond Market Index is in Index Fund
that seeks to track the performance of the Lehman Brothers Aggregate Bond
Index. Performance numbers reflect reinvestment of dividends and other
distributions. You cannot invest directly in an index.
3 The Funds holdings change frequently and the companies listed above may not
currently be part of the portfolio.
Choice Market Neutral Fund | 1
CHOICE MARKET NEUTRAL FUND
INVESTMENT RETURNS TABLE
Since Inception
through 10-31-03
- --------------------------------------------------------------------------------
Choice Market Neutral Class A (inception date 3-31-03)
FUND WITH SALES LOAD EFFECT (2.08)%
FUND WITHOUT SALES LOAD EFFECT 3.60%
- --------------------------------------------------------------------------------
Choice Market Neutral Class C (inception date 3-31-03)
FUND WITH SALES LOAD EFFECT 2.10%
FUND WITHOUT SALES LOAD EFFECT 3.10%
- --------------------------------------------------------------------------------
S&P 500(R)Stock Index 23.88%
PERFORMANCE IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. For Class A shares, total return figures
include an up-front 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
non-diversified; therefore, it is is more exposed to individual stock volatility
and market pressure than funds investing in a larger number of securities.
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 the 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).
2 | Choice Market Neutral Fund
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
COMMON STOCKS 48.0%
BANKING 2.4%
1,700 Bank of America Corp. $ 128,741
3,500 Washington Mutual, Inc. 153,125
-------------
281,866
-------------
BEVERAGES 0.9%
2,000 Anheuser-Busch Cos., Inc. 98,520
-------------
COMPUTERS-HARDWARE 0.6%
17,000 Sun Microsystems, Inc.* 67,320
-------------
COMPUTERS-SOFTWARE 7.0%
4,500 First Data Corp. 160,650
12,000 Microsoft Corp. 313,800
6,800 PeopleSoft, Inc.* 141,168
4,000 Synopsys, Inc.* 126,880
1,800 VERITAS Software Corp.* 65,070
-------------
807,568
-------------
ELECTRONICS-SEMICONDUCTOR 7.6%
MANUFACTURING
10,500 Applied Materials, Inc.* 245,385
5,000 Celestica, Inc.* 71,000
5,500 Maxim Integrated Products, Inc. 273,405
2,200 Novellus Systems, Inc.* 90,838
27,000 Vitesse Semiconductor Corp.* 190,080
-------------
870,708
-------------
INSURANCE 2.2%
4,300 American International Group, Inc. 261,569
-------------
MEDIA 1.3%
4,200 Fox Entertainment Group, Inc.* 116,340
900 Viacom, Inc. Class B 35,883
-------------
152,223
-------------
MEDICAL-BIOTECHNOLOGY 5.7%
5,200 Abbot Laboratories 221,624
16,000 CancerVax Corp.* 205,920
161,111 GlycoGenesys, Inc.* 206,222
16,111 GlycoGenesys, Inc. Warrants* 17,883
-------------
651,649
-------------
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Market Neutral Fund | 3
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
PHARMACEUTICALS 1.9%
1,700 Johnson & Johnson $ 85,561
4,100 Pfizer, Inc. 129,560
-------------
215,121
-------------
RECREATION 1.8%
1,400 Hollywood Entertainment Corp.* 21,280
8,400 The Walt Disney Co. 190,176
-------------
211,456
-------------
REAL ESTATE 0.6%
9,300 MeriStar Hospitality Corp.* 63,519
-------------
RETAIL-COSMETICS & PERSONAL CARE 0.9%
1,900 Colgate-Palmolive Co. 101,061
-------------
RETAIL-DEPARTMENT STORES 1.9%
1,700 Kohl's Corp.* 95,319
5,200 Pier 1 Imports, Inc. 120,120
-------------
215,439
-------------
RETAIL-DRUG STORES 0.6%
5,100 Duane Reade, Inc.* 70,125
-------------
RETAIL-HOME SPECIALTY 0.9%
2,800 The Home Depot, Inc. 103,796
-------------
RETAIL-SPECIALTY 1.0%
1,200 AutoZone, Inc.* 115,320
-------------
RETAIL-TOYS 2.9%
17,200 Mattel, Inc. 332,992
-------------
SUPERMARKETS 1.0%
6,800 Kroger Co.* 118,932
-------------
SEE NOTES TO FINANCIAL STATEMENTS.
4 | Choice Market Neutral Fund
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
TELECOMMUNICATIONS-EQUIPMENT 6.8%
7,500 Cisco Systems, Inc.* $ 157,350
41,500 JDS Uniphase Corp.* 147,325
8,500 New Focus, Inc.* 44,115
9,500 Nokia Corp. ADR 161,405
18,500 Powerwave Technologies, Inc.* 120,435
13,000 RF Micro Devices, Inc.* 152,230
-------------
782,860
-------------
TOTAL COMMON STOCKS
(cost $5,164,931) 5,522,044
-------------
PRINCIPAL AMOUNT
SHORT-TERM INVESTMENTS 50.2%
$2,000,000 U.S. Treasury Bill 0.81%,11/6/2003 1,999,777
2,000,000 U.S. Treasury Bill 0.81%,12/4/2003 1,998,515
1,773,177 UMB Bank Money Market Fiduciary,
Variable Rate Demand Deposit, 0.27% 1,773,177
-------------
TOTAL SHORT-TERM INVESTMENTS
(cost $5,771,469) 5,771,469
-------------
TOTAL INVESTMENTS
(cost $10,936,400) 98.2% 11,293,513
Other Assets less Liabilities 1.8% 205,829
-------------
NET ASSETS 100.0% $ 11,499,342
=============
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Market Neutral Fund | 5
CHOICE MARKET NEUTRAL FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2003
NUMBER OF SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
SECURITIES SOLD SHORT
1,000 3M Corp. $ 78,870
1,500 Advanced Auto Parts* 117,330
6,000 AFLAC, Inc. 218,880
8,700 Altera Corp.* 176,001
9,500 Andrew Corp.* 124,260
1,800 Antigenics, Inc.* 19,692
1,900 Avon Products, Inc. 129,124
2,300 Beckman Coulter, Inc. 114,195
1,800 Biotech Holders Trust Depository Receipts 231,750
1,000 Business Objects SA* 32,860
4,800 Cadence Design Systems, Inc.* 73,872
2,000 Cheesecake Factory, Inc.* 79,880
1,700 CVS Corp. 59,806
55,300 GlycoGenesys, Inc.* 70,784
1,700 Guidant Corp. 86,717
5,000 iShares S&P 500 Index Fund 526,500
3,500 Jabil Circuit, Inc.* 97,475
6,000 KLA-Tencor Corp.* 343,980
8,500 Leapfrog Enterprises, Inc.* 293,845
5,000 Magma Design Automation, Inc.* 121,150
2,000 Maxtor Corp.* 27,340
1,900 Movie Gallery, Inc.* 39,292
11,000 Nasdaq 100 Trust* 386,980
10,000 NetIQ Corp.* 121,400
2,000 PepsiCo, Inc. 95,640
2,000 Research in Motion, Ltd.* 88,240
1,700 Ross Stores, Inc. 85,017
5,000 Safeway, Inc.* 105,500
3,400 SAP AG ADR 124,236
5,500 Texas Instruments, Inc. 159,060
3,200 The News Corp. Ltd. 114,080
3,400 Total System Services, Inc. 93,772
14,000 TriQuint Semiconductor, Inc.* 100,380
3,100 Wells Fargo & Co. 174,592
3,500 Williams-Sonoma, Inc.* 123,655
-------------
TOTAL SECURITIES SOLD SHORT
(proceeds $4,802,369) $ 4,836,155
=============
* Non-income producing securities.
ADR - American Depositary Receipt
SEE NOTES TO FINANCIAL STATEMENTS.
6 | Choice Market Neutral Fund
CHOICE MARKET NEUTRAL FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2003
- -----------------------------------------------------------------------------------------------
ASSETS
Investments in securities, at value
(cost $5,164,931) $ 5,522,044
Short-Term investments, at amortized cost 5,771,469
Receivable for Fund shares sold 29,000
Deposit at broker 5,090,121
Dividends and interest receivable 1,193
Receivable for investments sold 5,759,235
Prepaid expenses and other assets 12,322
------------
Total Assets 22,185,384
------------
LIABILITIES
Securities sold short, at value (Proceeds of $4,802,369) 4,836,155
Payable for investments purchased 5,736,088
Accrued investment advisory fee 17,792
Accrued distribution fee 10,130
Due to custodian 52,205
Accrued expenses and other liabilities 33,672
------------
Total Liabilities 10,686,042
------------
NET ASSETS $ 11,499,342
============
NET ASSETS CONSIST OF
Paid in capital $ 11,300,764
Accumulated net realized loss on investments,
and securities sold short (124,749)
Net unrealized appreciation on investments,
and securities sold short 323,327
------------
NET ASSETS $ 11,499,342
============
CLASS A SHARES
Net assets $ 9,147,362
Shares outstanding (no par value, unlimited shares authorized) 882,639
NET ASSET VALUE PER SHARE (NET ASSETS/SHARES OUTSTANDING) 10.36
============
MAXIMUM OFFERING PRICE PER SHARE (NET ASSET VALUE PLUS 5.82%
OF NET ASSET VALUE OR 5.50% OF OFFERING PRICE) 10.96
============
CLASS C SHARES
Net assets $ 2,351,980
Shares outstanding (no par value, unlimited shares authorized) 228,048
NET ASSET VALUE AND OFFERING PER SHARE
(NET ASSETS/SHARES OUTSTANDING)* 10.31
============
* Shares are subject to contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Market Neutral Fund | 7
CHOICE MARKET NEUTRAL FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 2003(1)
- ---------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 10,086
Interest 22,258
---------
Total Investment Income 32,344
---------
EXPENSES
Investment advisory fees 70,757
Fund administration and accounting fees 38,819
Federal and state registration fees - Class A 16,464
Federal and state registration fees - Class C 10,010
Rule 12b-1 fees - Class A 11,833
Rule 12b-1 fees - Class C 9,075
Professional fees 20,617
Transfer agent fees and expenses - Class A 12,955
Transfer agent fees and expenses - Class C 7,108
Custody fees 7,017
Reports to shareholders 3,211
Trustees' fees and related expenses 1,386
Other 1,375
---------
Total expenses before dividends on short sales 210,627
Dividends on short positions 7,590
Total expenses 218,217
Less advisory fees waived (54,842)
---------
Net Expenses 163,375
---------
NET INVESTMENT LOSS (131,031)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment securities 431,271
Short positions (501,778)
Futures contracts (54,242)
Net change in unrealized appreciation/depreciation on investments
and securities sold short 323,327
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 198,578
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 67,547
=========
(1) Commenced operations on March 31, 2003.
SEE NOTES TO FINANCIAL STATEMENTS.
8 | Choice Market Neutral Fund
CHOICE MARKET NEUTRAL FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD
ENDED
OCTOBER 31, 2003(1)
- ---------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment loss $ (131,031)
Net realized gain (loss) on:
Investment securities 431,271
Short positions (501,778)
Futures contracts (54,242)
Net change in unrealized appreciation/depreciation on investments
and securities sold short 323,327
------------
Net increase in net assets resulting from operations 67,547
------------
CAPITAL SHARE TRANSACTIONS
Shares sold
Class A shares 10,809,599
Class C shares 2,352,086
Shares redeemed
Class A shares (1,724,757)
Class C shares (5,133)
------------
Net increase in net assets from capital share transactions 11,431,795
TOTAL INCREASE IN NET ASSETS 11,499,342
------------
NET ASSETS
Beginning of Year --
------------
End of Year $ 11,499,342
============
(1)Commenced operations on March 31, 2003.
SEE NOTES TO FINANCIAL STATEMENTS.
Choice Market Neutral Fund | 9
CHOICE MARKET NEUTRAL FUND
FINANCIAL HIGHLIGHTS
CLASS A SHARES CLASS C SHARES
FOR THE FOR THE
PERIOD ENDED PERIOD ENDED
OCT. 31, 2003(1) OCT. 31, 2003(1)
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE*
Net Asset Value, Beginning of Period $ 10.00 $ 10.00
------------ ------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment loss (0.17) (0.24)
Net realized and unrealized gain
on investments 0.53 0.55
------------ ------------
Total Income from Investment Operations 0.36 0.31
------------ ------------
Net asset value, end of period $ 10.36 $ 10.31
============ ============
Total return(2,3) 3.60% 3.10%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period (000s) $ 9,147 $ 2,352
Ratio of expenses to average net
assets, after waiver(4) 3.40%(5) 4.50%(6)
Ratio of expenses to average net
assets, before waiver(4) 4.70%(5) 5.82%(6)
Ratio of net investment loss to average
net assets, after waiver(4) (2.84)% (3.94)%
Ratio of net investment loss to average
net assets, before waiver(4) (4.12)% (5.24)%
PORTFOLIO TURNOVER RATE(2) 1175% 1175%
<FN>
(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-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 would be 3.59%
and 4.88% for the Class A shares for the year ended October 31, 2003.
(6) Excludes dividends on short sales. Including dividends on short sales, the
ratio of expenses to average net assets net of fees waived would be 4.70%
and 6.00% for the Class C shares for the year ended October 31, 2003.
</FN>
* Selected data for a share outstanding throughout the period
SEE NOTES TO FINANCIAL STATEMENTS.
10 | Choice Market Neutral Fund
Choice Market Neutral Fund
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2003
(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 Market Neutral Fund
(the "Fund") is a non-diversified series of the Trust 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 Fund will generally maintain a balance of long and short
positions. The Fund offers two classes of shares (Class A and Class C).
Each class of shares has a different combination of sales charges, fees and
eligibility requirements. Class A shares are subject to a maximum sales
charge of 5.5% and the Class C shares are subject to a maximum contingent
deferred sales charge of 1.00% on redemption of shares held less than one
year. Each class of shares has equal rights as 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 Fund in the preparation of its financial statements. These
policies are in conformity with accounting principles generally accepted in
the United States of America ("GAAP"), 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 sale price on
the national securities exchange on which such securities are primarily
traded. 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 Fund is charged for those expenses that are directly attributable
to the portfolio, such as advisory fees. Expenses directly attributable
to a class of shares, such as distribution fees, are charged to that
class. Expenses that are not directly attributable to a portfolio are
typically allocated among each portfolio in the Trust in proportion to
their relative net assets. Certain Fund expenses may be reduced by
brokerage credits which are shown as Expenses Paid Indirectly in the
Statement 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 Statement of
Operations. The Fund maintains assets consisting of cash or liquid
securities equal in amount to the liability created by the short sale.
These assets are adjusted daily to reflect changes in the value of the
securities sold short.
Choice Market Neutral Fund | 11
(D) FUTURES CONTRACTS
The 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 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 the market
value of the purchase obligation for long futures contracts or the
market value of the instrument underlying the contract for the short
futures contracts. 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 counter-party under the terms of the contract.
(E) OPTION TRANSACTIONS
For hedging purposes, the Fund may buy and sell put and call options,
write covered put and call options on portfolio securities and write
over-the-counter options where the completion of the obligation is
dependent upon the credit standing of another party. The risk in
writing a call option is that a Fund gives up the opportunity for
profit if the market price of the security increases. The risk in
writing a put 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 a 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 Fund intends 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 Fund.
(G) DISTRIBUTIONS 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 gains may differ for financial statement
purposes from their 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 Fund
determines 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.
12 | Choice Market Neutral Fund
(3) INVESTMENT ADVISER FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund has an agreement (the "Agreement") with the Adviser, with whom
certain officers and trustees of the Fund are affiliated, to furnish
investment advisory services to the Fund. Under the terms of this
Agreement, the Fund will pay the Adviser a monthly fee at the annual rate
of 1.65% of the Fund's average daily net assets. For the period ended
October 31, 2003, the Adviser received advisory fees of $70,757. The
Agreement provides for an expense reimbursement from the Adviser if the
Fund's total expenses, exclusive of taxes, interest on borrowings,
dividends on securities sold short, brokerage commissions, and
extraordinary expenses, exceed 3.40% for Class A and 4.50% for Class C of
average net assets of each respective class through February 24, 2004.
After such date, the expense limitation may be terminated at any time. At
October 31, 2003, amounts subject to possible recoupment are $54,842,
recoverable through October 31, 2006. CIM Securities, LLC ("CIM"), an
affiliate of the Adviser, is the distributor of the Fund's shares. The Fund
has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. The Plan authorizes payments by the Fund 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 Fund's Class A and Class C shares pay up
to 0.35% and 0.75% of each class's average daily net assets, respectively,
for distribution service, and the Class C shares pay up to 0.25% of average
daily net assets for shareholder related charges. For the period ended
October 31, 2003, the Fund incurred Rule 12b-1 fees of $11,833 and $9,075
for Class A and Class C shares, respectively. As distributor, CIM received
commissions of $2,267 from the sale of Class A shares for the period ended
October 31, 2003. During the period ended October 31, 2003, the Fund paid
$131,226 in brokerage commissions to CIM on the purchase and sale of
portfolio securities.
(4) CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the period ended October 31, 2003
were as follows:
Class A Class C
Shares sold 1,047,546 228,540
Shares redeemed (164,907) (492)
--------- ---------
Net Increase 882,639 228,048
========= =========
(5) INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Fund for the period ended October 31, 2003 were
$35,185,113 and $30,882,792, respectively.
(6) FEDERAL INCOME TAX INFORMATION
At October 31, 2003, the cost of securities, on a tax basis and gross
unrealized appreciation (depreciation) on investments for federal income
tax purposes were as follows:
Market Neutral
Cost of Investments $ 6,183,701
Gross Unrealized Appreciation 435,696
Gross Unrealized (Depreciation) (62,699)
Net Unrealized Appreciation (Depreciation)
on Investments $ 372,997
===========
As of October 31, the components of accumulated earnings (deficit) on a tax
basis were as follows:
Market Neutral
Net Realized Capital Loss $ (75,079)
Net Unrealized Appreciation 273,657
Total Accumulated Gain $ 198,578
============
The difference between cost amounts for financial statement and federal
income tax purpose is due primarily to timing differences in recognizing
certain gains and losses in security transactions. Federal income tax
capital loss carryforwards for the Market Neutral Fund expire as follows:
$75,079 in 2011. To the extent gains are offset by capital loss
carryforwards, such future gains will not be distributed.
Choice Market Neutral Fund | 13
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Trustees The Choice Funds
We have audited the accompanying statement of assets and liabilities of the
Choice Market Neutral Fund (the "Fund") (one of the portfolios constituting the
Choice Funds), including the schedule of portfolio investments as of October 31,
2003 and the related statement of operations, changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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, 2003 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 the
Choice Market Neutral Fund as of October 31, 2003, the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
November 4, 2003
14 | Choice Market Neutral Fund
CHOICE FUNDS TRUSTEES AND OFFICERS (UNAUDITED)
INTERESTED TRUSTEE Patrick S. Adams*
NAME, ADDRESS, AND AGE 5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 43
POSITION(S) HELD WITH FUND President, CEO, Trustee, Chairman.
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as President/Trustee since 1999
PRINCIPAL OCCUPATION(S) President and Director, Choice Investment Management, LLC, since August, 1999.
DURING PAST 5 YEARS 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 4
OVERSEEN BY TRUSTEE
OTHER DIRECTORSHIPS HELD None
BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE William H. Young
NAME, ADDRESS, AND AGE 5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 53
POSITION(S) HELD WITH FUND Trustee (Independent)
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as President/Trustee since 2003
PRINCIPAL OCCUPATION(S) Independent Consultant for Financial Services 1996 to present. Consultant-Interim
DURING PAST 5 YEARS CEO United Fund Services a Mutual Fund Service Provider, March
2003 to pres- ent. Advisory Board Academy of Financial
Services/PrecisionMarketing, 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 4
OVERSEEN BY TRUSTEE
OTHER DIRECTORSHIPS HELD None
BY TRUSTEE
Choice Market Neutral Fund | 15
CHOICE FUNDS TRUSTEES AND OFFICERS (UNAUDITED)
NAME, ADDRESS, AND AGE Dr. Richard A. Hathaway
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 42
POSITION(S) HELD WITH FUND Trustee (Independent)
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as Trustee since 1999
PRINCIPAL OCCUPATION(S) Physician with Colorado Permanente since 1992. Dr. Hathaway is a Board certified
DURING PAST 5 YEARS orthopedic surgeon.
NUMBER OF FUNDS IN COMPLEX 4
OVERSEEN BY TRUSTEE
OTHER DIRECTORSHIPS HELD None
BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE Gregory S. Drose
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 39
POSITION(S) HELD WITH FUND Treasurer
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as Treasurer since 2000
PRINCIPAL OCCUPATION(S) Chief Operating Officer of Choice Investment Management, LLC since November
DURING PAST 5 YEARS 1999. Vice President of Marketing/Due Diligence, D.E. Frey & Company, Inc. from
September 1998 to November 1999. Vice
President/Branch Manager for Owen- Joseph
Securities from June 1995 to June 1998.
Director of Student Loans and Accounts, The
Colorado College from November 1993 to May
1995.
- ------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE Sharon E. Adams**
5299 DTC Boulevard, Greenwood Village, Colorado 80111
Age: 40
POSITION(S) HELD WITH FUND Secretary
TERM OF OFFICE AND LENGTH OF Indefinite, until successor elected
TIME SERVED Served as Secretary since 1999
PRINCIPAL OCCUPATION(S) Vice President of Choice Investment Management, LLC since August 1999. Full-
DURING PAST 5 YEARS 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.
16 | Choice Market Neutral Fund
A CHOICE FOR ALL SEASONS
CHOICE
CHOICE FUNDS o c/o Gemini Fund Services, LLC
4020 South 147th Street o Suite 2 Omaha, NE 68137 o
800-392-7107 WWW.CHOICEFUNDS.NET
CIM SECURITIES, LLC, DISTRIBUTOR
MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS.
Item 2. Code of Ethics.
(a) As of the date of this report, Choice Investment Management, LLC, the
registrant's adviser, 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. The code of ethics will be presented for approval by the Board of
Trustees of Choice Funds at an in person meeting of the Board on January 16,
2004. A copy of the code of ethics is filed as an exhibit to this Form N-CSR.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Trustees has not selected an audit committee financial
expert as defined in Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Companies. Not applicable.
Not applicable.
Item 6. Reserved.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Reserved.
Item 9. 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 by the filing date, 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 10. Exhibits.
(a)(1) Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached
hereto as EX-99.CODEETH (a)(2) Certifications required by Item 10(a)(2) of Form
N-CSR are filed and attached hereto as Exhibit 99.CERT. (b) Certification
required by Item 10(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 January 2, 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 January 2, 2004
----------------------------------------------------------------------------
By: /S/ GREGORY S. DROSE
----------------------
Gregory S. Drose
Chief Financial Officer
Date January 2, 2004
----------------------------------------------------------------------------