SEMI-ANNUAL REPORT
February 28, 1998
LOGO:
Potomac Funds
100 South Royal Street
Alexandria, Virginia 22314
550 Mamaroneck Avenue
Harrison, New York 10528
(800) 851-0511
<PAGE>
SEMI-ANNUAL REPORT
FEBRUARY 28, 1998
DEAR SHAREHOLDERS:
We are pleased to present the first Potomac Funds semi-annual report for the
period ended February 28, 1998. This initial period of assets under management
has been a particularly exciting, challenging, and gratifying experience for all
of us at the Potomac Funds.
The individual portfolio commencement dates and respective returns from
inception through February 28th are as follows: the U.S. Plus Fund began trading
on October 20, 1997 and increased 14.10%; the OTC Plus Fund also initially
received investment assets on October 20th and increased 12%. The U.S./Short
began on November 7, 1997 and decreased 14.20%; the OTC/Short Fund started on
October 16, 1997 and decreased 16.60% for the period. Due to the different
commencement dates, the individual portfolio results do not correlate perfectly
to one another when comparing the beta differences. However, each of the
portfolios did perform in a true manner to their respective investment
objectives. The U.S. Government Money Market Fund began on October 20, 1997 and
its investments are primarily in money market instruments that are issued or
guaranteed as to principal and interest by the U.S. Government, its agencies, or
instrumentalities, as well as in repurchase agreements collateralized fully by
U.S. Government securities.
One area of disappointment has been the lack of interest in the Japan
Portfolios. We have not been successful in raising an adequate level of assets
for the Japan/Long and Japan/Short Funds and have decided to close them to any
investors until further notice.
As you may know, the Bloomberg Financial Markets News Service provides a
daily mutual fund performance ranking service. For the period January 1, 1998
through March 31, 1998, Bloomberg ranked the OTC Plus Fund 1st of 938 equity
growth funds and the U.S. Plus Fund 17th of 938 equity growth funds. Please note
that Rafferty Asset Management (the Adviser) receives fees from the Potomac
Funds for investment services rendered on a daily basis. As noted in Footnote 7
of this Report, the Adviser agreed to waive advisory fees for the period ended
February 28, 1998. The waiver of these fees resulted in Fund returns being
higher than they otherwise would have been and, therefore, the Bloomberg
rankings of the OTC Plus and U.S. Plus Portfolios are higher than would have
been the case if the advisory fees were not waived by the Adviser. Of course, we
must advise you that this past performance is no guarantee that such results
will be realized in the future.
At this time, we would also like to thank you for your continuing
confidence in our investment abilities and we remain dedicated to professionally
serving your investment needs.
Sincerely,
/s/James Terry Apple /s/Philip Harding /s/Thomas Mulrooney
James Terry Apple Philip Harding Thomas Mulrooney
Chief Investment Officer Senior Vice President Chief Operating Officer
<PAGE>
<TABLE>
<CAPTION>
U.S. PLUS FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998 (UNAUDITED)
- -------------------------------------------------------
FACE AMOUNT VALUE
- -------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS - 98.24%*
$15,091,898 U.S. Treasury Bill
5.65%, 5/28/98 $15,099,602
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $15,096,299) 15,099,602
-----------
<CAPTION>
- -------------------------------------------------------
CONTRACTS
- -------------------------------------------------------
CALL OPTIONS PURCHASED - 2.04%*
<S> <C> <C>
43 S&P 500 Index Future
Expiring March 1998 at 1030
(Cost $218,544) 312,825
-----------
TOTAL INVESTMENTS - 100.28%*
(Cost of $15,314,843) $15,412,427
===========
WRITTEN OPTION CONTRACTS
43 S&P 500 Index Future - Put
Expiring March 1998 at 1030 $ 93,525
-----------
TOTAL OPTIONS WRITTEN
(Premiums received $200,224)$ 93,525
===========
* Calculated as a percentage of net assets.
<CAPTION>
- -------------------------------------------------------
UNREALIZED
CONTRACTS GAIN
- -------------------------------------------------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED
45 S&P 500 Index Future Contracts
Expiring March 1998 (Underlying
Face Amount at Market Value
$11,818,127) $ 655,601
===========
<CAPTION>
U.S./SHORT FUND
SCHEDULE OF SHORT FUTURE CONTRACTS
FEBRUARY 28, 1998 (UNAUDITED)
- -------------------------------------------------------
UNREALIZED
CONTRACTS LOSS
- -------------------------------------------------------
SHORT FUTURES CONTRACTS
<S> <C> <C>
1 S&P 500 Index Futures
Contracts Expiring March
1998 (Underlying
Face Amount at
Market Value $52,525) ($1,030)
===========
See notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
OTC PLUS FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998 (UNAUDITED)
- -------------------------------------------------------
SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 93.72%*
29,863 Microsoft Corporation ** $ 2,529,998
20,247 Intel Corporation 1,815,902
12,489 Cisco Systems, Inc. ** 822,713
3,980 Dell Computer Corporation ** 556,703
11,157 WorldCom, Inc. ** 426,058
6,827 MCI Communications
Corporation 326,416
12,060 Oracle Corporation ** 296,977
4,564 Sun Microsystems, Inc. ** 217,360
3,254 Amgen Inc. ** 172,868
5,797 Tele-Communications, Inc. ** 168,476
4,504 Applied Materials, Inc. ** 165,804
3,435 Telefonaktiebolaget LM
Ericsson ADR (1) 155,648
4,292 3Com Corporation ** 153,439
2,617 HBO & Company 141,645
2,235 Tellabs, Inc. ** 134,938
3,802 Comcast Corporation -
Special Class A 133,070
2,647 Costco Companies, Inc. 129,372
2,772 PeopleSoft, Inc. ** 123,874
1,664 Parametric Technology
Company ** 100,776
1,281 BMC Software, Inc. ** 97,997
1,834 PanAmSat Corporation ** 97,432
2,161 Compuware Corporation ** 91,033
2,350 Ascend Communications, Inc. ** 87,979
2,969 Nextel Communications Inc. -
Class A ** 87,771
951 Linear Technology Corporation 72,038
1,351 Paychex, Inc. 69,746
1,167 Northwest Airlines Corp. -
Class A ** 68,707
1,483 Chancellor Media
Corporation ** 66,365
1,620 Maxim Integrated
Products, Inc. ** 65,408
3,060 Staples, Inc. ** 64,642
957 PACCAR Inc. 60,590
866 Network Associates, Inc. ** 55,965
961 Nordstrom, Inc. 55,107
1,219 Cintas Corporation 51,808
1,252 Sigma-Aldrich Corporation 49,454
1,043 KLA -Tencor Corporation ** 48,140
1,102 Altera Corporation ** 47,523
1,186 Gartner Group, Inc. - Class A ** 47,291
4,284 Novell, Inc. ** 45,049
921 Quintiles Transnational Corp. ** 45,014
840 QUALCOMM Incorporated ** 42,840
1,617 ADC Telecommunications, Inc. ** 41,739
<PAGE>
<CAPTION>
- -------------------------------------------------------
SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
2,175 Chiron Corporation ** $ 41,734
1,657 Quantum Corporation ** 41,632
1,388 Biomet, Inc. 41,380
923 Biogen, Inc. ** 40,727
923 Xilinx, Inc. ** 40,497
1,012 General Nutrition
Companies, Inc. ** 40,228
659 Reuters Group PLC -
Spons ADR (1) 39,470
892 Adobe Systems Incorporated 39,416
975 Starbucks Corporation 38,573
1,575 Apple Computer, Inc. 37,209
1,404 Adaptec, Inc. ** 37,118
658 Fiserv, Inc. ** 36,026
830 Bed Bath & Beyond, Inc. ** 35,845
571 Herman Miller, Inc. 34,974
1,193 American Power Conversion
Corporation ** 34,597
564 Jacor Communications, Inc. ** 32,642
735 Electronic Arts, Inc. ** 32,432
853 Rexall Sundown, Inc. ** 31,561
865 Centocor, Inc. ** 31,194
757 Cracker Barrel Old Country
Store, Inc. 30,611
1,102 Andrew Corporation ** 30,443
1,489 DSC Communications
Corporation ** 29,222
961 Molex Incorporated 29,071
620 Cambridge Technology
Partners, Inc. ** 28,210
952 Genzyme Corporation ** 28,144
603 Tech Data Corporation ** 28,040
577 Stewart Enterprises, Inc. -
Class A 27,191
941 McCormick & Company,
Incorporated 26,995
562 Autodesk, Inc. 26,626
612 Apollo Group, Inc. ** 25,933
1,393 U.S. Office Products Company ** 25,771
1,019 Viking Office Products, Inc. ** 22,418
1,153 Netscape Communications
Corporation ** 22,341
1,249 Atmel Corporation ** 20,296
1,170 Worthington Industries, Inc. 20,036
384 First Health Group Corp. ** 19,128
991 Oxford Health Plans, Inc. ** 17,033
540 Dura Pharmaceuticals, Inc. ** 13,568
-----------
TOTAL COMMON STOCKS
(Cost $9,716,758) 11,210,007
-----------
See notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
OTC PLUS FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998 (UNAUDITED)
<CAPTION>
- -------------------------------------------------------
CONTRACTS VALUE
- -------------------------------------------------------
CALL OPTIONS PURCHASED - 4.35%*
<S> <C> <C>
31 Nasdaq Index
Expiring March 1998 at 1030
(Cost $413,074) $ 520,800
-----------
TOTAL INVESTMENTS - 98.07%
(Cost of $10,129,832) $11,730,807
===========
* Calculated as a percentage of net assets.
** Non-income producing security.
(1)Foreign security.
<CAPTION>
OTC/SHORT FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998 (UNAUDITED)
- -------------------------------------------------------
FACE AMOUNT VALUE
- -------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS - 6.29%*
$200,000 U.S. Treasury Bill
5.65%, 5/28/98 $ 200,102
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $200,059) 200,102
-----------
<CAPTION>
- -------------------------------------------------------
SHARES
- -------------------------------------------------------
COMMON STOCKS - 0.00%*
0.53 Reuters Group Plc ADR (1) 32
-----------
TOTAL COMMON STOCKS
(Cost $32) 32
-----------
<CAPTION>
- -------------------------------------------------------
CONTRACTS
- -------------------------------------------------------
<S> <C> <C>
PUT OPTIONS PURCHASED - 0.02%*
1 Nasdaq Index Expiring
March 1998 at 1130
(Cost $767) 700
-----------
TOTAL INVESTMENTS - 6.31%*
(Cost of $200,858) $ 200,834
===========
* Calculated as a percentage of net assets.
(1) Foreign security.
See notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
OTC SHORT FUND
SCHEDULE OF SECURITIES SOLD SHORT
FEBRUARY 28, 1998 (UNAUDITED)
- -------------------------------------------------------
SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
8,444 Microsoft Corporation $715,610
5,729 Intel Corporation 513,806
3,529 Cisco Systems, Inc. 232,467
1,124 Dell Computer Corporation 157,215
3,158 WorldCom, Inc. 120,593
1,928 MCI Communications
Corporation 92,180
3,408 Oracle Corporation 83,920
1,290 Sun Microsystems, Inc. 61,435
918 Amgen Inc. 48,768
1,642 Tele-Communications, Inc. 47,719
1,273 Applied Materials, Inc. 46,861
970 Telefonaktiebolaget LM
Ericsson ADR 43,952
1,215 3Com Corporation 43,435
738 HBO & Company 39,943
631 Tellabs, Inc. 38,096
1,074 Comcast Corporation -
Special Class A 37,589
748 Costco Companies, Inc. 36,558
782 PeopleSoft, Inc. 34,945
470 Parametric Technology
Company 28,464
522 PanAmSat Corporation 27,731
362 BMC Software, Inc. 27,692
611 Compuware Corporation 25,738
841 Nextel Communications Inc. -
Class A 24,861
664 Ascend Communications, Inc. 24,858
269 Linear Technology Corporation 20,376
381 Paychex, Inc. 19,669
330 Northwest Airlines Corp. -
Class A 19,428
419 Chancellor Media Corporation 18,750
457 Maxim Integrated Products, Inc. 18,451
863 Staples, Inc. 18,230
270 PACCAR Inc. 17,094
245 Network Associates, Inc. 15,832
272 Nordstrom, Inc. 15,597
341 Cintas Corporation 14,492
354 Sigma-Aldrich Corporation 13,983
296 KLA -Tencor Corporation 13,662
310 Altera Corporation 13,368
335 Gartner Group, Inc. - Class A 13,358
1,214 Novell, Inc. 12,766
261 Quintiles Transnational Corp. 12,756
237 QUALCOMM Incorporated 12,087
615 Chiron Corporation 11,800
<PAGE>
<CAPTION>
- -------------------------------------------------------
SHARES VALUE
- -------------------------------------------------------
469 Quantum Corporation $ 11,783
455 ADC Telecommunications, Inc. 11,744
393 Biomet, Inc. 11,716
260 Biogen, Inc. 11,472
261 Xilinx, Inc. 11,451
286 General Nutrition Companies, Inc. 11,368
186 Reuters Group PLC - Spons ADR 11,136
252 Adobe Systems Incorporated 11,135
273 Starbucks Corporation 10,800
398 Adaptec, Inc. 10,522
445 Apple Computer, Inc. 10,513
235 Bed Bath & Beyond, Inc. 10,149
185 Fiserv, Inc. 10,128
161 Herman Miller, Inc. 9,861
337 American Power
Conversion Corporation 9,773
209 Electronic Arts, Inc. 9,222
159 Jacor Communications, Inc. 9,202
241 Rexall Sundown, Inc. 8,917
244 Centocor, Inc. 8,799
313 Andrew Corporation 8,646
213 Cracker Barrel Old
Country Store, Inc. 8,613
422 DSC Communications
Corporation 8,282
272 Molex Incorporated 8,228
175 Cambridge Technology
Partners, Inc. 7,962
269 Genzyme Corporation 7,952
170 Tech Data Corporation 7,905
163 Stewart Enterprises, Inc.
- Class A 7,681
266 McCormick & Company,
Incorporated 7,630
160 Autodesk, Inc. 7,580
173 Apollo Group, Inc. 7,331
394 U.S. Office Products Company 7,289
288 Viking Office Products, Inc. 6,335
325 Netscape Communications
Corporation 6,297
352 Atmel Corporation 5,720
331 Worthington Industries, Inc. 5,668
109 First Health Group Corp. 5,429
279 Oxford Health Plans, Inc. 4,795
153 Dura Pharmaceuticals, Inc. 3,844
-----------
TOTAL SECURITIES
SOLD SHORT
(Proceeds $3,170,328) $ 3,169,013
===========
See notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
U.S GOVERNMENT MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998 (UNAUDITED)
<CAPTION>
- -------------------------------------------------------
FACE AMOUNT VALUE
- -------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS - 19.89%*
$1,258,000 U.S. Treasury Bill
5.65%, 5/28/98 $ 1,258,504
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $1,258,504) 1,258,504
-----------
TOTAL INVESTMENTS - 19.89%*
(Cost $1,258,504) $ 1,258,504
===========
* Calculated as a percentage of net assets.
<CAPTION>
JAPAN/LONG FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998 (UNAUDITED)
- -------------------------------------------------------
FACE AMOUNT VALUE
- -------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS - 82.83%*
$140,000 U.S. Treasury Bill
5.65%, 5/28/98 $ 140,072
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $140,041) 140,072
-----------
<CAPTION>
- -------------------------------------------------------
CONTRACTS
- -------------------------------------------------------
CALL OPTIONS PURCHASED - 3.71%*
<S> <C> <C>
2 Nikkei 225 Stock Index Future
Expiring March 1998 at
16500 yen
(Cost $3,547) 4,987
1 Nikkei 225 Stock Index Future
Expiring March 1998 at
17000 yen
(Cost $376) 1,286
-----------
TOTAL CALL OPTIONS
(Cost $3,923) 6,273
-----------
TOTAL INVESTMENTS - 86.54%*
(Cost of $143,964) $ 146,345
===========
* Calculated as a percentage of net assets.
<CAPTION>
- -------------------------------------------------------
UNREALIZED
CONTRACTS GAIN
- -------------------------------------------------------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED
1 Nikkei 225 Stock Index Futures
Contracts Expiring March 1998
(Underlying Face Amount at
Market Value $66,834) $ 2,072
===========
</TABLE>
<PAGE>
<TABLE>
JAPAN/SHORT FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998 (UNAUDITED)
<CAPTION>
- -------------------------------------------------------
FACE AMOUNT VALUE
- -------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS - 51.02%*
$10,000 U.S. Treasury Bill
5.65%, 5/28/98 $ 10,004
-----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $10,003) 10,004
-----------
<CAPTION>
- -------------------------------------------------------
CONTRACTS
- -------------------------------------------------------
PUT OPTIONS PURCHASED - 1.01%*
<S> <C> <C>
1 Nikkei 225 Stock Index Future
Expiring March 1998 at
16000 yen
(Cost $676) 198
-----------
TOTAL INVESTMENTS - 52.03%*
(Cost $10,679) $ 10,202
===========
* Calculated as a percentage of net assets.
See notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
FEBRUARY 28, 1998
<CAPTION>
POTOMAC FUNDS U.S. PLUS U.S./SHORT
FUND FUND
<S> <C> <C>
ASSETS:
Investments, at market value .............................................. $15,412,427 $ --
Cash ...................................................................... 28,586 --
Receivable for investments sold ........................................... -- --
Receivable for Fund shares sold ........................................... -- --
Receivable from Investment Adviser ........................................ -- --
Receivable from broker .................................................... -- 183,096
Deposit at broker ......................................................... 226,125 2,485
Dividends receivable ...................................................... -- --
Organization costs, net of accumulated amortization ....................... 14,333 14,485
Other assets .............................................................. 15,708 10,163
----------- -----------
Total assets ......................................................... 15,697,179 210,229
----------- -----------
LIABILITIES:
Securities sold short, at value (Proceeds of $3,170,328
for the OTC/Short Fund) ................................................. -- --
Payable to custodian ...................................................... -- 124,007
Written options, at value (Premiums received of $200,224 for the
U.S. Plus Fund) ......................................................... 93,525 --
Payable for investments purchased ......................................... -- --
Payable for Fund shares redeemed .......................................... 122,871 --
Payable to Investment Adviser ............................................. 39,170 17,499
Payable for written options closed ........................................ -- --
Payable to broker ......................................................... 18,000 --
Dividends payable ......................................................... -- --
Accrued expenses and other liabilities .................................... 54,751 17,848
----------- -----------
Total liabilities .................................................... 328,317 159,354
----------- -----------
NET ASSETS ................................................................ $15,368,862 $ 50,875
=========== ===========
NET ASSETS CONSIST OF:
Capital stock ............................................................. $14,070,219 $ 273,042
Accumulated undistributed net investment income (loss) .................... 134,748 20,867
Accumulated undistributed net realized gain (loss) on investments
sold, securities sold short, option contracts expired or closed,
future contracts and foreign currency transactions ..................... 304,011 (242,004)
Net unrealized appreciation (depreciation) on:
Investments ............................................................ 97,584 --
Short positions ........................................................ -- --
Written options ........................................................ 106,699 --
Futures ................................................................ 655,601 (1,030)
Foreign currency ....................................................... -- --
----------- -----------
Total Net Assets ..................................................... $15,368,862 $ 50,875
=========== ===========
Shares outstanding
(unlimited shares of beneficial interest authorized, no par value) ........ 1,349,098 5,929
Net Asset Value, Redemption Price and Offering Price Per Share ............ $ 11.39 $ 8.58
=========== ===========
Cost of Investments ....................................................... $15,314,843 $ --
=========== ===========
See notes to the financial statements.
<PAGE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
FEBRUARY 28, 1998
OTC PLUS OTC/SHORT U.S. GOVERNMENT JAPAN/LONG JAPAN/SHORT
FUND FUND MONEY MARKET FUND FUND
FUND
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments, at market value ........................ $ 11,730,807 $ 200,834 $ 1,258,504 $ 146,345 $ 10,202
Cash ................................................ -- 162,620 189 22,211 8,910
Receivable for investments sold ..................... 7,527,099 2,514,530 -- -- --
Receivable for Fund shares sold ..................... 2,681 2,494,945 5,851,907 -- --
Receivable from Investment Adviser .................. 22,924 7,877 -- -- --
Receivable from broker .............................. -- -- -- 2,078 --
Deposit at broker ................................... 537,929 1,004,377 -- -- --
Dividends receivable ................................ 1,213 -- -- -- --
Organization costs, net of accumulated amortization . 14,333 14,299 14,333 14,409 14,942
Other assets ........................................ 16,817 11,128 9,617 8,831 8,869
------------ ------------ ------------ ------------ ------------
Total assets ................................... 19,853,803 6,410,610 7,134,550 193,874 42,923
------------ ------------ ------------ ------------ ------------
LIABILITIES:
Securities sold short, at value (Proceeds
of $3,170,328 for the
OTC/Short Fund) ................................... -- 3,169,013 -- -- --
Payable to custodian ................................ 236,738 -- -- -- --
Written options, at value (Premiums
received of $200,224 for the
U.S. Plus Fund) ................................... -- -- -- -- --
Payable for investments purchased ................... -- -- -- 2,187 --
Payable for Fund shares redeemed .................... 7,567,667 -- 777,481 -- --
Payable to Investment Adviser ....................... -- -- 1,554 8,562 12,497
Payable for written options closed .................. 6,260 -- -- -- --
Payable to broker ................................... -- -- -- -- --
Dividends payable ................................... -- -- 318 -- --
Accrued expenses and other liabilities .............. 81,628 57,374 26,589 14,009 10,817
------------ ------------ ------------ ------------ ------------
Total liabilities .............................. 7,892,293 3,226,387 805,942 24,758 23,314
------------ ------------ ------------ ------------ ------------
NET ASSETS .......................................... $ 11,961,510 $ 3,184,223 $ 6,328,608 $ 169,116 $ 19,609
============ ============ ============ ============ ============
NET ASSETS CONSIST OF:
Capital stock ....................................... $ 9,072,812 $ 5,828,323 $ 6,328,608 $ 163,717 $ 29,641
Accumulated undistributed net investment
income (loss)..................................... (25,187) 15,415 -- 570 425
Accumulated undistributed net realized
gain (loss) on investments sold,
securities sold short, option
contracts expired or closed,
future contracts and foreign
currency transactions ............................ 1,312,910 (2,660,806) -- 376 (9,980)
Net unrealized appreciation (depreciation) on:
Investments ...................................... 1,600,975 (24) -- 2,381 (477)
Short positions .................................. -- 1,315 -- -- --
Written options .................................. -- -- -- -- --
Futures .......................................... -- -- -- 2,072 --
Foreign currency ................................. -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Net Assets ............................... $ 11,961,510 $ 3,184,223 $ 6,328,608 $ 169,116 $ 19,609
============ ============ ============ ============ ============
Shares outstanding
(unlimited shares of beneficial interest
authorized, no par value)......................... 1,068,328 381,775 6,328,608 19,973 2,154
Net Asset Value, Redemption Price and
Offering Price Per Share ......................... $ 11.20 $ 8.34 $ 1.00 $ 8.47 $ 9.10
============ ============ ============ ============ ============
Cost of Investments ................................. $ 10,129,832 $ 200,858 $ 1,258,504 $ 143,964 $ 10,679
============ ============ ============ ============ ============
See notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS (UNAUDITED)
FEBRUARY 28, 1998
POTOMAC FUNDS
<CAPTION>
U.S. PLUS U.S./SHORT
FUND FUND
October 20, 1997(1) November 7, 1997(1)
to February 28, 1998 to February 28, 1998
<S> <C> <C>
INVESTMENT INCOME:
Dividend income ................................................... $ -- $ --
Interest income ................................................... 234,644 32,460
----------- -----------
Total investment income ...................................... 234,644 32,460
----------- -----------
EXPENSES:
Investment advisory fees .......................................... 32,386 6,468
Administration fees ............................................... 23,196 3,447
Shareholder servicing and accounting costs ........................ 23,729 9,646
Custody fees ...................................................... 4,442 2,157
Federal and state registration .................................... 7,913 7,913
Professional fees ................................................. 16,032 4,959
Amortization of organizational expenses ........................... 1,117 965
Reports to shareholders ........................................... 1,647 324
Directors' fees and expenses ...................................... 1,200 236
Other ............................................................. 5,585 1,052
----------- -----------
Total expenses before waiver and reimbursement of expenses and
dividends on short positions ............................... 117,247 37,167
Less: Waiver of expenses and reimbursement from Adviser ...... (52,474) (25,574)
----------- -----------
Net expenses before dividends on short positions .................. 64,773 11,593
Dividends on short positions ...................................... -- --
----------- -----------
Total expenses ............................................... 64,773 11,593
----------- -----------
NET INVESTMENT INCOME (LOSS) ...................................... 169,871 20,867
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on:
Investments .................................................... (122,654) (67,174)
Short transactions ............................................. -- --
Option contracts expired or closed ............................. 511,696 (56,987)
Futures contracts .............................................. (85,031) (117,843)
Foreign currency ............................................... -- --
----------- -----------
304,011 (242,004)
----------- -----------
Change in unrealized appreciation (depreciation) on:
Investments .................................................... 97,584 --
Short positions ................................................ -- --
Written options ................................................ 106,699 --
Futures ........................................................ 655,601 (1,030)
Foreign currency ............................................... -- --
----------- -----------
859,884 (1,030)
----------- -----------
Net realized and unrealized gain (loss) on investments ....... 1,163,895 (243,034)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ... $ 1,333,766 $ (222,167)
=========== ===========
<PAGE>
<CAPTION>
U.S. GOVERNMENT
OTC PLUS OTC/SHORT MONEY MARKET
FUND FUND FUND
October 20, 1997(1) October 16, 1997(1) October 20, 1997(1)
to February 28, 1998 to February 28, 1998 to February 28, 1998
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income.......................... $ 2,264 $ -- $ --
Interest income.......................... 5,496 42,383 28,344
--------- ----------- --------
Total investment income............. 7,760 42,383 28,344
--------- ----------- --------
EXPENSES:
Investment advisory fees................. 16,473 13,471 2,542
Administration fees...................... 11,835 16,928 3,403
Shareholder servicing and
accounting costs....................... 17,750 21,676 18,958
Custody fees............................. 49,215 15,144 2,091
Federal and state registration........... 7,913 7,913 7,913
Professional fees........................ 9,261 6,887 3,620
Amortization of organizational
expenses............................... 1,117 1,151 1,117
Reports to shareholders.................. 838 554 193
Directors' fees and expenses............. 610 404 141
Other.................................... 2,954 2,050 629
--------- ----------- --------
Total expenses before waiver and
reimbursement of expenses and
dividends on short positions...... 117,966 86,178 40,607
Less: Waiver of expenses and
reimbursement from Adviser......... (85,019) (62,210) (35,522)
--------- ----------- --------
Net expenses before dividends on
short positions........................ 32,947 23,968 5,085
Dividends on short positions............. -- 3,000 --
--------- ----------- --------
Total expenses...................... 32,947 26,968 5,085
--------- ----------- --------
NET INVESTMENT INCOME (LOSS)............. (25,187) 15,415 23,259
--------- ----------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on:
Investments........................... 1,151,796 (1,471) --
Short transactions.................... -- (2,658,262) --
Option contracts expired or closed.... 161,114 (1,073) --
Futures contracts..................... -- -- --
Foreign currency...................... -- -- --
--------- ----------- --------
1,312,910 (2,660,806) --
--------- ----------- --------
Change in unrealized appreciation
(depreciation) on:
Investments........................... 1,600,975 (24) --
Short positions....................... -- 1,315 --
Written options....................... -- -- --
Futures............................... -- -- --
Foreign currency...................... -- -- --
--------- ----------- --------
1,600,975 1,291 --
--------- ----------- --------
Net realized and unrealized
gain (loss) on investments........ 2,913,885 (2,659,515) --
--------- ----------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.............. $2,888,698 $(2,644,100) $ 23,259
========== =========== ========
<PAGE>
<CAPTION>
JAPAN/LONG JAPAN/SHORT
FUND FUND
October 29, 1997(1) December 11, 1997(1)
to February 28, 1998 to February 28, 1998
<S> <C> <C>
INVESTMENT INCOME:
Dividend income.......................... $ -- $ --
Interest income.......................... 793 821
-------- --------
Total investment income............. 793 821
-------- --------
EXPENSES:
Investment advisory fees................. 111 216
Administration fees...................... 123 136
Shareholder servicing and
accounting costs....................... 8,499 6,398
Custody fees............................. 2,882 1,773
Federal and state registration........... 7,913 7,913
Professional fees........................ 2,551 2,625
Amortization of organizational
expenses............................... 1,041 508
Reports to shareholders.................. 6 15
Directors' fees and expenses............. 4 11
Other.................................... 20 49
-------- --------
Total expenses before waiver and
reimbursement of expenses and
dividends on short positions...... 23,150 19,644
Less: Waiver of expenses and
reimbursement from Adviser......... (22,927) (19,248)
-------- --------
Net expenses before dividends on
short positions........................ 223 396
Dividends on short positions............. -- --
-------- --------
Total expenses...................... 223 396
-------- --------
NET INVESTMENT INCOME (LOSS)............. 570 425
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on:
Investments........................... (5,922) (3,153)
Short transactions.................... -- --
Option contracts expired or closed.... 1,401 5,650
Futures contracts..................... 4,946 (12,630)
Foreign currency...................... (49) 153
-------- --------
376 (9,980)
-------- --------
Change in unrealized appreciation
(depreciation) on:
Investments........................... 2,381 (477)
Short positions....................... -- --
Written options....................... -- --
Futures............................... 2,072 --
Foreign currency...................... -- --
-------- --------
4,453 (477)
-------- --------
Net realized and unrealized
gain (loss) on investments........ 4,829 (10,457)
-------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.............. $ 5,399 $(10,032)
======== ========
1 Commencement of Operations.
See notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
<CAPTION>
POTOMAC FUNDS U.S. PLUS U.S./SHORT
FUND FUND
October 20, 1997(1) November 7, 1997(1)
to February 28, 1998 to February 28, 1998
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ....................................... $ 169,871 $ 20,867
Net realized gain (loss) on investments sold, securities sold short,
option contracts expired or closed, future contracts and foreign
currency transactions ............................................ 304,011 (242,004)
Change in unrealized appreciation (depreciation) on investments,
short positions, options, future contracts and foreign currency .. 859,884 (1,030)
------------ ------------
Net increase (decrease) in net assets from operations ......... 1,333,766 (222,167)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income .............................................. (35,123) --
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold .......................................... 52,998,671 30,267,110
Proceeds from shares issued to holders in reinvestment of dividends 34,225 --
Capital contributions .............................................. -- 1,155
Cost of shares redeemed ............................................ (38,962,677) (29,995,223)
------------ ------------
Net increase in net assets from capital share transactions .... 14,070,219 273,042
------------ ------------
TOTAL INCREASE IN NET ASSETS ....................................... 15,368,862 50,875
------------ ------------
NET ASSETS:
Beginning of period ................................................ 0 0
------------ ------------
End of period (including undistributed net investment income (loss)
of $134,748, $20,867, ($25,187), $15,415, $0, $570 and $425,
respectively) .................................................... $ 15,368,862 $ 50,875
============ ============
<PAGE>
<CAPTION>
U.S. GOVERNMENT
OTC PLUS OTC/SHORT MONEY MARKET
FUND FUND FUND
October 20, 1997(1) October 16, 1997(1) October 20, 1997(1)
to February 28, 1998 to February 28, 1998 to February 28, 1998
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss)........................... $ (25,187) $ 15,415 $ 23,259
Net realized gain (loss) on investments
sold, securities sold short, option
contracts expired or closed, future
contracts and foreign currency
transactions......................................... 1,312,910 (2,660,806) --
Change in unrealized appreciation
(depreciation) on investments, short
positions, options, future contracts
and foreign currency................................. 1,600,975 1,291 --
----------- ------------ -----------
Net increase (decrease) in
net assets from operations...................... 2,888,698 (2,644,100) 23,259
----------- ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. -- -- (23,259)
----------- ------------ -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold.............................. 82,384,872 107,685,165 44,854,128
Proceeds from shares issued to
holders in reinvestment of dividends................. -- -- 12,507
Capital contributions.................................. 4,500 7,000 --
Cost of shares redeemed................................ (73,316,560) (101,863,842 (38,538,027)
----------- ------------ -----------
Net increase in net assets from
capital share transactions...................... 9,072,812 5,828,323 6,328,608
----------- ------------ -----------
TOTAL INCREASE IN NET ASSETS .......................... 11,961,510 3,184,223 6,328,608
----------- ------------ -----------
NET ASSETS:
Beginning of period.................................... 0 0 0
----------- ------------ -----------
End of period (including undistributed
net investment income (loss) of $134,748,
$20,867, ($25,187), $15,415, $0, $570
and $425, respectively).............................. $11,961,510 $ 3,184,223 $ 6,328,608
=========== ============ ===========
<PAGE>
<CAPTION>
JAPAN/LONG JAPAN/SHORT
FUND FUND
October 29, 1997(1) December 11, 1997(1)
to February 28, 1998 to February 28, 1998
<S> <C> <C>
OPERATIONS:
Net investment income (loss)........................... $ 570 $ 425
Net realized gain (loss) on investments
sold, securities sold short, option
contracts expired or closed, future
contracts and foreign currency
transactions......................................... 376 (9,980)
Change in unrealized appreciation
(depreciation) on investments, short
positions, options, future contracts
and foreign currency................................. 4,453 (477)
-------- ----------
Net increase (decrease) in
net assets from operations...................... 5,399 (10,032)
-------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. -- --
-------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold.............................. 530,127 1,185,152
Proceeds from shares issued to
holders in reinvestment of dividends................. -- --
Capital contributions.................................. -- --
Cost of shares redeemed................................ (366,410) (1,155,511)
-------- ----------
Net increase in net assets from
capital share transactions...................... 163,717 29,641
-------- ----------
TOTAL INCREASE IN NET ASSETS .......................... 169,116 19,609
-------- ----------
NET ASSETS:
Beginning of period.................................... 0 0
-------- ----------
End of period (including undistributed
net investment income (loss) of $134,748,
$20,867, ($25,187), $15,415, $0, $570
and $425, respectively).............................. $169,116 $ 19,609
======== ==========
1 Commencement of Operations.
See notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (UNAUDITED)
For a fund share outstanding throughout the period
POTOMAC FUNDS U.S. PLUS U.S./SHORT
FUND FUND
October 20, 1997(1) November 7, 1997(1)
to February 28, 1998 to February 28, 1998
<S> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD................................................. $ 10.00 $ 10.00
----------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)........................................... 0.14(4) 0.09(4)
Net realized and unrealized gain (loss) on investments................. 1.27 (1.51)
----------- -------
Total from investment operations.................................. 1.41 (1.42)
----------- -------
LESS DIVIDENDS FROM NET INVESTMENT INCOME.............................. (0.02) --
----------- -------
NET ASSET VALUE, END OF PERIOD......................................... $ 11.39 $ 8.58
=========== =======
TOTAL RETURN(2)........................................................ 14.10% (14.20%)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period.............................................. $15,368,862 $50,875
Ratio of net expenses to average net assets:
Before expense reimbursement(3)..................................... 2.72% 5.17%
After expense reimbursement(3)...................................... 1.50% 1.61%
Ratio of net investment income to average net assets:
Before expense reimbursement(3)..................................... 2.72% (0.65%)
After expense reimbursement(3)...................................... 3.94% 2.91%
Portfolio turnover rate(5)............................................. 0.00% 0.00%
<PAGE>
<CAPTION>
U.S. GOVERNMENT
OTC PLUS OTC/SHORT MONEY MARKET
FUND FUND FUND
October 20, 1997(1) October 16, 1997(1) October 20, 1997(1)
to February 28, 1998 to February 28, 1998 to February 28, 1998
<S> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD........................................... $ 10.00 $ 10.00 $ 1.00
----------- --------- ---------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)..................................... (0.04)(4) 0.04(4) 0.02(4)
Net realized and unrealized gain (loss) on investments........... 1.24 (1.70) --
--------- --------- ---------
Total from investment operations............................ 1.20 (1.66) 0.02
--------- --------- ---------
LESS DIVIDENDS FROM NET INVESTMENT INCOME........................ -- -- (0.02)
--------- --------- ---------
NET ASSET VALUE, END OF PERIOD................................... $ 11.20 $ 8.34 $ 1.00
========= ========= =========
TOTAL RETURN(2).................................................. 12.00% (16.60%) 1.63%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period........................................ $11,961,510 $3,184,223 $6,328,608
Ratio of net expenses to average net assets:
Before expense reimbursement(3)............................... 5.37% 5.76% 8.00%
After expense reimbursement(3)................................ 1.50% 1.60% 1.00%
Ratio of net investment income to average net assets:
Before expense reimbursement(3)............................... (5.02%) (3.13%) (2.42%)
After expense reimbursement(3)................................ (1.15%) 1.03% 4.58%
Portfolio turnover rate(5)....................................... 599.92% 1883.85% N/A
<PAGE>
<CAPTION>
JAPAN/LONG JAPAN/SHORT
FUND FUND
October 29, 1997(1) December 11, 1997(1)
to February 28, 1998 to February 28, 1998
<S> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD...................................... $ 10.00 $ 10.00
-------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)................................ 0.12(4) 0.04(4)
Net realized and unrealized gain (loss) on investments...... (1.65) (0.94)
-------- -------
Total from investment operations....................... (1.53) (0.90)
-------- -------
LESS DIVIDENDS FROM NET INVESTMENT INCOME................... -- --
-------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 8.47 $ 9.10
======== =======
TOTAL RETURN(2)............................................. (15.30%) (9.00%)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period................................... $169,116 $19,609
Ratio of net expenses to average net assets:
Before expense reimbursement(3).......................... 155.97% 81.82%
After expense reimbursement(3)........................... 1.50% 1.65%
Ratio of net investment income to average net assets:
Before expense reimbursement(3).......................... (150.63%) (78.40%)
After expense reimbursement(3)........................... 3.84% 1.77%
Portfolio turnover rate(5).................................. 0.00% 0.00%
1 Commencement of Operations.
2 Not annualized.
3 Annualized.
4 Net investment income (loss) per share represents net investment income (loss)
for the respective period divided by the daily average shares of beneficial
interest outstanding throughout each period.
5 Portfolio turnover ratio is calculated without regard to short-term securities
having a maturity of less than one year. All of the Funds, with the exception
of the OTC Plus Fund and the OTC/Short Fund, typically hold most of their
investments in options, futures contracts and repurchase agreements which are
deemed short-term securities.
See notes to the financial statements.
</TABLE>
<PAGE>
POTOMAC FUNDS
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 28, 1998 (UNAUDITED)
1. ORGANIZATION
Potomac Funds (the "Trust") was organized as a Massachusetts Business Trust on
June 6, 1997 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 objective and policies. The series presently authorized are the U.S.
Plus Fund, U.S./Short Fund, OTC Plus Fund, OTC/Short Fund, U.S. Government Money
Market Fund, Japan/Long Fund and the Japan/Short Fund ( each a "Fund" and
collectively, the "Funds"). Each Fund (other than the U.S. Government Money
Market Fund) is a "non-diversified" series of the Trust pursuant to the 1940
Act. The U.S. Plus Fund, OTC Plus Fund and U.S. Government Money Market Fund
commenced operations on October 20, 1997; the U.S./Short Fund commenced
operations on November 7, 1997; the OTC/Short Fund commenced operations on
October 16, 1997; the Japan/Long Fund commenced operations on October 29, 1997;
and the Japan/Short Fund commenced operations on December 11, 1997.
The objective of the U.S. Plus Fund is to provide investment returns that
correspond to 150% of the performance of the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500 Index"). The objective of the U.S./Short Fund is
to provide investment returns that inversely correlate to the performance of the
S&P 500 Index. The objective of the OTC Plus Fund is to provide investment
returns that correspond to 125% of the performance of the Nasdaq 100 Index
("Nasdaq Index"). The OTC/Short Fund is to provide investment returns that
inversely correlate to the performance of the Nasdaq Index. The objective of the
U.S. Government Money Market Fund is to provide security of principal, current
income and liquidity by investing primarily in money market instruments issued
or guaranteed, as to principal and interest, by the U.S. government, it agencies
or instrumentalities. The objective of the Japan/Long Fund is to provide
investment returns that correspond to the Nikkei 225 Stock Average ("Nikkei
Index"). The objective of the Japan/Short Fund is to provide investment returns
that inversely correlate to the performance of the Nikkei Index.
Costs incurred by the Trust in connection with the organization, registration
and the initial public offering of shares, aggregating $15,450 for each Fund,
are being deferred and amortized over the period of benefit, but not to exceed
sixty months from the Fund's commencement of operations. These costs were
advanced by the Adviser and will be reimbursed by the Trust. The proceeds of any
redemption of the initial shares by the original shareholder will be reduced by
a pro-rata portion of any then unamortized organizational expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of redemption.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
A) INVESTMENT VALUATION - Securities that are listed on a securities
exchange, domestic or foreign, are valued at the last quoted sales price on the
day the valuation is made. Price information on listed stocks is taken from the
exchange where the security is primarily traded. If no sale is reported at that
time, the mean of the last bid and asked price is used. When market quotations
for options and futures positions held by a Fund are readily available, those
positions will be valued based upon such quotations. Other assets and securities
for which no quotations are readily available or for which the Adviser has
reason to question the validity of quotations received are valued at fair value
as determined in good faith by the Board of Trustees. Quotations of foreign
securities or other assets denominated in foreign currencies are translated to
U.S. Dollar equivalents using the net foreign exchange rate in effect at the
close of the stock exchange in the country where the security is issued.
Instruments with a remaining maturity of 60 days or less are valued at an
amortized cost, which approximates market value.
<PAGE>
B) REPURCHASE AGREEMENTS - Each Fund may enter into repurchase agreements
with banks that are members of the Federal Reserve System or securities dealers
who are members of a national securities exchange or are primary dealers in U.S.
Government Securities. In connection with transactions in repurchase agreements,
it is the Trust's policy that the Fund receive, as collateral, securities whose
market value, including accrued interest, at all times will be at least equal to
100% of the amount invested by the Fund in each repurchase agreement. If the
seller defaults, and the value of the collateral declines, realization of the
collateral by the Fund may be delayed or limited.
C) FORWARD CURRENCY EXCHANGE CONTRACTS - The Japan/Long Fund and the
Japan/Short Fund may enter into forward currency contracts for the purpose of
hedging foreign currency risk. Under these contracts, they are obligated to
exchange currencies at specified future dates. Risks arise from the possible
inability of counter-parties to meet the terms of their contracts and from
movements in foreign currencies.
D) WRITTEN OPTION ACCOUNTING - Each Fund, other than the U.S. Government
Money Market Fund, may write (sell) options. When a Fund writes an option, an
amount equal to the premium received is entered in the Fund's accounting records
as an asset and equivalent liability. The amount of the liability is
subsequently marked-to-market to reflect the current value of the option
written. When an option expires, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold).
E) STOCK INDEX FUTURE CONTRACTS AND OPTIONS ON FUTURE CONTRACTS - Each Fund,
other than the U.S. Government Money Market Fund, may purchase and sell stock
index futures contracts and options on such future contracts. Futures contracts
are contracts for delayed delivery of securities at a specified future delivery
date and at a specific price. 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 broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or 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.
F) RISKS OF OPTIONS, FUTURE CONTRACTS AND OPTIONS ON FUTURES CONTRACTS - The
risks inherent in the use of options, future contracts and options on future
contracts include 1) adverse changes in the value of such instruments; 2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the price of the underlying securities, index
or future contract; 3) the possible absence of a liquid secondary market for any
particular instrument at any time; and 4) the possible need to defer closing out
certain positions to avoid adverse tax consequences.
G) FEDERAL INCOME TAXES - Each Fund intends to comply with the requirements
of the Internal Revenue Code of 1986, as amended, necessary to qualify as a
regulated investment company and to make the requisite distributions of income
and capital gains to their shareholders sufficient to relieve it from all or
substantially all Federal income taxes.
H) INCOME AND EXPENSES - The Funds are charged for those expenses that are
directly attributable to each portfolio, such as advisory, custody and certain
shareholder service fees. Expenses that are not directly attributable to a
portfolio are typically allocated among the Trust's portfolios in proportion to
their respective net assets, number of shareholder accounts, or net sales, where
applicable.
I) DISTRIBUTIONS TO SHAREHOLDERS - Each Fund, other than the U.S. Government
Money Market Fund, intends to distribute to its shareholders at least annually
any net investment income, net realized capital gains, and net realized capital
gains from foreign currency transactions. The U.S. Government Money Market Fund
ordinarily will declare dividends from net investment income on a daily basis
and distribute those dividends monthly. Each Fund, other than the Japan/Long
Fund, Japan/Short Fund and U.S. Government Money Market Fund, utilizes earnings
and profits distributed to shareholders on redemptions of shares as a part of
the dividends paid deduction for income tax purposes.
<PAGE>
J) USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
K) OTHER - Investment and shareholder transactions are recorded on trade
date. The Funds determine the gain or loss realized from the investment
transactions by comparing the original cost of the security lot sold with the
net sales proceeds. Dividend income is recognized on the ex-dividend date or as
soon as information is available to the Funds, and interest income is recognized
on an accrual basis. Generally accepted accounting principles require that
permanent financial reporting and tax differences be reclassified to capital
stock.
3. SHORT POSITIONS
The Japan/Short Fund, U.S./Short Fund and OTC/Short Fund may engage in short
sale transactions. For financial statement purposes, an amount equal to the
settlement amount is included in the Statement of Assets and Liabilities as an
asset and an equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current value of the short position. Subsequent
fluctuations in the market prices of securities sold, but not yet purchased, may
require purchasing the securities at prices which may differ from the market
value reflected on the Statement of Assets and Liabilities. The Fund is liable
for any dividends payable on securities while those securities are in a short
position. As collateral for its short positions, the Fund is required under the
1940 Act to maintain segregated assets consisting of cash, cash equivalents or
liquid securities. These segregated assets are required to be adjusted daily to
reflect changes in the value of the securities sold short.
4. FOREIGN SECURITIES
Investing in foreign securities involves special risks and considerations not
typically associated with investing in U.S. companies. These risks include
revaluation of currencies and future adverse political and economic
developments. Moreover, securities of many foreign companies and their markets
may be less liquid and their prices more volatile than those of securities of
comparable U.S. companies.
<PAGE>
5. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Funds for the period ended February 28, 1998, were
as follows:
<TABLE>
<CAPTION>
U.S. PLUS FUND U.S./SHORT FUND OTC PLUS FUND OTC/SHORT FUND
<S> <C> <C> <C> <C>
Shares sold 5,177,575 3,315,671 8,536,287 10,360,947
Shares issued to holders in
reinvestment of dividends 3,471 -- -- --
Shares redeemed (3,831,948) (3,309,742) (7,467,959) (9,979,172)
--------- --------- --------- ---------
Net increase 1,349,098 5,929 1,068,328 381,775
========= ========= ========= =========
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET
FUND JAPAN/LONG FUND JAPAN/SHORT FUND
<S> <C> <C> <C>
Shares sold 44,854,128 58,864 118,594
Shares issued to holders in
reinvestment of dividends 12,507 -- --
Shares redeemed (38,538,027) (38,891) (116,440)
---------- ------ --------
Net increase 6,328,608 19,973 2,154
========== ====== ========
</TABLE>
6. INVESTMENT TRANSACTIONS
During the period ended February 28, 1998, the aggregate purchases and sales of
investments (excluding short-term investments, options, futures and foreign
currency) were:
<TABLE>
<CAPTION>
U.S. PLUS FUND U.S./SHORT FUND OTC PLUS FUND OTC/SHORT FUND
<S> <C> <C> <C> <C>
Purchases $0 $0 $66,899,705 $89,242,281
Sales $0 $0 $50,786,223 $91,246,094
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET
FUND JAPAN/LONG FUND JAPAN/SHORT FUND
<S> <C> <C> <C>
Purchases $0 $0 $0
Sales $0 $0 $0
</TABLE>
<PAGE>
<TABLE>
During the period ended February 28, 1998, the following Funds wrote the
following options:
<CAPTION>
U.S. PLUS FUND U.S./SHORT FUND
------------------------- -------------------------
NUMBER OF PREMIUM NUMBER OF PREMIUM
CONTRACTS AMOUNT CONTRACTS AMOUNT
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 0 $ 0 0 $ 0
Options written 238 989,748 51 251,480
Options terminated (195) (789,524) (51) (251,480)
------- -------- ------- --------
Outstanding at end of period 43 $200,224 0 $ 0
======= ======== ======= ========
<CAPTION>
OTC PLUS FUND OTC/SHORT FUND
------------------------- -------------------------
NUMBER OF PREMIUM NUMBER OF PREMIUM
CONTRACTS AMOUNT CONTRACTS AMOUNT
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 0 $ 0 0 $ 0
Options written 257 530,332 92 305,212
Options terminated (257) (530,332) (92) (305,212)
------- -------- ------- --------
Outstanding at end of period 0 $ 0 0 $ 0
======= ======== ======= ========
<CAPTION>
JAPAN/LONG FUND JAPAN/SHORT FUND
------------------------- -------------------------
NUMBER OF PREMIUM NUMBER OF PREMIUM
CONTRACTS AMOUNT CONTRACTS AMOUNT
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 0 $ 0 0 $ 0
Options written 2 2,537 14 36,605
Options terminated (2) (2,537) (14) (36,605)
-------- ------- ------ -------
Outstanding at end of period 0 $ 0 0 $ 0
======== ======= ====== =======
</TABLE>
Transactions in futures contracts for the period ended February 28, 1998, for
the following funds were as follows:
<TABLE>
<CAPTION>
U.S. PLUS FUND JAPAN/LONG FUND
------------------------- -------------------------
NUMBER OF AGGREGATE FACE NUMBER OF AGGREGATE FACE
CONTRACTS VALUE OF CONTRACTS CONTRACTS VALUE OF CONTRACTS
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 0 $ 0 0 $ 0
Contracts opened 204 49,768,416 4 256,617
Contracts closed (159) (38,605,890) (3) (191,855)
------- ----------- ------- --------
Outstanding at end of period 45 $11,162,526 1 $ 64,762
======= =========== ======= ========
</TABLE>
<PAGE>
<TABLE>
Transactions in short futures contracts for the period ended February 28, 1998,
for the following funds were as follows:
<CAPTION>
U.S./SHORT FUND JAPAN/SHORT FUND
------------------------- -------------------------
NUMBER OF AGGREGATE FACE NUMBER OF AGGREGATE FACE
CONTRACTS VALUE OF CONTRACTS CONTRACTS VALUE OF CONTRACTS
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 0 $ 0 0 $ 0
Contracts opened 96 18,376,640 5 314,708
Contracts closed (95) (18,325,145) (5) (314,708)
--- ----------- --- ---------
Outstanding at end of period 1 $ 51,495 0 $ 0
=== =========== === =========
</TABLE>
At February 28, 1998, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
<TABLE>
<CAPTION>
U.S. PLUS FUND U.S./SHORT FUND OTC PLUS FUND OTC/SHORT FUND
<S> <C> <C> <C> <C>
Appreciation $97,584 $ 0 $1,622,515 $7,724
(Depreciation) 0 0 (21,540) (7,748)
------- --- ---------- ------
Net unrealized appreciation
(depreciation) on investments $97,584 $ 0 $1,600,975 ($ 24)
======= === ========== ======
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET
FUND JAPAN/LONG FUND JAPAN/SHORT FUND
<S> <C> <C> <C>
Appreciation $ 0 $2,381 $ 0
(Depreciation) 0 0 (477)
--- ------ -----
Net unrealized appreciation
(depreciation) on investments $ 0 $2,381 ($477)
=== ====== =====
At February 28, 1998, the cost of investments for federal income tax purposes
was $15,314,843, $0, $10,129,832, $200,858, $1,258,504, $143,964 and $10,679 for
the U.S. Plus Fund, U.S./Short Fund, OTC Plus Fund, OTC/Short Fund, U.S.
Government Money Market Fund, Japan/Long Fund and Japan/Short Fund,
respectively.
</TABLE>
<PAGE>
<TABLE>
7. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Funds have entered into an investment advisory agreement with Rafferty Asset
Management, LLC ("Adviser"). The Adviser receives a fee, computed daily and
payable monthly, at the annual rates presented below as applied to each Fund's
daily net assets. The Adviser has voluntarily agreed to waive Advisory Fees or
pay all operating expenses in excess of the annual rates presented below as
applied to each Fund's daily net assets. For the period ended February 28, 1998,
the Adviser voluntarily waived or paid the following fees, by Fund:
<CAPTION>
U.S. PLUS FUND U.S./SHORT FUND OTC PLUS FUND OTC/SHORT FUND
<S> <C> <C> <C> <C>
Annual Advisory rate 0.75% 0.90% 0.75% 0.90%
Annual cap on expenses 1.50% 1.65% 1.50% 1.65%
Fees waived $52,474 $25,574 $85,019 $62,210
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET
FUND JAPAN/LONG FUND JAPAN/SHORT FUND
-------------- --------------- ---------------
<S> <C> <C> <C>
Annual Advisory rate 0.50% 0.75% 0.90%
Annual cap on expenses 1.00% 1.50% 1.65%
Fees waived $35,522 $22,927 $19,248
</TABLE>
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held bank
holding company, serves as custodian, transfer agent, administrator and
accounting services agent for the Trust.
Distribution services are performed pursuant to distribution agreements with
First Data Distributors, Inc., the Trust's principal underwriter, and other
broker-dealers.
8. SUBSEQUENT EVENTS
Effective April 3, 1998, the Japan/Long Fund and Japan/Short Fund were closed to
new investors.
<PAGE>
INVESTMENT ADVISER
Rafferty Asset Management, LLC
550 Mamaroneck Avenue
Harrison, NY10528
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
PAYING AGENT, SHAREHOLDER SERVICING
AGENT & CUSTODIAN
Firstar Trust Company
P.O. Box 1993
Milwaukee, WI 53201-1993
COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, WI53202
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
