The Disruptive Growth Fund
SHAREHOLDER LETTER
Dear Shareholder:
It is a cliche to say the world is a rapidly changing place. And lately
the pace of that change has skyrocketed. Companies survive by their ability to
adapt to change. However, as recent history has shown, established industry
leaders often succumb to newer companies who aren't bound by their past
successes.
For years established names have provided the benchmarks for the
investment world. But as companies like Intel, Honda, and Cisco demonstrate,
stalwart corporate leaders can be usurped by companies offering simpler, less
expensive products to new categories of consumers.
This is the theory of disruptive technology. In fact, it is the
underlying principle behind the investment decisions for The Disruptive Growth
Fund. Using the research into disruptive companies of Clayton Christensen, a
Harvard Business School professor and author of THE INNOVATOR'S DILEMMA, we have
formulated an investment methodology to identify those companies that fit past
patterns of success. This methodology helps us evaluate whether a company will
make the critical jump from capital consumption to capital creation.
Not only does the past patterns of success model help us choose stocks
that we believe will be winners, it also provides the analytical tools to
recognize a disrupted company. Disruptive technology provides insight into such
questions as: do we purchase a stock after the market has lowered its valuation
by 30% to 40% for missed earnings or revenue expectations? Was the shortfall a
one-time event or is the core business being disrupted? If the company is being
disrupted, the stock may appear inexpensive, but may yield a continuing series
of disappointments in the future. Historically, very few industry leaders whose
core business has been disrupted have been able to adapt their business models
to meet the radical changes required. Clayton's disruptive technology framework
provides a discipline with which we sort technology's potential winners from the
losers.
FUND PERFORMANCE
The inception date of March 10, 2000 for The Disruptive Growth Fund is
memorable because it coincided with the peak in the Nasdaq Composite Index. The
ensuing second and third quarters of 2000 were the second and fourth worst
performing quarters, respectively, for the Nasdaq Composite over the past twelve
years. The Nasdaq Composite fell 37.32% from its March peak to its closing low
on May 23rd. The media has largely characterized this fall as a price correction
for grossly overvalued technology stocks.
However, applying mathematical criteria rather than speculation
provides a more useful analysis. Using a discounted cash flow model, the net
present value (NPV) of a growth company with a 1% earnings yield growing at 25%
can be set equal to the NPV of a value company with a 10% earnings yield growing
at only 2.9%. Assuming the Federal Reserve's raising of interest rates might
result in lower earnings of approximately 15%, the net effect to the growth
company would be a lowering of the NPV by 35%, but a lowering of only 4% to the
value company. This disparity in NPV is because the value company's earnings are
growing at a substantially slower rate than those of the growth company. We
believe this effect may help explain recent market events.
The Disruptive Growth Fund's performance was similarly impacted by the
change in earnings expectations that the market has undergone. At the close of
the second quarter, roughly 90% of the Fund was invested in technology related
stocks. By the end of July, we had lowered our semiconductor weighting from
approximately 25% of the portfolio to approximately 15% and had shifted the
proceeds into disruptive companies we had identified in the health care sector.
In September, we increased our exposure from 5% to 10% for the emerging energy
technology or distributed generation companies in the portfolio, again at the
expense of technology companies. Both of these sector shifts out of technology
stocks proved to be very valuable and were instrumental in helping us achieve a
third quarter with positive performance when most benchmarks posted negative
performance for the quarter.
In the short term, it is very difficult to avoid the effects of
earnings expectations being reset and then thrown across the entire market,
impacting all stocks. However implying the same downward revision of earnings
will be equally distributed over the long term is an assumption that holds only
under panic conditions. As the market looks forward and those assumptions begin
to unravel, we believe those companies that are disruptive - that offer a
product or service that begs the question: Why would I ever go back to doing
things the old way? - will prove to be attractive long term investments.
The performance of The Disruptive Growth Fund from inception to August
31, 2000 is summarized below in Table I. The performance of the Nasdaq Composite
and the S&P 500 are also included. For the semiannual period ending August 31st,
The Disruptive Growth Fund is down (21.90%). With a maximum sales load of 5.75%
considered, the Fund would be down (26.39%). For the corresponding period, the
Nasdaq Composite is down (16.68%) and the S&P 500 is up 9.38%. Table I also
demonstrates the results for a $10,000 investment made into each of the two
indices and into the Fund respectively, during this period.
TABLE I
The Disruptive Growth Fund
(WITH MAXIMUM SALES LOAD)
vs. the S&P 500 and the Nasdaq Composite Indexes
Disruptive
Growth S&P500 NASDAQ Composite
8/31/00 $ 7,810.00 $10,937.92 $8,331.68
8/30/00 $ 7,560.00 $10,829.03 $8,128.58
8/29/00 $ 7,580.00 $10,878.42 $8,085.71
8/28/00 $ 7,620.00 $10,908.24 $8,062.78
8/25/00 $ 7,560.00 $10,853.05 $8,007.50
8/24/00 $ 7,500.00 $10,866.34 $8,028.49
8/23/00 $ 7,360.00 $10,849.38 $7,944.77
8/22/00 $ 7,240.00 $10,792.12 $7,840.18
8/21/00 $ 7,130.00 $10,801.82 $7,830.16
8/18/00 $ 7,060.00 $10,745.86 $7,784.98
8/17/00 $ 6,960.00 $10,776.83 $7,805.84
8/16/00 $ 6,780.00 $10,659.86 $7,648.03
8/15/00 $ 6,710.00 $10,691.53 $7,629.13
8/14/00 $ 6,730.00 $10,742.86 $7,625.23
8/11/00 $ 6,590.00 $10,600.47 $7,505.95
8/10/00 $ 6,530.00 $10,516.39 $7,447.56
8/9/00 $ 6,710.00 $10,605.89 $7,632.78
8/8/00 $ 6,760.00 $10,676.40 $7,622.97
8/7/00 $ 6,750.00 $10,650.53 $7,651.58
8/4/00 $ 6,550.00 $10,532.36 $7,501.77
8/3/00 $ 6,410.00 $10,456.44 $7,447.34
8/2/00 $ 6,310.00 $10,355.67 $7,246.46
8/1/00 $ 6,360.00 $10,350.58 $7,300.05
7/31/00 $ 6,450.00 $10,298.25 $7,461.43
7/28/00 $ 6,280.00 $10,219.45 $7,255.45
7/27/00 $ 6,650.00 $10,433.04 $7,610.46
7/26/00 $ 7,090.00 $10,452.35 $7,898.63
7/25/00 $ 7,220.00 $10,610.87 $7,981.53
7/24/00 $ 7,210.00 $10,537.60 $7,886.45
7/21/00 $ 7,440.00 $10,651.44 $8,110.04
7/20/00 $ 7,570.00 $10,762.11 $8,288.52
7/19/00 $ 7,240.00 $10,664.15 $8,033.15
7/18/00 $ 7,470.00 $10,748.42 $8,273.88
7/17/00 $ 7,680.00 $10,868.85 $8,467.01
7/14/00 $ 7,560.00 $10,865.18 $8,410.58
7/13/00 $ 7,410.00 $10,763.42 $8,269.31
7/12/00 $ 7,110.00 $10,742.25 $8,120.22
7/11/00 $ 6,810.00 $10,654.98 $7,836.64
7/10/00 $ 6,890.00 $10,616.78 $7,883.92
7/7/00 $ 7,000.00 $10,640.38 $7,968.91
7/6/00 $ 6,820.00 $10,480.32 $7,844.86
7/5/00 $ 6,760.00 $10,404.01 $7,651.79
7/3/00 $ 7,060.00 $10,569.65 $7,793.85
6/30/00 $ 6,960.00 $10,461.81 $7,855.83
6/29/00 $ 6,770.00 $10,373.79 $7,679.78
6/28/00 $ 7,000.00 $10,463.11 $7,804.79
6/27/00 $ 6,960.00 $10,430.88 $7,643.59
6/26/00 $ 7,090.00 $10,465.11 $7,748.89
6/23/00 $ 6,910.00 $10,365.66 $7,616.62
6/22/00 $ 7,120.00 $10,442.60 $7,797.85
6/21/00 $ 7,440.00 $10,636.04 $8,049.74
6/20/00 $ 7,280.00 $10,613.11 $7,949.42
6/19/00 $ 7,130.00 $10,685.34 $7,902.85
6/16/00 $ 6,900.00 $10,530.26 $7,646.68
6/15/00 $ 6,850.00 $10,631.74 $7,617.41
6/14/00 $ 6,770.00 $10,572.84 $7,521.68
6/13/00 $ 6,850.00 $10,564.46 $7,627.95
6/12/00 $ 6,730.00 $10,394.71 $7,463.25
6/9/00 $ 6,920.00 $10,473.24 $7,675.05
6/8/00 $ 6,820.00 $10,507.17 $7,577.44
6/7/00 $ 6,770.00 $10,576.58 $7,604.57
6/6/00 $ 6,580.00 $10,478.21 $7,440.39
6/5/00 $ 6,710.00 $10,548.45 $7,569.91
6/2/00 $ 6,710.00 $10,617.53 $7,553.31
6/1/00 $ 6,240.00 $10,413.03 $7,096.00
5/31/00 $ 5,820.00 $10,210.10 $6,736.32
5/30/00 $ 5,840.00 $10,221.47 $6,852.33
5/26/00 $ 5,330.00 $9,901.27 $6,348.49
5/25/00 $ 5,380.00 $9,925.62 $6,348.96
5/24/00 $ 5,440.00 $10,051.32 $6,478.23
5/23/00 $ 5,350.00 $9,869.86 $6,268.15
5/22/00 $ 5,710.00 $10,062.69 $6,663.62
5/19/00 $ 5,890.00 $10,107.44 $6,715.50
5/18/00 $ 6,230.00 $10,324.45 $7,009.26
5/17/00 $ 6,390.00 $10,400.01 $7,219.72
5/16/00 $ 6,550.00 $10,530.04 $7,363.54
5/15/00 $ 6,330.00 $10,431.67 $7,145.81
5/12/00 $ 6,200.00 $10,205.90 $6,990.15
5/11/00 $ 6,110.00 $10,111.22 $6,931.76
5/10/00 $ 5,910.00 $9,930.08 $6,704.27
5/9/00 $ 6,330.00 $10,137.83 $7,100.97
5/8/00 $ 6,530.00 $10,223.67 $7,268.09
5/5/00 $ 6,710.00 $10,283.48 $7,560.13
5/4/00 $ 6,660.00 $10,117.84 $7,368.83
5/3/00 $ 6,740.00 $10,157.23 $7,343.21
1/0/00 $ 6,950.00 $10,380.02 $7,497.99
5/1/00 $ 7,250.00 $10,537.52 $7,839.92
4/28/00 $ 7,220.00 $10,423.97 $7,646.96
4/27/00 $ 6,980.00 $10,513.01 $7,475.37
4/26/00 $ 6,790.00 $10,483.71 $7,190.26
4/25/00 $ 6,940.00 $10,600.93 $7,350.98
4/24/00 $ 6,500.00 $10,259.54 $6,897.88
4/20/00 $ 6,780.00 $10,293.04 $7,217.58
4/19/00 $ 6,860.00 $10,242.20 $7,341.43
4/18/00 $ 6,880.00 $10,343.35 $7,514.07
4/17/00 $ 6,430.00 $10,054.69 $7,010.15
4/14/00 $ 6,040.00 $9,732.70 $6,578.61
4/13/00 $ 6,750.00 $10,335.00 $7,282.74
4/12/00 $ 6,860.00 $10,526.26 $7,466.65
4/11/00 $ 7,380.00 $10,765.28 $8,033.68
4/10/00 $ 7,690.00 $10,792.55 $8,295.73
4/7/00 $ 8,040.00 $10,877.84 $8,807.26
4/6/00 $ 7,920.00 $10,770.15 $8,452.92
4/5/00 $ 7,670.00 $10,668.08 $8,258.14
4/4/00 $ 8,150.00 $10,720.12 $8,217.87
4/3/00 $ 8,190.00 $10,800.39 $8,366.01
3/31/00 $ 8,830.00 $10,747.26 $9,057.58
3/30/00 $ 8,800.00 $10,670.86 $8,829.92
3/29/00 $ 9,160.00 $10,818.42 $9,199.88
3/28/00 $ 9,590.00 $10,811.35 $9,574.68
3/27/00 $ 9,690.00 $10,926.89 $9,821.61
3/24/00 $ 9,640.00 $10,952.71 $9,830.47
3/23/00 $ 9,580.00 $10,951.92 $9,786.06
3/22/00 $ 9,610.00 $10,760.37 $9,635.80
3/21/00 $ 9,320.00 $10,711.68 $9,332.61
3/20/00 $ 9,450.00 $10,444.65 $9,131.21
3/17/00 $ 9,830.00 $10,500.70 $9,503.84
3/16/00 $ 9,330.00 $10,457.65 $9,343.92
3/15/00 $ 9,180.00 $9,980.78 $9,076.98
3/14/00 $ 9,580.00 $9,743.81 $9,322.61
3/13/00 $ 10,000.00 $9,919.14 $9,719.96
3/10/00 $ 10,000.00 $10,000.00 $10,000.00
<TABLE>
<CAPTION>
Performance Result for a $10,000 Investment
Inception Date* to August 31, 2000
<S> <C> <C>
Investment Value Percent Change
--------------------------------------------------------------------- --------------------- ------------------
--------------------------------------------------------------------- --------------------- ------------------
Disruptive Growth Fund - WITH A MAXIMUM 5.75% SALES LOAD. $ 7,361 (26.39%)
Disruptive Growth Fund - WITHOUT A SALES LOAD. $ 7,810 (21.90%)
Nasdaq Composite $ 8,332 (16.68%)
S&P 500 $10,938 9.38%
--------------------------------------------------------------------- --------------------- ------------------
</TABLE>
*FUND INCEPTION DATE IS MARCH 10, 2000.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE MAY FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL VALUE. THE S&P 500 INDEX IS AN UNMANAGED INDEX OF
LARGE CAPITALIZATION COMMON STOCKS. S&P 500 PERFORMANCE IS REPORTED ON A TOTAL
RETURN BASIS, I.E WITH REINVESTED DIVIDENDS. THE NASDAQ COMPOSITE IS A BROADER
MEASURE OF ALL COMMON STOCKS LISTED ON THE NASDAQ MARKET AND ITS PERFORMANCE IS
REPORTED ON A PRICE RETURN BASIS. REINVESTED DIVIDENDS FOR THE NASDAQ COMPOSITE
ARE CONSIDERED NEGLIGIBLE. THE DISRUPTIVE GROWTH FUND'S PERFORMANCE WITHOUT THE
RECEIPT OF DIVIDENDS AND THEIR REINVESTMENT WOULD BE (26.41%) SINCE INCEPTION
WITH THE SALES LOAD AND (21.92%) WITHOUT A SALES LOAD..
--------------------------------------------------------------------------------
Because The Disruptive Growth Fund is on a March 1st to February 28th
fiscal year, the semiannual performance data reported in Table I ends with
August 31, 2000. However, because the mutual fund industry performance ranking
and evaluation services report results on a calendar quarter basis, the Trustees
of the Innovative Fund Group have elected to include Fund performance results
for calendar quarters, presented below in Table II.
TABLE II
<TABLE>
<CAPTION>
The Disruptive Growth Fund Quarterly Performance
<S> <C> <C> <C>
------------------------------------------------------- ----------------- ------------------- ---------------
Inception* Second Third
through 3/31/00 Qtr. Ending Qtr. Ending
6/30/00 9/30/00
------------------------------------------------------- ----------------- ------------------- ---------------
------------------------------------------------------- ----------------- ------------------- ---------------
Disruptive Growth Fund** (16.78%) (21.18%) 3.74%
Nasdaq Composite (9.42%) (13.27%) (7.39%)
S&P 500 7.47% (2.66%) (0.97%)
</TABLE>
*FUND INCEPTION DATE IS MARCH 10, 2000. FIRST QUARTER RESULTS INCLUDE MAXIMUM
SALES LOAD OF 5.75%. **DIVIDENDS RECEIVED AND THEIR REINVESTMENT BY THE
DISRUPTIVE GROWTH FUND ADDED 0.02%, 0.00%, AND 0.00%
FOR THE
PERIODS ENDING 3/31/00, 6/30/00, AND 9/30/00, RESPECTIVELY.
The trailing six-month performance for the period ending September 30,
2000, is (18.23%) for The Disruptive Growth Fund and (19.68%) for the Nasdaq
Composite. The S&P 500 is down (3.60%) for the corresponding period.
PORTFOLIO STRUCTURE
Table III profiles the portfolio structure of The Disruptive Growth
Fund. As of August 31, 2000, the Fund owned 48 companies, with the top ten
stocks comprising about 40% of the Fund. The largest sector exposure was to
technology with about 77% of the Fund's assets invested there. The remaining
portion of Fund assets was roughly split between health care and capital goods.
As we typically keep the Fund fully invested, cash amounted to slightly less
than 1% of the portfolio. Rather than trying to time the market, our focus is on
trying to own the right stocks for the long term.
TABLE III
The Disruptive Growth Fund
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Portfolio Profile
August 31, 2000
<S> <C> <C>
-------------------------------- -------------------------------------------------- ------------------------
Top Ten Holdings % of Fund
-------------------------------- -------------------------------------------------- ------------------------
---------- --------------------- -------------------------------------------------- ------------------------
GLW Corning 4.82%
MERX Merix 4.60%
VRTS Veritas Software 4.56%
PRCM Procom Technology 4.14%
BRCM Broadcom 4.10%
NTAP Network Appliance 4.03%
CLS Celestica 3.53%
KOPN Kopin 3.32%
INKT Inktomi 2.95%
MLNM Millennium Pharmaceutical 2.75%
---------- --------------------- -------------------------------------------------- ------------------------
Distribution by Economic Sector % of Fund
Technology 76.90%
Health Care 11.91%
Capital Goods 10.20%
Cash 0.49%
Common Stock Distribution by Market Capitalization % of Fund
---------- --------------------- -------------------------------------------------- ------------------------
Mega-Cap. > $100 billion 12.52%
Large Cap. > $10 billion to $100 billion 38.93%
Mid-Cap. > $1 billion to $10 billion 36.89%
Small Cap. < $1 billion 9.68%
---------- --------------------- -------------------------------------------------- ------------------------
</TABLE>
Within the technology sector, our largest industry exposure is to
telecommunications, semiconductors, and computer software & services. Exposure
to the health care sector is principally focused on pharmaceutical companies
that are investigating new drug discovery techniques and on biotechnology
companies. Capital goods holdings consist of companies that are on the leading
edge of developing new energy generation sources that will play an important
role in the way electricity is produced and used in the future.
The market-cap distribution data at the bottom of Table III shows that
The Disruptive Growth Fund is invested in companies across several tiers of the
market. While we strive to add disruptive companies to the portfolio at their
earliest stage, it is difficult to identify these companies in the small cap
tier. If you consider the 412 Initial Public Offerings so far in 2000, their
average market capitalization today is about $1.5 billion. Currently, slightly
less than 50% of The Disruptive Growth Fund is invested in companies with less
than $10 billion in market capitalization. Our holdings in the higher tiers of
the market reflect our view that the value creation cycle of disruptive
companies can persist, in some cases, for extended periods of time.
OUTLOOK
With the past six Federal Reserve rate hikes, the yield curve moved to
a clearly inverted slope in July where it has remained, with short term interest
rates higher than long term. The last time the yield curve remained inverted for
a significant amount of time was in 1989. And the prospect of higher interest
rates is still weighing on many investors' minds as they worry about higher
energy prices.
In recent months the failure of some leading bellwether technology
stocks and other high profile companies to meet the expectations of investors
has been highly visible. Computer related stocks tumbled from their mid-summer
highs: Intel more than 50%, Apple almost 70%, and Dell close to 50%. In
addition, Kodak was off about 40%, Microsoft fell about 50%, and both Xerox and
AT&T were down almost 60% from their highs. Confidence in the technology sector
has clearly been tested.
However, what may have been lost on many investors is the extent to
which some of these companies' business models are being disrupted. What is
interpreted as a significant slowdown in economic growth may in some cases
represent company specific issues. Digital photography, smaller hand held
digital assistants, voice recognition software, internet-protocol telephony for
voice, distributed computing, and wireless devices and connections are all among
the disruptive elements that are challenging the competitive advantage of
established companies.
While the macroeconomic picture appears to be somewhat uncertain, the
investment outlook must be put into perspective. We have just completed two of
the worst quarters in the performance of the Nasdaq Composite in recent memory.
The put to call volume ratio on the S&P 500 is approaching historic highs. The
average price decline in NYSE and Nasdaq shares from their 52-week highs exceeds
the classic bear correction levels of 20% and 45%, respectively. Mutual fund
cash levels are estimated to have increased from 4% in August to about 7% in
October. Data from the Investment Company Institute shows that about $300
billion has moved into money market accounts since August, with assets of $1.8
trillion now on the sidelines for the mutual fund industry. From a technical
standpoint, the Nasdaq Composite has never experienced three consecutive
negative performing quarters over the past 15 years. And several research firms
on Wall Street have stated that they expect the Federal Reserve to start cutting
rates in the first half of 2001. These factors suggest to us that we are much
closer to the bottom in this market than we are near a top. We are fully
invested and have assembled a portfolio of innovative companies that we believe
are poised to disrupt and overtake mainstream markets.
In closing, let me take this opportunity to thank you for your support.
We appreciate your participation in The Disruptive Growth Fund and welcome your
comments and suggestions, either through regular mail or through our website at
www.disruptivegrowthfund.com.
Yours truly,
/s/Neil A. Eisner
President, EC Advisors, Inc.
<PAGE>
<TABLE>
<CAPTION>
The Disruptive Growth Fund
Schedule of Investments - August 31, 2000
(Unaudited)
<S> <C> <C>
Shares Value
Common Stocks - 98.0%
Computer Hardware - 6.1%
Efficient Networks, Inc. (a) 1,500 $ 80,602
Netpliance, Inc. (a) 3,700 19,656
Palm, Inc. (a) 741 32,604
Redback Networks, Inc. (a) 450 67,219
Sun Microsystems, Inc. (a) 550 69,816
------------------
------------------
269,897
------------------
------------------
Computer Storage Devices - 11.0%
EMC Corp. (a) 1,000 98,000
Network Appliance, Inc. (a) 1,525 178,425
Procom Technology, Inc. (a) 3,800 183,350
SanDisk Corp. (a) 300 25,050
------------------
------------------
484,825
------------------
------------------
Computer Software & Services - 15.4%
Akamai Technologies, Inc. (a) 1,000 75,563
InfoSpace, Inc. (a) 2,200 85,800
Inktomi Corp. (a) 1,000 130,375
Numerical Technologies, Inc. (a) 1,000 39,125
Phone.com, Inc. (a) 900 83,194
Veritas Software Corp. (a) 1,675 201,942
Wind River Systems, Inc. (a) 1,600 65,200
------------------
------------------
681,199
------------------
------------------
Drugs - Biotechnology - 5.9%
Affymetrix, Inc. (a) 700 55,300
Aurora Biosciences Corp. (a) 950 64,956
Caliper Technologies Corp. (a) 900 55,913
Celera Genomics Group (a) 800 86,750
------------------
------------------
262,919
------------------
------------------
Drugs & Pharmaceuticals - 6.7%
Cubist Pharmaceuticals, Inc. (a) 1,000 61,125
ImClone Systems, Inc. (a) 1,200 115,650
Millennium Pharmaceuticals, Inc. (a) 850 121,656
------------------
------------------
298,431
------------------
------------------
Electrical Industrial Apparatus - 3.9%
Ballad Power Systems, Inc. (a) 600 60,825
Capstone Turbine Corp. (a) 900 83,081
Plug Power, Inc. (a) 600 26,850
------------------
------------------
170,756
------------------
------------------
Electronic Instruments & Controls - 13.0%
Celestica, Inc. (a) 2,000 156,250
Flextronics International Ltd. (a) 1,450 120,803
Merix Corp. (a) 4,200 203,700
Solectron Corp. (a) 2,100 95,156
------------------
------------------
575,909
------------------
------------------
The Disruptive Growth Fund
Schedule of Investments - August 31, 2000 - continued
(Unaudited)
Shares Value
Common Stocks - continued
Semiconductors - 15.5%
ARM Holdings Plc. (a) (c) 1,500 $ 61,313
Atmel Corp. (a) 5,000 100,000
Broadcom Corp. (a) 725 181,250
Kopin Corp. (a) 4,400 147,125
PMC-Sierra, Inc. (a) 200 47,200
SDL, Inc. (a) 200 79,463
Xilinx, Inc. (a) 800 71,100
------------------
------------------
687,451
------------------
------------------
Surgical & Medical Instruments - 0.5%
SonoSite, Inc. (a) 650 21,734
------------------
------------------
Telecommunications - 20.0%
Bookham Technology Plc. (a) (c) 450 27,787
Corning Inc. 650 213,159
Digex, Inc. (a) 1,500 127,031
Exodus Communications, Inc. (a) 2,600 177,937
JDS Uniphase Corp. (a) 800 99,587
Net2Phone, Inc. (a) 1,400 41,388
Nortel Networks Corp. 900 73,406
Polycom, Inc. (a) 300 33,713
Stratos Lightwave, Inc. (a) 1,300 61,100
Wireless Facilities, Inc. (a) 390 29,250
------------------
------------------
884,358
------------------
------------------
TOTAL COMMON STOCKS (Cost $3,730,513) 4,337,479
------------------
------------------
Principal
Amount Value
Money Market Securities - 0.5%
UMB Treasury Fund, 4.83% (b) (Cost $21,713) $ 21,713 21,713
------------------
------------------
TOTAL INVESTMENTS - 99.1% (Cost $3,752,226) 4,359,192
------------------
------------------
Other assets in excess of liabilities - 1.5% 66,257
------------------
------------------
Total Net Assets - 100.0% $ 4,425,449
==================
(a) Non-Income Producing
(b) Variable rate security; the coupon rate shown represents the rate at August 31, 2000.
(c) American Depository Receipt
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Disruptive Growth Fund
Statement of Assets & Liabilities - August, 31, 2000
(Unaudited)
<S> <C> <C>
Assets
Investment in securities (cost $3,752,226) $ 4,359,192
Dividends receivable 134
Interest receivable 222
Receivable for fund shares sold 61,845
Receivable for securities sold 42,515
Due from the Administrator (Unified) 27,750
------------------
Total assets 4,491,658
Liabilities
Accrued investment advisory fee $ 4,834
Accrued 12b-1 fees 1,532
Payable to custodian bank 1,328
Payable for securities purchased 58,515
-----------------
Total liabilities 66,209
------------------
Net Assets $ 4,425,449
==================
Net Assets consist of:
Paid in capital $ 4,859,130
Accumulated net investment loss (20,904)
Accumulated net realized loss on investments (1,019,743)
Net unrealized appreciation on investments 606,966
------------------
Net Assets, for 566,409 shares $ 4,425,449
==================
Net Asset Value
Net Assets value and redemption price per share ($4,425,449/566,409) $ 7.81
==================
Maximum offering price per share (100/94.25 of $7.81) $ 8.29
==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Disruptive Growth Fund
Statement of Operations for the period March 10, 2000
(Commencement of Operations) to August 31, 2000 (Unaudited)
<S> <C> <C>
Investment Income
Dividend income $ 926
Interest income 2,900
---------------
Total Income 3,826
Expenses
Investment advisory fee $ 21,197
12b-1 fees 3,533
------------------
Total operating expenses 24,730
---------------
Net Investment Loss (20,904)
---------------
Realized & Unrealized Gain (Loss)
Net realized loss on investment securities (1,015,888)
Net realized loss on options transactions (3,855)
Change in net unrealized appreciation
on investment securities 606,966
------------------
Net loss on investment securities (412,777)
---------------
Net decrease in net assets resulting from operations $ (433,681)
===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Disruptive Growth Fund
Statement of Changes for the period March 10, 2000
(Commencement of Operations) to August 31, 2000 (Unaudited)
<S> <C>
Increase (Decrease) in Net Assets
Operations
Net investment loss $ (20,904)
Net realized loss on investment securities (1,019,743)
Change in net unrealized appreciation 606,966
-----------------
Net decrease in net assets resulting from operations (433,681)
-----------------
Distributions to shareholders
From net investment income 0
From net realized gain 0
-----------------
Total distributions 0
-----------------
Share Transactions
Net proceeds from sale of shares 4,899,289
Shares issued in reinvestment 0
Shares redeemed (40,159)
-----------------
Net increase in net assets resulting
from share transactions 4,859,130
-----------------
-----------------
Total increase in net assets 4,425,449
-----------------
Net Assets
Beginning of period 0
-----------------
End of period [including accumulated net
investment loss of $20,904] $ 4,425,449
=================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Disruptive Growth Fund
Financial Highlights for the period March 10, 2000
(Commencement of Operations) to August 31, 2000 (Unaudited)
<S> <C>
Selected Per Share Data
Net asset value, beginning of period $ 10.00
--------------
Income from investment operations
Net investment loss (0.05)
Net realized and unrealized loss (2.14)
--------------
Total from investment operations (2.19)
--------------
Net asset value, end of period $ 7.81
==============
Total Return (21.90)(a)
Ratios and Supplemental Data
Net assets, end of period (000) $ 4,425
Ratio of expenses to average net assets 1.75% (b)
Ratio of net investment income to
average net assets (1.48)(b)
Portfolio turnover rate 92.13%
(a) For period of less than a full year, total return is not annualized.
(b) Annualized
</TABLE>
<PAGE>
THE DISRUPTIVE GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000 (UNAUDITED)
NOTE 1. ORGANIZATION
The Disruptive Growth Fund (the "Fund") was organized as a series of the
Innovative Fund Group (the "Trust") on November 29, 1999 and commenced
operations on March 10, 2000. The Trust is an open-end investment company
established under the laws of Ohio by an Agreement and Declaration of Trust
dated November 29, 1999, (the "Trust Agreement"). The Fund's investment
objective is to provide long-term capital appreciation. The Trust Agreement
permits the Board of Trustees (the "Board") to issue an unlimited number of
shares of beneficial interest of separate series without par value.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by each
Fund in the preparation of its financial statements.
SECURITIES VALUATION - Securities, which are traded on any exchange or on the
NASDAQ over-the-counter market, are valued at the last quoted sale price.
Lacking a last sale price, a security is valued at its last bid price except
when, in the Fund adviser's opinion, the last bid price does not accurately
reflect the current value of the security. All other securities for which
over-the-counter market quotations are readily available are valued at their
last bid price. When market quotations are not readily available, when the
Fund's adviser determines the last bid price does not accurately reflect the
current value or when restricted securities are being valued, such securities
are valued as determined in good faith by the Fund's adviser, subject to review
of the Board.
Fixed-income securities generally are valued by using market quotations, but may
be valued on the basis of prices furnished by a pricing service when the Fund's
adviser believes such prices accurately reflect the fair market value of such
securities. A pricing service utilizes electronic data processing techniques
based on yield spreads relating to securities with similar characteristics to
determine prices for normal institutional-size trading units of debt securities
without regard to sale or bid prices. When prices are not readily available from
a pricing service, or when restricted or illiquid securities are being valued,
securities are valued at fair value as determined in good faith by the Fund's
adviser, subject to review of the Board. Short-term investments in fixed-income
securities with maturities of less than 60 days when acquired, or which
subsequently are within 60 days of maturity, are valued by using the amortized
cost method of valuation, which the Board has determined will represent fair
value.
FEDERAL INCOME TAXES - The Fund intends to qualify each year as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended. By so
qualifying, the Fund will not be subject to federal income taxes to the extent
that it distributes substantially all of its net investment income and any
realized capital gains.
DIVIDENDS AND DISTRIBUTIONS - The Fund intends to comply with federal tax rules
regarding distribution of substantially all of its net investment income and
capital gains. These rules may cause multiple distributions during the course of
the year.
OPTION WRITING - When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current fair value of the option written. Premiums received from writing
options that expire unexercised are treated by the Fund on the expiration date
as realized gains from investments. The difference between the premium and the
amount paid on effecting a closing purchase transaction, including brokerage
commissions, is also treated as a realized gain, or if the premium is less than
the amount paid for the closing purchase transaction, as a realized loss. If a
call option is exercised, the premium is added to the proceeds from the sale of
the underlying
THE DISRUPTIVE GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000 - CONTINUED (UNAUDITED)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
security or currency in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund as writer of an option bears the
market risk of an unfavorable change in the price of the security underlying the
written option.
OPTIONS - The cost of portfolio securities acquired by exercising call options
owned is to be increased by the premium paid to buy the call. The proceeds from
securities sold by exercising put options owned should be decreased by the
premium paid to buy the put. Actively traded put and call options owned by the
Fund are to be accounted for in the same manner as marketable securities.
REDEMPTION FEES - The Fund charges a redemption fee of 1.50% of the current net
asset value of shares redeemed if the shares are owned less than 90 days. The
fee is charged for the benefit of remaining shareholders to defray Fund
portfolio transaction expenses and facilitate portfolio management. This fee
applies to shares being redeemed in the order in which they are purchased. The
fee, which is retained by the Fund, is accounted for as an addition to paid-in
capital.
OTHER - The Fund follows industry practice and records security transactions on
the trade date. The specific identification method is used for determining gains
or losses for financial statements and income tax purposes. Dividend income is
recorded on the ex-dividend date and interest income is recorded on an accrual
basis. Discounts and premiums on securities purchased are amortized over the
life of the respective securities.
NOTE 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
EC Advisors, Inc., (the "Adviser"), 7435 Watson Road, Suite 88, St. Louis,
Missouri 63119 is a newly formed investment adviser that serves as adviser to
the Fund. Under the terms of the management agreement (the "Agreement"), the
Adviser manages the Fund's investments subject to approval of the Board of
Trustees and pays all of the operating expenses of the Fund except brokerage,
taxes, borrowing costs (such as interest and dividend expenses of securities
sold short), fees and expenses of non-interested person trustees, extraordinary
expenses, and expenses incurred pursuant to Rule 12b-1 under the Investment
Company Act of 1940. It should be noted that most investment companies pay their
own operating expenses directly, while the Fund's expenses, except those
specified above, are paid by the Adviser. As compensation for its management
services and agreement to pay the Fund's expenses, the Fund is obligated to pay
the Adviser a fee computed and accrued daily and paid monthly at an annual rate
of 1.50% of the average daily net assets of the Fund. For the period March 10,
2000 through August 31, 2000, the Adviser received a fee of $21,197 from the
Fund.
The Fund retains Unified Fund Services, Inc., ("Unified"), 431 North
Pennsylvania Street, Indianapolis, Indiana 46204, a wholly owned subsidiary of
Unified Financial Services, Inc., (the "Administrator"), to manage the Fund's
business affairs and provide the Fund with administrative services, including
all regulatory reporting and necessary office equipment, personnel and
facilities. The Administrator receives a monthly fee from the Adviser equal to
an annual rate of 0.10% of the Fund's assets under $50 million, 0.07% of the
Fund's assets from $50 million to $100 million, 0.05% of the Fund's assets from
$100 million to $500 million, 0.04% from $500 million to $1 billion and 0.03% of
the Fund's assets over $1 billion (subject to a minimum fee of $1,500 per
month).
THE DISRUPTIVE GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000 - CONTINUED (UNAUDITED)
NOTE 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
Unified also acts as the Fund's transfer agent and, in such capacity, maintains
the records of each shareholder's account, answers shareholders' inquiries
concerning their accounts, processes purchases and redemptions of the Fund's
shares, acts as dividend and distribution disbursing agent and performs other
shareholder service functions. For its services as transfer agent, Unified
receives a monthly fee from the Adviser of $1.30 per shareholder account
(subject to a minimum monthly fee of $1,250). In addition, Unified provides the
Fund with fund accounting services, which includes certain monthly reports,
recordkeeping and other management-related services. For its services as Fund
accountant, Unified receives an annual fee from the Adviser equal to 0.05% of
the Fund's assets up to $50 million, 0.04% of the Fund's assets from $50 million
to $100 million, 0.03% of the Fund's assets from $100 million to $500 million,
0.02% from $500 million to $1 billion, and 0.01% over $1 billion (subject to
various monthly minimum fees, the maximum being $1,500 per month for assets of
$5 million and over).
Eisner Securities, Inc., (the "Distributor"), is the exclusive agent for
distribution of shares of the Fund. Neil A. Eisner and Bruce D. Oakes, Officers
and Trustees of the Trust, are affiliates of the Distributor. The Distributor is
obligated to sell the shares of the Fund on a best efforts basis only against
purchase orders for the shares. Shares of the Fund are offered to the public on
a continuous basis. For the period March 10, 2000 through August 31, 2000, the
Distributor received a sales load of $11,947 from the Fund. The Distributor also
received brokerage commissions from the Fund for executing portfolio purchases
and sales transactions. For the period March 10, 2000 through August 31, 2000,
the Distributor received brokerage commissions in the amount of $2,655 from the
Fund.
The Fund has adopted a distribution plan in accordance to Rule 12b-1 under the
Investment Company Act of 1940 under which the Fund will pay a distribution fee.
at a rate of 0.25% per annum of the average daily net assets. For the period
March 10, 2000 through August 31, 2000, Eisner Securities, Inc., received a fee
of $434 from the Fund.
NOTE 4. SHARE TRANSACTIONS
As of August 31, 2000, there were an unlimited number of authorized shares for
the Fund. Paid in capital at August 31, 2000 was $4,859,130.
<TABLE>
<CAPTION>
Transactions in shares were as follows:
FOR THE PERIOD MARCH 10, 2000 (COMMENCEMENT
OF OPERATIONS)
TO AUGUST 31, 2000
<S> <C> <C>
SHARES DOLLARS
Shares sold 572,782 $4,899,289
Shares issued in reinvestment 0 0
Shares redeemed (6,373) (40,159)
-------- -----------
566,409 $4,859,130
======== ===========
</TABLE>
THE DISRUPTIVE GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000 - CONTINUED (UNAUDITED)
NOTE 5. INVESTMENTS
For the period March 10, 2000 (commencement of operations) through August 31,
2000, purchases and sales of investment securities, other than short-term
investments, aggregated $7,068,218 and $2,321,816, respectively. As of August
31, 2000, the gross unrealized appreciation for all securities totaled $773,230
and the gross unrealized depreciation for all securities totaled $166,264 for a
net unrealized appreciation of $606,966. The aggregate cost of securities for
federal income tax purposes at August 31, 2000 was $3,752,226.
NOTE 6. ESTIMATES
Preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
