PROSPECTUS
May 1, 1998
Firsthand Funds
101 Park Center Plaza, Suite 1300
San Jose, CA 95113
(408) 294-2200
The Technology Value Fund
The Medical Specialists Fund
The Technology Leaders Fund
The Technology Innovators Fund
No-Load Funds
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Firsthand Funds (the "Trust"), a Delaware business trust, is an open-end
management investment company that is offering shares of beneficial interest
("shares") in series, each series representing a distinct fund with its own
investment objectives and policies. At present, there are four series authorized
by the Trust, The Technology Value Fund, The Medical Specialists Fund, The
Technology Leaders Fund, and The Technology Innovators Fund (individually, a
"Fund," and collectively, the "Funds"). Each Fund is non-diversified and has the
primary investment objective of long-term growth of capital. Although certain of
the Funds' investments may produce dividends, interest or other income, current
income is not a consideration in selecting a Fund's investments.
As an open-end management investment company, the Trust will offer each
Fund's shares on a continuous basis and will redeem such shares upon the demand
of a shareholder. Sales and redemptions will be effected at the net asset value
per share next determined after receipt of a proper order. The investor will pay
no sales charge or redemption fee.
The initial minimum investment in each Fund is $10,000 unless the investment
is made by an Individual Retirement Account ("IRA"), in which case the minimum
initial investment is $2,000. Subsequent investments in each Fund must be at
least $50. Lower minimums are available to investors purchasing shares of the
Funds through certain brokerage firms. Please see "How to Purchase Shares" in
this Prospectus for additional information.
Interactive Research Advisers, Inc. will serve as the investment adviser to
the Funds. Interactive Research Advisers, Inc. intends to focus its research on
the objective of long-term growth. Please see "Investment Advisory and Other
Services" in this Prospectus for additional information.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. Please retain it for future
reference. A Statement of Additional Information dated May 1, 1998 has been
filed with the Securities and Exchange Commission and is hereby incorporated by
reference in its entirety. A copy of the Statement of Additional Information can
be obtained at no charge by calling the number listed below. The Internet
address for the Funds is www.techfunds.com. The Securities and Exchange
Commission maintains a Web Site (www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other information
regarding the Funds.
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FOR INFORMATION OR ASSISTANCE IN OPENING AN ACCOUNT, PLEASE CALL:
Nationwide (Toll-Free)............................................1-888-884-2675
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<PAGE>
Firsthand Funds
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101 Park Center Plaza, Suite 1300
San Jose, CA 95113
Board of Trustees Underwriter
Kevin M. Landis, Chairman CW Fund Distributors, Inc
Kendrick W. Kam 312 Walnut Street
Michael T. Lynch Cincinnati, Ohio 45202
Mark K. Taguchi
Officers Transfer Agent
Kevin M. Landis, President Countrywide Fund Services, Inc.
Kendrick W. Kam, Secretary P.O. Box 5354
Yakoub Billawala, Treasurer Cincinnati, Ohio 45201
(Toll-free) 1-888-884-2675
Investment Adviser
Interactive Research Advisers, Inc.
101 Park Center Plaza, Suite 1300
San Jose, CA 95113
Table of Contents
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Prospectus Summary.............................................................3
Summary of Fund Expenses.......................................................5
Financial Highlights...........................................................6
Investment Objective, Policies and Risk Considerations.........................9
Investment Advisory and Other Services........................................14
How to Purchase Shares........................................................15
How to Redeem Shares..........................................................16
Shareholder Services..........................................................17
Exchange Privilege............................................................18
Dividends and Distributions...................................................19
Taxes.........................................................................19
Calculation of Share Price....................................................20
Performance Information.......................................................20
General Information...........................................................22
No person has been authorized to give any information or to make any
representation with respect to the Funds other than those contained in this
Prospectus, and information or representations not herein contained, if given or
made, must not be relied upon as having been authorized by the Funds. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy in any jurisdiction to any person to whom it is unlawful to make such an
offer or solicitation in such jurisdiction.
<PAGE>
Prospectus Summary
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Investment Objective and Policies
Each Fund's investment objective is long-term capital appreciation.
The TECHNOLOGY VALUE FUND seeks to achieve its objective by investing primarily
in securities of companies in the electronic technology and medical technology
fields which Interactive Research Advisers, Inc. (the "Investment Adviser")
considers to be undervalued and have potential for capital appreciation.
The MEDICAL SPECIALISTS FUND seeks to achieve its objective by investing
primarily in securities of companies in the health and biotechnology fields
which the Investment Adviser considers to have a strong earnings growth outlook
and potential for capital appreciation.
The TECHNOLOGY LEADERS FUND seeks to achieve its objective by investing
primarily in securities of companies in the high technology field which the
Investment Adviser considers to have the strongest competitive position.
The TECHNOLOGY INNOVATORS FUND seeks to achieve its objective by investing
primarily in securities of companies in the high technology field which the
Investment Adviser considers to be best positioned to introduce successful new
products.
The Trust
Firsthand Funds, a Delaware business trust organized as Interactive Investments
in November 1993, is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end management investment company which
will issue its shares in series, each series representing a distinct fund with
its own investment objectives and policies. The Board of Trustees to date has
authorized the issuance of shares in the four series which are the subject of
this Prospectus but may authorize additional series in the future.
Risk Factors
Generally
An investment in the Funds may be subject to certain risks hereinafter
described, including general risks associated with all securities investments.
There can be no assurance the Funds will be able to achieve their investment
objectives.
Each Fund will concentrate its investments in the technology industry. The Funds
will be subject to greater risk because of their concentration of investments in
a single industry and within certain segments of the industry. In addition, each
Fund may, from time to time, invest a substantial portion of its assets in the
securities of small capitalization companies. The securities of smaller
companies often involve higher risks and may be subject to wider price
fluctuations than securities of larger companies.
Each Fund may also invest a portion of its assets in other securities that
entail certain risks, such as foreign securities, securities of unseasoned
issuers and options. Please see "Investment Objective, Policies and Risk
Considerations" in this Prospectus for additional information.
Non-Diversification
Each Fund will be operated as a "non-diversified" portfolio, which means that
half of each Fund's portfolio can be invested in two or more stocks, while the
other half is spread out among investments not exceeding 5% of the Fund's total
assets. As a result of their non-diversified status, each Fund's shares may be
more susceptible to adverse change in the value of securities of a particular
company than would be the shares of a diversified investment company.
<PAGE>
Purchases of Shares
Shares of the Funds may be purchased at the next determined net asset value per
share (see "Calculation of Share Price"). Shares will be sold without a sales
load, with an initial investment of at least $10,000, or $2,000 for initial
investments by an IRA (see "How to Purchase Shares"). Subsequent investments
must be at least $50, subject to certain exceptions. Purchases may be made by
check or by bank wire. Lower minimums are available to investors purchasing
shares of the Funds through certain brokerage firms or financial institutions.
Redemptions of Shares
Investors may redeem shares at their next determined net asset value per share
by so instructing the Funds' Transfer Agent. Investors may also redeem shares
through a brokerage firm or financial institution through whom shares are owned.
See "How to Redeem Shares."
Investment Adviser
The Funds will be managed by Interactive Research Advisers, Inc. (the
"Investment Adviser"). The Investment Adviser is paid a monthly management fee
at the annual rate of 1.50% of each Fund's average daily net assets. The
Investment Adviser is also responsible for the provision of administrative
services to the Funds, for which it receives an additional fee. From time to
time, the Investment Adviser may waive all or some of its fees which would have
the effect of lowering a Fund's overall expense ratio and increasing the return
to shareholders during the period such amount is waived or assumed.
Transfer Agent
The Investment Adviser has retained Countrywide Fund Services, Inc. (the
"Transfer Agent"), P.O. Box 5354, Cincinnati, Ohio 45201, to provide
administrative, accounting and pricing, dividend disbursing, shareholder
servicing and transfer agent services. For further information regarding the
Transfer Agent, see "Investment Advisory and Other Services."
Dividends
Each Fund intends to declare and distribute income dividends and capital gains
distributions as may be required to qualify as a regulated investment company
under the Internal Revenue Code. See "Taxes." Currently, each Fund intends to
distribute income and capital gains annually. All dividends and distributions
will be reinvested automatically in shares of the applicable Fund unless the
shareholder elects otherwise. See "Dividends and Distributions."
<PAGE>
Summary of Fund Expenses
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The purpose of the tables below is to assist the investor in understanding the
various costs and expenses an investor in each of the Funds will bear directly
or indirectly. There are no sales charges, "loads" or maintenance charges of any
kind imposed on the purchase of shares (see "How to Purchase Shares").
<TABLE>
SHAREHOLDER TRANSACTION EXPENSES:
<CAPTION>
The The Medical The The Technology
Technology Specialists Technology Innovators
Value Fund Fund Leaders Fund Fund
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
Maximum sales load imposed on purchases..... None None None None
Maximum sales load imposed
on reinvested dividends................... None None None None
Deferred sales load......................... None None None None
Redemption fee.............................. None * None * None * None *
* A wire transfer fee is charged by the Funds' Custodian in the case of
redemptions made by wire. Such fee is subject to change and is currently $9.
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets):
Management Fees............................. 1.50% 1.50% 1.50% 1.50%
12b-1 Fees.................................. None None None None
Other Expenses.............................. .43% .45% .45% .45%
------------ -------------- ------------- -------------
Total Fund Operating Expenses(A) ........... 1.93% 1.95% 1.95% 1.95%
============ ============== ============= =============
(A)The Advisory Agreement limits each Fund's total annual operating expenses to
1.95% of the Fund's average daily net assets up to $200 million, 1.90% of
such assets from $200 million to $500 million, 1.85% of such assets from $500
million to $1 billion, and 1.80% of such assets in excess of $1 billion.
</TABLE>
With respect to The Technology Value Fund, Annual Fund Operating Expenses are
based on amounts incurred during the most recent fiscal year, except that they
have been restated to reflect current fees as if they had been in effect during
the entire year. With respect to The Medical Specialists Fund, The Technology
Leaders Fund and The Technology Innovators Fund, the percentages expressing
Other Expenses are based on estimated amounts for the current fiscal year.
Please see "Investment Advisory and Other Services" for a description of the
Funds' expenses.
Example:
Assuming (i) a $1,000 investment and (ii) a 5% annual return, an investor would
pay the following expenses over the periods indicated:
<TABLE>
<CAPTION>
The The Medical The The Technology
Technology Specialists Technology Innovators
Value Fund Fund Leaders Fund Fund
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
1 Year $20 $20 $20 $20
3 Year 61 61 61 61
5 Year 104
10 Year 225
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
</TABLE>
<PAGE>
<TABLE>
Financial Highlights
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The following information is an integral part of the Funds' financial statements
and should be read in conjunction with the financial statements. The financial
statements of The Technology Value Fund, The Medical Specialists Fund, and The
Technology Leaders Fund as of December 31, 1997 and the following information
were audited by Tait, Weller and Baker. These financial statements appear in the
Statement of Additional Information of the Funds, which can be obtained by
shareholders by calling the Transfer Agent (nationwide call toll-free
1-888-884-2675) or by writing to the Trust at the address on the front of this
Prospectus. As of the date of this Prospectus, The Technology Innovators Fund
has not commenced operations and thus no financial information has been provided
as to this Fund.
TECHNOLOGY VALUE FUND
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<CAPTION>
Selected Per Share Data and Ratios for a Share Outstanding Throughout Each Period
Year Year Year Period
Ended Ended Ended Ended
12/31/97 12/31/96 12/31/95 12/31/94(A)
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<S> <C> <C> <C> <C>
Net asset value at beginning of period......... $ 26.66 $ 18.44 $ 11.70 $ 10.00
------------ -------------- ------------- -------------
Income from investment operations:
Net investment loss......................... ( 0.26) ( 0.08) ( 0.14 ) ( 0.03 )
Net realized and unrealized
gains on investments...................... 1.90 11.20 7.28 2.56
------------ -------------- ------------- -------------
Total from investment operations............... 1.64 11.12 7.14 2.53
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Less distributions:
From net realized gains..................... ( 1.80) ( 2.90) ( 0.40 ) ( 0.83 )
In excess of net realized gains............. ( .44) -- -- --
------------ -------------- ------------- -------------
Total distributions............................ ( 2.24) ( 2.90) ( 0.40 ) ( 0.83 )
------------ -------------- ------------- -------------
Net asset value at end of period............... $ 26.06 $ 26.66 $ 18.44 $ 11.70
============ ============== ============= =============
Total return................................... 6.46% 60.55% 61.17% 25.30% (B)
============ ============== ============= =============
Net assets at end of period (millions)......... $ 194.4 $ 35.1 $ 2.7 $ 0.2
============ ============== ============= =============
Ratio of expenses to average net assets ....... 1.93% 1.81% 1.98% 1.96% (C)
Ratio of net investment loss
to average net assets....................... ( 1.43%) ( 0.55%) ( 1.45% ) ( 1.29%)(C)
Portfolio turnover rate........................ 101% 43% 45% 56%
Average commission paid
per investment security traded.............. $ 0.0330 $ 0.0426 N/A N/A
(A) Represents the period from the commencement of operations (May 20, 1994) to
December 31, 1994.
(B) Not annualized.
(C) Annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL SPECIALISTS FUND
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Selected Per Share Data and Ratios for a Share Outstanding Throughout Each Period
Period
Ended
12/31/97(A)
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<S> <C>
Net asset value at beginning of period...................................................... $ 10.00
---------------
Income from investment operations:
Net investment income.................................................................... 0.01
Net realized and unrealized
gains on investments................................................................... 0.11
---------------
Total from investment operations............................................................ 0.12
---------------
Less distributions:
Dividends from net investment income..................................................... --
Distributions from net realized gains.................................................... --
---------------
Total distributions......................................................................... --
---------------
Net asset value at end of period............................................................ $ 10.12
===============
Total Return(B) ............................................................................ 1.20%
===============
Net assets at end of period (millions)...................................................... $ 2.4
===============
Ratio of expenses to average net assets(C) ................................................. 1.81%
Ratio of net investment income
to average net assets(C) ................................................................ 1.75%
Portfolio turnover rate..................................................................... 0%
Average commission paid per investment security traded...................................... $ 0.0266
(A) Represents the period from commencement of operations (December 10, 1997) to
December 31, 1997.
(B) Not annualized.
(C) Annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TECHNOLOGY LEADERS FUND
============================================================================================================
Selected Per Share Data and Ratios for a Share Outstanding Throughout Each Period
Period
Ended
12/31/97(A)
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value at beginning of period...................................................... $ 10.00
---------------
Income from investment operations:
Net investment income.................................................................... 0.01
Net realized and unrealized
gains on investments................................................................... 0.06
---------------
Total from investment operations............................................................ 0.07
---------------
Less distributions:
Dividends from net investment income..................................................... --
Distributions from net realized gains.................................................... --
---------------
Total distributions......................................................................... --
---------------
Net asset value at end of period............................................................ $ 10.07
===============
Total return(B) ............................................................................ 0.70%
===============
Net assets at end of period (millions)...................................................... $ 3.6
===============
Ratio of expenses to average net assets (C) ................................................ 1.80%
Ratio of net investment income
to average net assets(C) ................................................................ 1.77%
Portfolio turnover rate..................................................................... 0%
Average commission paid per investment security traded...................................... $ 0.0300
(A) Represents the period from commencement of operations (December 10, 1997) to
December 31, 1997.
(B) Not annualized.
(C) Annualized.
</TABLE>
<PAGE>
Investment Objective, Policies and
Risk Considerations
================================================================================
Investment Objective
The Technology Value Fund
The Technology Value Fund's investment objective is long-term growth of capital.
Under normal market conditions, the Fund will invest at least 65% of the value
of its total assets in equity securities of companies, which may be of any size,
in the electronic technology and medical technology fields which, in the
Investment Adviser's opinion, are undervalued and have potential for capital
appreciation.
The Medical Specialists Fund
The Medical Specialists Fund's investment objective is long-term growth of
capital. Under normal market conditions, the Fund will invest at least 65% of
its total assets in equity securities of companies, which may be of any size, in
the health and biotechnology fields that, in the Investment Adviser's opinion,
have a strong earnings growth outlook and potential for capital appreciation
without regard to market capitalization. The health and biotechnology fields
include the cardiovascular medical device, minimally invasive surgical tool,
pharmaceutical, biotechnology, managed care provider and generic drug segments
of the technology industry.
The Technology Leaders Fund
The Technology Leaders Fund's investment objective is long-term growth of
capital. Under normal market conditions, the Fund will invest at least 65% of
its total assets in equity securities of companies, which may be of any size, in
the high technology field that, in the Investment Adviser's opinion, have the
strongest competitive position. In assessing the strength of a company's
competitive position, the Investment Adviser may consider such factors as
technology leadership, market share, patents and other intellectual property,
strength of management, marketing prowess and product development capabilities.
The high technology field includes the semiconductor, computer, computer
peripheral, software, telecommunication and mass storage device segments of the
technology industry.
The Technology Innovators Fund
The Technology Innovators Fund's investment objective is long-term growth of
capital. Under normal market conditions, the Fund will invest at least 65% of
its total assets in equity securities of companies, which may be of any size, in
the high technology field that, in the Investment Adviser's opinion, are best
positioned to introduce successful new products. In assessing a company's
capacity for innovation, the Investment Adviser may consider a number of
factors, including technical vision, marketing acumen, proprietary technological
advantages and a demonstrated ability to bring products to market quickly. The
high technology field includes the semiconductor, computer, computer peripheral,
software, telecommunication and mass storage device segments of the technology
industry.
Each Fund's investment objective may not be changed without shareholder
approval. However, for temporary defensive purposes, each Fund may invest any
portion of its assets in cash or cash equivalents. Potential investors should be
aware that risks exist in all types of investments and there can be no assurance
that the Funds will be successful in achieving their respective investment
objectives. The Funds' shares are intended for long-term investment. The Funds'
investment policies are outlined below, and where applicable, factors which may
increase the risk of investing in the Funds have been noted.
<PAGE>
Investment Policies
Equity Securities
The equity securities in which the Funds may invest include common stock,
convertible long-term corporate debt obligations, preferred stock, convertible
preferred stock and warrants. The securities selected will typically be traded
on a national securities exchange, the NASDAQ System or over-the-counter, and
may include securities of both large, well-known companies as well as smaller,
less well-known companies, including foreign securities listed on a foreign
securities exchange or traded in the United States. Although certain of the
Funds' investments may produce dividends, interest or other income, current
income is not a consideration in selecting a Fund's investments.
The Investment Adviser's analysis of a potential investment will focus on
valuing an enterprise and purchasing securities of the enterprise when the
Investment Adviser believes that value exceeds the market price. The Investment
Adviser intends to focus on the fundamental worth of the companies under
consideration, where fundamental worth is defined as the value of the basic
businesses of the firm, including products, technologies, customer relationships
and other sustainable competitive advantages. For purposes of the Investment
Adviser's analysis, fundamental worth is a reflection of the value of an
enterprise's assets and its earning power, and will be determined by use of
price-earnings ratios and comparison with sales of comparable assets to
independent third party buyers in arms' length transactions. Balance sheet
strength, the ability to generate earnings and a strong competitive position are
the major factors the Investment Adviser will use in appraising an investment.
Applicable price-earnings ratios depend on the earnings potential of an
enterprise as determined by the Investment Adviser. For example, an enterprise
that is a relatively high growth company would normally command a higher
price-earnings ratio than lower growth companies because expected future profits
would be higher.
Each Fund invests primarily in equity securities, which by definition entail
risk of loss of capital. Investments in equity securities are subject to
inherent market risks and fluctuation in value due to earnings, economic
conditions and other factors beyond the control of the Investment Adviser.
Securities in a Fund's portfolio may not increase as much as the market as a
whole and some undervalued securities may continue to be undervalued for long
periods of time. Some securities may be inactively traded, i.e., not quoted
daily in the financial press, and thus may not be readily bought or sold.
Although profits in some Fund holdings may be realized quickly, it is not
expected that most investments will appreciate rapidly. Each Fund may invest up
to 15% of its net assets in illiquid securities, but each Fund does not
presently intend to invest more than 5% of its net assets in securities of
unseasoned issuers or in securities which are subject to legal or contractual
restrictions on resale.
Each Fund may, from time to time, invest a substantial portion of its assets in
small capitalization companies. While smaller companies generally have potential
for rapid growth, they often involve higher risks because they lack the
management experience, financial resources, product diversification and
competitive strengths of larger corporations. In addition, in many instances,
the securities of smaller companies are traded only over-the-counter or on a
regional securities exchange, and the frequency and volume of their trading is
substantially less than is typical of larger companies. Therefore, the
securities of smaller companies may be subject to wider price fluctuations. When
making large sales, a Fund may have to sell portfolio holdings at discounts from
quoted prices or may have to make a series of small sales over an extended
period of time.
Foreign Securities
Each Fund may purchase foreign securities that are listed on a foreign
securities exchange or over-the-counter market, or which are represented by
American Depository Receipts and are listed on a domestic securities exchange or
traded in the United States on over-the-counter markets. While the Funds have no
present intention to invest any significant portion of their assets in foreign
securities, each Fund reserves the right to invest up to 15% of the value of its
net assets (measured at the time of purchase) in the securities of foreign
issuers and obligors. Foreign investments may be subject to risks that are not
typically associated with investing in domestic companies. For example, such
investment may be adversely affected by changes in currency rates and exchange
control regulations, future political and economic developments and the
possibility of seizure or nationalization of companies, or the imposition of
withholding taxes on income.
<PAGE>
Debt Securities
Each Fund may also invest in debt obligations of corporate issuers, the U.S.
Government, states, municipalities or state or municipal government agencies
that in the opinion of the Investment Adviser offer long-term capital
appreciation possibilities because of the timing of such investments. Each Fund
intends that no more than 35% of its total assets will be comprised of such debt
securities. Investments in such debt obligations may result in long-term capital
appreciation because the value of debt obligations varies inversely with
prevailing interest rates. Thus, an investment in debt obligations that is sold
at a time when prevailing interest rates are lower than they were at the time of
investment will typically result in capital appreciation. However, the reverse
is also true, so that if an investment in debt obligations is sold at a time
when prevailing interest rates are higher than they were at the time of
investment, a capital loss will typically be realized. Accordingly, if a Fund
invests in the debt obligations described above, such investments will generally
be made when the Investment Adviser expects that prevailing interest rates will
be falling, and will generally be sold when the Investment Adviser expects
interest rates to rise.
Each Fund's investments in this area will consist solely of investment grade
securities (rated BBB or higher by Standard & Poor's Ratings Group or Baa or
higher by Moody's Investors Service, Inc., or unrated securities determined by
the Investment Adviser to be of comparable quality). While securities in these
categories are generally accepted as being of investment grade, securities rated
BBB or Baa have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to pay
principal and interest than is the case with higher grade securities. In the
event a security's rating is reduced below a Fund's minimum requirements, the
Fund will sell the security, subject to market conditions and the Investment
Adviser's assessment of the most opportune time for sale.
Put and Call Options
The Medical Specialists Fund, The Technology Leaders Fund and The Technology
Innovators Fund may each write (sell) covered put and call options as a means of
enhancing their respective returns, and may buy put and call options written by
others covering securities and stock indices to attempt to provide protection
against the adverse effects of anticipated changes in the prices of such
securities. Each Fund may write covered call options as a means of enhancing its
return through the receipt of premiums when the Investment Adviser determines
that the underlying securities have achieved their potential for appreciation.
Option writing, while designed to hedge and enhance income, may result in lost
profit and transaction costs. The Statement of Additional Information contains
more information regarding these activities.
Fundamental Investment Policies
Each Fund has adopted the following fundamental investment policies, which may
not be changed without shareholder approval:
Non-Diversification of Investments
As non-diversified investment companies, the Funds may be subject to greater
risks than diversified companies because of the possible fluctuation in the
values of securities of fewer issuers. However, at the close of each fiscal
quarter at least 50% of the value of each Fund's total assets will be
represented by one or more of the following: (i) cash and cash items, including
receivables; (ii) U.S. Government securities; (iii) securities of other
registered investment companies; and (iv) securities (other than U.S. Government
securities and securities of other regulated investment companies) of any one or
more issuers which meet the following limitations: (a) the Fund will not invest
more than 5% of its total assets in the securities of any such issuer and (b)
the entire amount of the securities of such issuer owned by the Fund will not
represent more than 10% of the outstanding voting securities of such issuer.
Additionally, not more than 25% of the value of a Fund's total assets may be
invested in the securities of any one issuer. Each Fund will not invest more
than 5% of its total assets in the securities of any single investment company
nor more than 10% of their total assets in the securities of all other
investment companies.
<PAGE>
Concentration of Investments
Each Fund will concentrate its investments in the technology industry.
Concentration allows a Fund to invest 25% or more of the value of its total
assets in securities of issuers in a particular industry. Each Fund will
therefore invest 25% or more of its total assets in the technology industry. It
is possible that, compared to the broad market, a particular group of related
stocks will decline in price due to developments affecting an industry. For
example, the technology industry may be strongly affected by changes in the
economic climate, broad market swings, moves in a dominant industry stock or
regulatory changes.
The Technology Value Fund will invest primarily in a combination of companies
within the electronic and medical technology segments, while The Medical
Specialists Fund will invest primarily in companies within the health and
biotechnology segments and each of The Technology Leaders Fund and The
Technology Innovators Fund will invest primarily in companies within the high
technology segment. The Funds will be subject to greater risk because of their
concentration of investments in a single industry and within certain segments of
the industry. For example, investments in the health and biotechnology segments
include the risk that the economic prospects, and the share prices, of health
and biotechnology companies can fluctuate dramatically due to changes in the
regulatory or competitive environments. Investments in the high technology
segment include the risk that certain high technology products and services are
subject to competitive pressures and aggressive pricing. Investments in
companies that offer new products in the high technology segment, such as
investments in that area by The Technology Innovators Fund, include the risk
that the new products will not meet expectations or even reach the marketplace.
Additionally, health, biotechnology and high technology segment products and
services are subject to risk of rapid obsolescence caused by scientific
developments and technological advances.
Although the Investment Adviser currently believes that investments by the Funds
in certain health, biotechnology and technology companies may offer greater
opportunities for growth of capital than investments in other industries, such
investments may also expose investors to greater than average financial and
market risk. Accordingly, an investment in one or more of the Funds does not
constitute a balanced investment program.
The Funds intend to invest primarily in the following industry segments:
HIGH TECHNOLOGY HEALTH AND BIOTECHNOLOGY
--------------- ------------------------
o Semiconductor o Cardiovascular Medical Device
o Computer o Minimally Invasive Surgical Tool
o Computer Peripheral o Pharmaceutical
o Software o Biotechnology
o Telecommunication o Managed Care Provider
o Mass Storage Device o Generic Drug
Borrowing
Each Fund may borrow from banks for temporary or emergency purposes in an
aggregate amount not to exceed 25% of its total assets. Borrowing magnifies the
potential for gain or loss on the portfolio securities of a Fund and, therefore,
if employed, increases the possibility of fluctuation in the Fund's net asset
value. This is the speculative factor known as leverage. To reduce the risks of
borrowing, each Fund will limit its borrowings as described above. Each Fund may
pledge its assets in connection with borrowings. While a Fund's borrowings
exceed 5% of its total assets, it will not purchase additional portfolio
securities.
<PAGE>
Lending Portfolio Securities
Each Fund may make short-term loans of its portfolio securities to banks,
brokers and dealers. Lending portfolio securities exposes a Fund to the risk
that the borrower may fail to return the loaned securities or may not be able to
provide additional collateral or that a Fund may experience delays in recovery
of the loaned securities or loss of rights in the collateral if the borrower
fails financially. To minimize these risks, the borrower must agree to maintain
collateral marked to market daily, in the form of cash and/or U.S. Government
obligations, with the Funds' Custodian in an amount at least equal to the market
value of the loaned securities. Each Fund will limit the amount of its loans of
its portfolio securities to no more than 30% of its total assets.
Other Investment Policies
Each Fund proposes to follow certain other investment policies set forth below,
which are not matters of fundamental policy and may be changed at the discretion
of management of the Trust, without a vote of the shareholders:
Companies With Less Than Three Years' Continuous Operation
The Funds may purchase securities of any company with a record of less than
three years' continuous operation (including that of predecessors) but only to
the extent that such purchase would not cause a Fund's investments in all such
companies to exceed 25% of the value of its net assets at the time of purchase.
Each Fund presently intends not to invest more than 5% of the value of its net
assets in such companies during the coming year.
Warrants
The Funds may purchase warrants, valued at the lower of cost or market, but
only to the extent that such investments do not exceed 5% of a Fund's net assets
at the time of purchase.
Portfolio Turnover
The Funds will not seek to realize profits by anticipating short-term market
movements but rather intend to purchase securities for long-term capital
appreciation. While the rate of portfolio turnover will not be a limiting factor
when the Investment Adviser deems changes appropriate, it is expected that given
the Funds' investment objectives, each Fund's annual portfolio turnover will not
exceed 100%. Portfolio turnover is calculated by dividing the lesser of a Fund's
purchases or sales of portfolio securities during the period in question by the
monthly average of the value of the Fund's portfolio securities during that
period. Excluded from consideration in the calculation are all debt securities
with remaining maturities of one year or less when purchased by the Funds.
Money Market Instruments
For defensive purposes, each Fund may temporarily hold all or a portion of its
assets in money market instruments. The money market instruments which the Funds
may own from time to time include U.S. Government obligations having a maturity
of less than one year, commercial paper rated A-2 or better by Standard & Poor's
Ratings Group or Prime-2 or better by Moody's Investors Service, Inc.,
repurchase agreements, shares of money market investment companies, bank debt
instruments (certificates of deposit, time deposits and bankers' acceptances)
and other short-term instruments issued by domestic branches of U.S. financial
institutions that are insured by the Federal Deposit Insurance Corporation and
have assets exceeding $10 billion.
<PAGE>
Investment Advisory and Other Services
================================================================================
Investment Adviser
The Trust retains Interactive Research Advisers, Inc., 101 Park Center Plaza,
Suite 1300, San Jose, California 95113, as its Investment Adviser. The
Investment Adviser is controlled by Kendrick W. Kam and Kevin M. Landis, who
also serve as Trustees of the Trust.
Mr. Kam and Mr. Landis have served as co-portfolio managers of The Technology
Value Fund since the Fund's inception. Mr. Kam is the portfolio manager of The
Medical Specialists Fund and Mr. Landis is the portfolio manager of The
Technology Leaders Fund and The Technology Innovators Fund. Prior to his
association with the Investment Adviser, Mr. Kam was co-founder and Vice
President of Marketing and Finance for Novoste Corporation, a medical device
company headquartered in Aguadilla, Puerto Rico. Prior to his association with
the Investment Adviser, Mr. Landis served as New Products Marketing Manager for
S-MOS Systems, Inc., a San Jose, California-based semiconductor firm.
Under investment advisory contracts (the "Advisory Agreement") between the Trust
and the Investment Adviser, the Investment Adviser furnishes advice and
recommendations with respect to each Fund's portfolio of securities and
investments and provides persons satisfactory to the Trust's Board of Trustees
to act as officers of the Trust responsible for the overall management and
administration of the Trust, subject to supervision of the Trust's Board of
Trustees. Such officers as well as certain Trustees of the Trust may be
directors, officers or employees of the Investment Adviser or its affiliates.
All orders for transactions in securities on behalf of the Funds are placed with
broker-dealers selected by the Adviser. The Adviser may select broker-dealers
that provide it with research services and may cause the Funds to pay these
broker-dealers commissions that exceed those that other broker-dealers may have
charged, if it views the commissions as reasonable in relation to the value of
the brokerage and/or research services provided.
Under the Advisory Agreement, the Investment Adviser is responsible for (i) the
compensation of any of the Trust's Trustees, officers and employees who are
directors, officers, employees or shareholders of the Investment Adviser, (ii)
compensation of the Investment Adviser's personnel and payment of other expenses
in connection with the provision of portfolio management services under the
Advisory Agreement, and (iii) expenses of printing and distributing the Funds'
Prospectus and sales and advertising materials to prospective clients.
For the services provided by the Investment Adviser under the Advisory
Agreement, the Investment Adviser receives from each Fund a management fee equal
to 1.50% per annum of such Fund's average daily net assets. The management fee
is accrued daily and is paid to the Investment Adviser at the end of each month.
The Advisory Agreement requires the Investment Adviser to waive its management
fees and, if necessary, reimburse expenses of the Funds to the extent necessary
to limit each Fund's total operating expenses to 1.95% of its average net assets
up to $200 million, 1.90% of such assets from $200 million to $500 million,
1.85% of such assets from $500 million to $1 billion, and 1.80% of such assets
in excess of $1 billion.
Underwriter
The Funds have entered into an Underwriting Agreement with CW Fund Distributors,
Inc. (the "Underwriter"), 312 Walnut Street, 21st Floor, Cincinnati, Ohio 45202,
under which the Underwriter provides distribution services to the Funds. The
Underwriter is an indirect wholly-owned subsidiary of Countrywide Credit
Industries, Inc., a New York Stock Exchange listed company principally engaged
in the business of residential mortgage lending. Robert G. Dorsey and John F.
Splain are officers of both the Trust and the Underwriter.
<PAGE>
Fund Administration
The Trust has entered into a separate contract with the Investment Adviser
wherein the Investment Adviser is responsible for providing administrative and
general supervisory services to the Funds (the "Administration Agreement").
Under the Administration Agreement, the Investment Adviser oversees the
maintenance of all books and records with respect to the Funds' securities
transactions and the Funds' book of accounts in accordance with all applicable
federal and state laws and regulations. The Investment Adviser also arranges for
the preservation of journals, ledgers, corporate documents, brokerage account
records and other records which are required to be maintained pursuant to the
1940 Act.
Under the Administration Agreement, the Investment Adviser is responsible for
the equipment, staff, office space and facilities necessary to perform its
obligations. The Investment Adviser has also assumed responsibility for payment
of all of the Funds' operating expenses except for brokerage and commission
expenses and any extraordinary and non-recurring expenses.
For the services rendered by the Investment Adviser under the Administration
Agreement, the Investment Adviser receives a fee at the annual rate of .45% of
each Fund's average daily net assets up to $200 million, .40% of such assets
from $200 million to $500 million, .35% of such assets from $500 million to $1
billion, and .30% of such assets in excess of $1 billion.
The Investment Adviser has retained Countrywide Fund Services, Inc. (the
"Transfer Agent") to serve as the Funds' transfer agent, dividend paying agent
and shareholder service agent, to provide accounting and pricing services to the
Funds, and to assist the Investment Adviser in providing executive,
administrative and regulatory services to the Funds. The Transfer Agent is an
indirect wholly-owned subsidiary of Countrywide Credit Industries, Inc., a New
York Stock Exchange listed company principally engaged in the business of
residential mortgage lending. The Investment Adviser (not the Funds) pays the
Transfer Agent's fees for these services. In addition to the Transfer Agent, the
Adviser may retain and pay brokers who provide shareholder servicing to their
customers.
How to Purchase Shares
================================================================================
You may purchase shares directly through the Funds' Transfer Agent or through a
brokerage firm or financial institution that has agreed to sell the Funds'
shares. Your initial investment in the Funds must be at least $10,000 per Fund
(or $2,000 per Fund for IRAs). Lower minimums are available to investors
purchasing shares of the Funds through certain brokerage firms. Shares of the
Funds are sold on a continuous basis at the net asset value next determined
after receipt of a purchase order by the Funds or an agent of the Funds.
Purchase orders received by such agents prior to 4:00 p.m., eastern time, on any
business day are confirmed at the net asset value determined as of the close of
the regular session of trading on the New York Stock Exchange on that day. It is
the responsibility of agents to transmit properly completed orders promptly.
Agents may charge a fee (separately negotiated with their customers) for
effecting purchase orders. Direct purchase orders received by the Transfer Agent
by 4:00 p.m., eastern time, are confirmed at that day's net asset value.
You may open an account and make an initial investment in the Funds through
selected brokerage firms or financial intermediaries or by sending a check and a
completed account application form to Firsthand Funds, P.O. Box 5354,
Cincinnati, Ohio 45201-5354. Checks should be made payable to "Firsthand Funds."
The Funds will not accept third party checks for the purchase of shares.
The Transfer Agent (or your broker) mails you confirmations of all purchases or
redemptions of Fund shares. Certificates representing shares are not issued. The
Trust reserves the rights to limit the amount of investments and to refuse to
sell to any person.
<PAGE>
Investors should be aware that the Funds' account application contains
provisions in favor of the Trust and certain of its affiliates, excluding such
entities from certain liabilities (including, among others, losses resulting
from unauthorized shareholder transactions) relating to the various services
made available to investors.
Should an order to purchase shares be canceled because your check does not
clear, you will be responsible for any resulting losses or fees incurred by the
Trust or the Transfer Agent in the transaction.
Provided the Trust has received a completed account application form, you may
also purchase shares of the Funds by wire. Please telephone the Transfer Agent
(Nationwide call toll-free 1-888-884-2675) for instructions. You should be
prepared to give the name of the Fund in which you wish to purchase shares, the
name in which the account is to be established, the address, telephone number
and taxpayer identification number for the account, and the name of the bank
which will wire the money.
Your investment will be made at the next determined net asset value after your
wire is received together with the account information indicated above. If the
Transfer Agent does not receive timely and complete account information, there
may be a delay in the investment of your money and any accrual of dividends. To
make your initial wire purchase, you are required to mail a completed account
application to the Transfer Agent. Your bank may impose a charge for sending
your wire. There is presently no fee for receipt of wired funds, but the
Transfer Agent reserves the right to charge shareholders for this service upon
thirty days' prior notice to shareholders.
You may purchase and add shares to your account ($50 minimum) by mail or by bank
wire. Checks should be sent to Firsthand Funds, P.O. Box 5354, Cincinnati, Ohio
45201-5354. Checks should be made payable to "Firsthand Funds." Bank wires
should be sent as outlined above. Each additional purchase request must contain
the name of your account and your account number to permit proper crediting to
your account.
How to Redeem Shares
================================================================================
You may redeem shares of each Fund on each day that the Transfer Agent is open
for business by sending a written request to the Transfer Agent. You may also
redeem shares through a broker or financial intermediary through whom you own
shares. When requesting a direct redemption through the Transfer Agent, the
request must state the number of shares or the dollar amount to be redeemed and
your account number. The request must be signed exactly as your name appears on
the Trust's account records. If the shares to be redeemed have a value of
$25,000 or more, your signature must be guaranteed by any eligible guarantor
institution, including banks, brokers and dealers, municipal securities brokers
and dealers, government securities brokers and dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. A notary public is not an acceptable guarantor.
Redemption requests may direct that the proceeds be wired directly to your
existing account in any commercial bank or brokerage firm in the United States.
If your instructions request a redemption by wire, you will be charged a $9
processing fee by the Fund's Custodian. The Trust reserves the right, upon
thirty days' written notice, to change the processing fee. All charges will be
deducted from your account by redemption of shares in your account. Your bank or
brokerage firm may also impose a charge for processing the wire. In the event
that wire transfer of funds is impossible or impractical, the redemption
proceeds will be sent by mail to the designated account.
You may also redeem shares by placing a wire redemption through a securities
broker or dealer. Unaffiliated broker-dealers may impose a fee on the
shareholder for this service. You will receive the net asset value per share
next determined after receipt by the Trust's agent of your wire redemption
request. It is the responsibility of broker-dealers to properly transmit wire
redemption orders.
<PAGE>
You will receive the net asset value per share next determined after receipt by
the Transfer Agent (or other agents of the Funds) of your redemption request in
the form described above. Payment is made within three business days after
tender in such form, provided that payment for redemption of shares purchased by
check will be effected only after the check has been collected, which may take
up to fifteen days from the purchase date. To eliminate this delay, you may
purchase shares of the Funds by certified check or wire.
The Transfer Agent will consider all written and verbal instructions as
authentic and will not be responsible for the processing of exchange
instructions received by telephone which are reasonably believed to be genuine
or the delivery or transmittal of the redemption proceeds by wire. The affected
shareholders will bear the risk of any such loss.
At the discretion of the Transfer Agent, corporate investors and other
associations may be required to furnish an appropriate certification authorizing
redemptions to ensure proper authorization.
The Trust reserves the right to require you to close your account, other than an
IRA account, if at any time the value of your shares is less than $10,000 (based
on actual amounts invested, unaffected by market fluctuations), or such other
minimum amount as the Trust may determine from time to time. After notification
to you of the Trust's intention to close your account, you will be given sixty
days to increase the value of your account to the minimum amount.
The Trust reserves the right to suspend the right of redemption or to postpone
the date of payment for more than three business days under unusual
circumstances as determined by the Securities and Exchange Commission.
Shareholder Services
================================================================================
Contact the Transfer Agent (nationwide call toll-free 1-888-884-2675) for
additional information about the shareholder services described below.
Tax-Deferred Retirement Plans
Shares of each Fund are available for purchase in connection with the following
tax-deferred retirement plans:
-- Keogh Plans for self-employed individuals
-- Individual retirement account (IRA) plans for individuals and their
non-employed spouses, including Roth IRAs and Education IRAs
-- Qualified pension and profit-sharing plans for employees, including
those profit-sharing plans with a 401(k) provision
-- 403(b)(7) custodial accounts for employees of public school systems,
hospitals, colleges and other non-profit organizations meeting certain
requirements of the Internal Revenue Code (the "Code")
Direct Deposit Plans
Shares of each Fund may be purchased through direct deposit plans offered by
certain employers and government agencies. These plans enable a shareholder to
have all or a portion of his or her payroll or Social Security checks
transferred automatically to purchase shares of the Funds.
<PAGE>
Automatic Investment Plan
By completing the Automatic Investment Plan section of the account application,
you may make automatic monthly investments in each Fund from your bank, savings
and loan or other depository institution account. The minimum monthly investment
must be $50 under the plan. The Transfer Agent pays the costs associated with
these transfers, but reserves the right, upon thirty days' written notice, to
make reasonable charges for this service. Your depository institution may impose
its own charge for debiting your account which would reduce your return from an
investment in the Funds. You may change the amount of the investment or
discontinue the plan at any time by writing to the Transfer Agent.
Exchange Privilege
================================================================================
Shares of the Funds may be exchanged for each other at net asset value. Shares
of any Fund may also be exchanged at net asset value for shares of the Short
Term Government Income Fund (a series of Countrywide Investment Trust), which
invests in short-term U.S. Government obligations backed by the "full faith and
credit" of the United States and seeks high current income, consistent with
protection of capital. The Short Term Government Income Fund is not affiliated
with the Trust. You must obtain a copy of the Short Term Government Income
Fund's prospectus by calling 1-888-884-2675 or by writing to the Trust, and you
are advised to read it carefully before authorizing any exchange into, or
investment in, the Short Term Government Income Fund. Shares of the Short Term
Government Income Fund acquired via exchange may be re-exchanged for shares of
any Fund at net asset value.
To request an exchange, you may send a written request to the Transfer Agent.
The request must be signed exactly as your name appears on the Trust's account
records. Exchanges may also be requested by telephone. If you are unable to
execute your transaction by telephone (for example during times of unusual
market activity) consider requesting your exchange by mail. An exchange will be
effected at the next determined net asset value after receipt of a request by
the Transfer Agent. Your request is subject to the Fund's cut-off times.
The telephone exchange privilege is automatically available to all shareholders.
Neither the Trust, the Transfer Agent, nor their respective affiliates will be
liable for complying with telephone instructions they reasonably believe to be
genuine for any loss, damage, cost or expense in acting on such telephone
instructions. The affected shareholders will bear the risk of any such loss. The
Trust, or the Transfer Agent, or both, will employ reasonable procedures to
determine that telephone instructions are genuine. If the Trust and/or the
Transfer Agent do not employ such procedures, they may be liable for losses due
to unauthorized or fraudulent instructions. These procedures may include, among
others, requiring forms of personal identification prior to acting upon
telephone instructions, providing written confirmation of the transactions
and/or tape recording telephone instructions.
Because excessive exchanges can harm a Fund's performance, the Trust and/or the
Transfer Agent reserve the right to terminate your exchange privileges if you
make more than four exchanges out of any one Fund during a 12-month period. The
Fund may also refuse an exchange into a Fund from which you have redeemed shares
within the previous 90 days. A shareholder's exchanges may be restricted or
refused if a Fund receives or the Investment Adviser anticipates, simultaneous
orders affecting significant portions of that Fund's assets and, in particular,
a pattern of exchanges coinciding with a "market timing" strategy. The Trust
and/or the Transfer Agent reserve the right to refuse exchanges by any person or
group if, in the Investment Adviser's judgment, a Fund would be unable to
effectively invest the money in accordance with its investment objective and
policies, or would otherwise be potentially adversely affected. Although the
Trust and/or the Transfer Agent attempt to provide prior notice to affected
shareholders when it is reasonable to do so, they may impose these restrictions
at any time.
<PAGE>
Exchanges may only be made for shares of the Funds then offered for sale in your
state of residence and are subject to the applicable minimum initial investment
requirements. The exchange privilege may be modified or terminated by the Board
of Trustees upon 60 days' prior notice to shareholders. An exchange results in a
sale of Fund shares, which may cause you to recognize a capital gain or loss.
Dividends and Distributions
================================================================================
Each Fund expects to distribute substantially all of its net investment income
and net realized gains, if any, at least annually. Dividends and distributions
are automatically reinvested in additional shares of the Funds (the Share
Option) unless cash payments are specified on your application or are otherwise
requested by contacting the Transfer Agent.
If you elect to receive dividends in cash and the U.S. Postal Service cannot
deliver your checks or if your checks remain uncashed for six months, your
dividends may be reinvested in your account at the then-current net asset value
and your account will be converted to the Share Option. No interest will accrue
on amounts represented by uncashed distribution checks.
Taxes
================================================================================
The following discussion relates solely to the federal income tax treatment of
dividends and distributions by the Funds. Investors should consult their own tax
advisers for further details and for the application of state, local and foreign
tax laws to their particular situations.
Each Fund intends to qualify and to be treated as a "regulated investment
company" under Subchapter M of the Code by annually distributing substantially
all of its net investment company taxable income, net tax-exempt income and net
capital gains in dividends to its shareholders and by satisfying certain other
requirements related to the sources of its income and the diversification of its
assets. By so qualifying, a Fund will not be subject to federal income tax or
excise tax on that part of its investment company taxable income and net
realized short-term and long-term capital gains which it distributes to its
shareholders in accordance with the Code's timing requirements.
Dividends and distributions paid to shareholders are generally subject to
federal income tax and may be subject to state and local income tax. Dividends
from net investment income and distributions from any excess of net realized
short-term capital gains over net realized capital losses are currently taxable
to shareholders (other than tax-exempt entities that have not borrowed to
purchase or carry their shares of the Funds) as ordinary income.
Distributions of net capital gains (i.e., the excess of net long-term capital
gains over net short-term capital losses) by a Fund to its shareholders are
taxable to the recipient shareholders as capital gains, without regard to the
length of time a shareholder has held Fund shares. The maximum capital gains
rate for individuals is 28% with respect to assets held for more than 12 months,
but not more than 18 months, and 20% with respect to assets held more than 18
months. The maximum capital gains rate for corporate shareholders is the same as
the maximum tax rate for ordinary income. Redemptions of shares of the Funds are
taxable events on which a shareholder may realize a gain or loss.
To avoid a 31% federal backup withholding tax requirement on dividends,
distributions and redemption proceeds, individuals and other non-exempt
shareholders must certify their taxpayer identification number to the Trust on
the investment application and provide certain other certifications. A
shareholder may also be subject to backup withholding if the Internal Revenue
Service or a broker notifies the Trust that the number furnished by the
shareholder is subject to backup withholding for previous under-reporting of
interest or dividend income. Amounts withheld by the Funds are applied to the
shareholder's federal income tax liability. In addition, foreign shareholders
may be subject to federal income tax withholding of up to 30% of dividends,
distributions and redemption proceeds from the Funds.
<PAGE>
Reports containing appropriate federal income tax information (relating to the
tax status of dividends and capital gain distributions by the Funds) will be
furnished to each shareholder not later than 30 days following the close of the
calendar year during which the payments are made.
The above discussion concerning the taxation of dividends and distributions
received by shareholders is applicable whether a shareholder receives such
payment in cash or reinvests such amount in additional shares of the Funds.
Thus, dividends and distributions which are taxable as ordinary income or
capital gain are so taxable whether received in cash or reinvested in additional
shares of the Funds.
Additional information regarding the taxation of the Funds and their
shareholders is contained in the Statement of Additional Information under
"Taxes."
Calculation of Share Price
================================================================================
On each day that the Transfer Agent is open for business, the share price (net
asset value) of the shares of each Fund is determined as of the close of the
regular session of trading on the New York Stock Exchange, currently 4:00 p.m.,
eastern time. The Transfer Agent is open for business on each day the New York
Stock Exchange is open for business and on any other day when there is
sufficient trading in a Fund's investments that its net asset value might be
materially affected. The net asset value per share of each Fund is calculated by
dividing the sum of the value of the securities held by the Fund plus cash or
other assets minus all liabilities (including estimated accrued expenses) by the
total number of shares outstanding of the Fund, rounded to the nearest cent.
Portfolio securities are valued as follows: (1) securities which are traded on
stock exchanges or are quoted by NASDAQ are valued at the last reported sale
price as of the close of the regular session of trading on the New York Stock
Exchange on the day the securities are being valued, or, if not traded on a
particular day, at the most recent bid price, (2) securities traded in the
over-the-counter market, and which are not quoted by NASDAQ, are valued at the
most recent bid price, as obtained from one or more of the major market makers
for such securities, as of the close of the regular session of trading on the
New York Stock Exchange on the day the securities are being valued, (3)
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market,
and (4) securities (and other assets) for which market quotations are not
readily available are valued at their fair value as determined in good faith in
accordance with consistently applied procedures established by and under the
general supervision of the Board of Trustees. The net asset value per share of
each Fund will fluctuate with the value of the securities it holds.
Performance Information
================================================================================
Each Fund may, from time to time, include figures indicating its total return,
or yield and total return, in advertisements or reports to shareholders or
prospective investors. Any quotations of yield will be based on all investment
income per share earned during a given 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income"),
and will be computed by dividing net investment income by the maximum public
offering price per share on the last day of the period and annualizing the
result. Quotations of a Fund's average annual compounded rate of return on a
hypothetical investment in the Fund over a period of 1, 5 and 10 years (or
shorter periods dating from the commencement of Fund operations) will reflect
the deduction of a proportional share of Fund expenses (on an annual basis) and
will assume that all dividends and distributions are reinvested when paid.
<PAGE>
Performance information for a Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of a Fund's investment objectives and policies, the types and quality of
the Fund's portfolio investments, market conditions during the particular time
period and operating expenses. Such information should not be considered as a
representation of the Fund's future performance. For a further description of
the methods to be used to determine a Fund's average annual total return and
yield, please refer to "Performance Information" in the Statement of Additional
Information.
The table below shows the investment results for The Technology Value Fund for
various periods throughout the Fund's lifetime. The results represent "total
return" investment performance, which assumes the reinvestment of all capital
gains and income dividends for the indicated periods. Also included is
comparative information with respect to the unmanaged Standard & Poor's 500
Stock Index (the "S&P 500"), the NASDAQ Composite Index ("NASDAQ") and the Dow
Jones Industrial Average (the "DJIA"). The table does not make any allowance for
federal, state or local income taxes. The Firsthand Fund's Annual Report
contains additional performance information and is available on request and
without charge by calling 1-888-884-2675. As of the date of this Prospectus, The
Medical Specialists Fund, The Technology Leaders Fund and The Technology
Innovators Fund have not commenced operations or only recently commenced
operations and thus have no performance history.
The results should not be considered a representation of the total return from
an investment made in The Technology Value Fund today. The periods shown were
generally favorable ones for stock market investing. This information is
provided to help you better understand The Technology Value Fund and may not
provide a basis for comparison with other investments or mutual funds (including
The Medical Specialists Fund, The Technology Leaders Fund, and The Technology
Innovators Fund) which are managed according to different investment objectives
or strategies or which use a different method to calculate performance.
<TABLE>
<CAPTION>
TECHNOLOGY
PERIOD VALUE FUND S&P 500 DJIA NASDAQ**
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/20/94* - 12/31/94 25.30% 2.74% 3.52% 3.48%
1/1/95 - 12/31/95 61.17% 37.58% 36.84% 39.92%
1/1/96 - 12/31/96 60.55% 22.96% 28.88% 22.71%
1/1/97- 12/31/97 6.46% 33.36% 24.94% 22.15%
Aggregate Total
Return Since Inception
(as of 12/31/97) 245.17% 131.78% 128.08% 117.02%
Annualized Total
Return Since Inception
(as of 12/31/97) 40.82% 26.15% 25.59% 23.87%
* Fund Inception Date
** Measures price appreciation only; dividends not included.
</TABLE>
<PAGE>
General Information
================================================================================
Organization and Capital Structure
The Trust was organized in November 1993 as a Delaware business trust and is
authorized to issue an unlimited number of shares of beneficial interest. The
Trust currently has authorized the issuance of four series of shares, or Funds.
The Board of Trustees may authorize the creation of additional series without
shareholder approval.
All shares, when issued, will be fully paid and non-assessable and will be
redeemable and freely transferable. All shares have equal voting rights. They
can be issued as full or fractional shares. A fractional share has pro rata the
same kind of rights and privileges as a full share. The shares possess no
preemptive or conversion rights.
Each share of a Fund has one vote irrespective of the relative net asset value
of the shares. The voting rights of shareholders are non-cumulative, so that
holders of more than 50% of the shares can elect all Trustees being elected. On
issues affecting only a particular Fund, the shares of the affected Fund will
vote as a separate series. An example of such an issue would be a fundamental
investment restriction pertaining to only one Fund.
As of February 1, 1998, Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, California 94104, may be deemed to control The Technology Value Fund
and The Medical Specialists Fund by virtue of the fact that it owns of record
more than 25% of both Fund's shares. As of the same date, National Financial
Services Corp., 200 Liberty Street, 1 World Financial Center, New York, New
York, 10281, may be deemed to control The Technology Leaders Fund by virtue of
the fact that it owns of record more than 25% of the Fund's shares.
The Board of Trustees of the Trust is responsible for managing the business and
affairs of the Trust. The Board exercises all of the rights and responsibilities
required by, or made available under, the Delaware Business Trust Act.
Shareholder Meetings and Inquiries
Annual meetings of shareholders will not be held unless called by the
shareholders pursuant to the Delaware Business Trust Act or unless required by
the 1940 Act and the rules and regulations promulgated thereunder.
Special meetings of the shareholders may be held, however, at any time and for
any purpose, (i) if called by the Chairman of the Board of Trustees, if one
exists, the President and two or more Trustees, (ii) if called by one or more
shareholders holding 10% or more of the shares entitled to vote on matters
presented to the meeting, or (iii) if an annual meeting is not held within any
13-month period, upon application of any shareholder, a court of competent
jurisdiction may summarily order that such meeting be held.
Reports to Shareholders
The Funds will issue semiannual reports which will include a list of securities
owned by the Funds and financial statements which, in the case of the annual
report, will be examined and reported upon by the Funds' independent auditors.
<PAGE>
FIRSTHAND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
THE TECHNOLOGY VALUE FUND
THE MEDICAL SPECIALISTS FUND
THE TECHNOLOGY LEADERS FUND
THE TECHNOLOGY INNOVATORS FUND
This Statement of Additional Information is not a Prospectus, but is to be read
in conjunction with the Prospectus of Firsthand Funds dated May 1, 1998. A copy
of the Prospectus can be obtained by writing the Trust at 101 Park Center Plaza,
Suite 1300, San Jose, California 95113, or by calling the Trust at
1-888-884-2675.
TABLE OF CONTENTS
The Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Definitions, Policies and Risk Considerations . . . . . . . . . 2
Quality Ratings of Corporate Bonds and Preferred Stocks . . . .11
Investment Restrictions . . . . . . . . . . . . . . . . . . . .13
Management of the Trust . . . . . . . . . . . . . . . . . . . .15
Principal Security Holders . . . . . . . . . . . . . . . . . . 16
Investment Advisory and Other Services . . . . . . . . . . . . 18
Securities Transactions . . . . . . . . . . . . . . . . . . . .21
Purchase, Redemption and Pricing of Shares . . . . . . . . . . 22
Performance Information . . . . . . . . . . . . . . . . . . . .24
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Legal Counsel and Auditors . . . . . . . . . . . . . . . . . . 30
Miscellaneous Information . . . . . . . . . . . . . . . . . . .30
Financial Statements. . . . . . . . . . . . . . . . . . . . . .30
<PAGE>
THE TRUST
Firsthand Funds (the "Trust"), formerly Interactive Investments, was
organized as a Delaware business trust on November 11, 1993. The Trust currently
offers four series of shares to investors, The Technology Value Fund, The
Medical Specialists Fund, The Technology Leaders Fund, and The Technology
Innovators Fund (referred individually as a "Fund" and collectively as the
"Funds"). Each Fund has its own investment objectives and policies.
Each share of a Fund represents an equal proportionate interest in the
assets and liabilities belonging to that Fund with each other share of that Fund
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. The shares do not have cumulative
voting rights or any preemptive or conversion rights, and the Trustees have the
authority from time to time to divide or combine the shares of any Fund into a
greater or lesser number of shares of that Fund so long as the proportionate
beneficial interests in the assets belonging to that Fund and the rights of
shares of any other Fund are in no way affected. In case of any liquidation of a
Fund, the holders of shares of the Fund being liquidated will be entitled to
receive as a class a distribution out of the assets, net of the liabilities,
belonging to that Fund. Expenses attributable to any Fund are borne by that
Fund. Any general expenses of the Trust not readily identifiable as belonging to
a particular Fund are allocated by or under the direction of the Trustees in
such manner as the Trustees allocate such expenses on the basis of relative net
assets or number of shareholders. No shareholder is liable to further calls or
to assessment by the Trust without his express consent.
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
A more detailed discussion of some of the terms used and investment
policies described in the Prospectus (see "Investment Objectives, Policies and
Risk Considerations") appears below:
MAJORITY. As used in the Prospectus and this Statement of Additional
Information, the term "majority" of the outstanding shares of the Trust (or of
any Fund) means the lesser of (1) 67% or more of the outstanding shares of the
Trust (or the applicable Fund) present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust (or the applicable Fund) are present
or represented at such meeting or (2) more than 50% of the outstanding shares of
the Trust (or the applicable Fund).
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COMMERCIAL PAPER. Commercial paper consists of short-term (usually from
one to 270) unsecured promissory notes issued by corporations in order to
finance their current operations. Each Fund will only invest in commercial paper
rated A-1 by Standard & Poor's Ratings Group ("Standard & Poor's") or Prime-1 by
Moody's Investors Service, Inc. ("Moody's") or unrated paper of issuers who have
outstanding unsecured debt rated AA or better by Standard & Poor's or Aa or
better by Moody's. Certain notes may have floating or variable rates. Variable
and floating rate notes with a demand notice period exceeding seven days will be
subject to each Fund's policy with respect to illiquid investments unless, in
the judgment of the Adviser, such note is liquid.
The rating of Prime-1 is the highest commercial paper rating assigned
by Moody's. Among the factors considered by Moody's in assigning ratings are the
following: valuation of the management of the issuer; economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
strength of the issuer's parent company and the relationships which exist with
the issuer; and recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations. These factors are all considered in determining
whether the commercial paper is rated Prime-1. Issuers of commercial paper rated
A (highest quality) by Standard & Poor's have the following characteristics:
liquidity ratios are adequate to meet cash requirements; long-term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed; the
issuer has access to at least two additional channels of borrowing; basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and the reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1.
BANK DEBT INSTRUMENTS. Bank debt instruments in which the Funds may
invest consist of certificates of deposit, bankers' acceptances and time
deposits issued by national banks and state banks, trust companies and mutual
savings banks, or by banks or institutions the accounts of which are insured by
the Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation. Certificates of deposit are negotiable
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certificates evidencing the indebtedness of a commercial bank to repay funds
deposited with it for a definite period of time (usually from 14 days to one
year) at a stated or variable interest rate. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft which has been
drawn on it by a customer, which instruments reflect the obligation both of the
bank and of the drawer to pay the face amount of the instrument upon maturity.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Each Fund will not
invest in time deposits maturing in more than seven days if, as a result
thereof, more than 15% of the value of its net assets would be invested in such
securities and other illiquid securities.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions by which
a Fund purchases a security and simultaneously commits to resell that security
to the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. In the event of a bankruptcy or other default
by the seller of a repurchase agreement, a Fund could experience both delays in
liquidating the underlying security and losses. To minimize these possibilities,
each Fund intends to enter into repurchase agreements only with its Custodian,
with banks having assets in excess of $10 billion and with broker-dealers who
are recognized as primary dealers in U.S. Government obligations by the Federal
Reserve Bank of New York. Collateral for repurchase agreements is held in
safekeeping in the customer-only account of the Funds' Custodian at the Federal
Reserve Bank. A Fund will not enter into a repurchase agreement not terminable
within seven days if, as a result thereof, more than 15% of the value of its net
assets would be invested in such securities and other illiquid securities.
Although the securities subject to a repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would never be more
than one year after the Fund's acquisition of the securities and normally would
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the securities, and will not be
related to the coupon rate of the purchased security. At the time a Fund enters
into a repurchase agreement, the value of the underlying security, including
accrued interest, will equal or exceed the value of the repurchase agreement,
and, in the case of a repurchase agreement exceeding one day, the seller will
agree that the value of the underlying security, including accrued interest,
will at all times equal or exceed the value of the repurchase agreement. The
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collateral securing the seller's obligation must be of a credit quality at least
equal to a Fund's investment criteria for portfolio securities and will be held
by the Custodian or in the Federal Reserve Book Entry System.
For purposes of the Investment Company Act of 1940, as amended (the
"1940 Act"), a repurchase agreement is deemed to be a loan from a Fund to the
seller subject to the repurchase agreement and is therefore subject to a Fund's
investment restriction applicable to loans. It is not clear whether a court
would consider the securities purchased by a Fund subject to a repurchase
agreement as being owned by that Fund or as being collateral for a loan by the
Fund to the seller. In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the securities before repurchase of
the security under a repurchase agreement, a Fund may encounter delay and incur
costs before being able to sell the security. Delays may involve loss of
interest or decline in price of the security. If a court characterized the
transaction as a loan and a Fund has not perfected a security interest in the
security, that Fund may be required to return the security to the seller's
estate and be treated as an unsecured creditor of the seller. As an unsecured
creditor, a Fund would be at the risk of losing some or all of the principal and
income involved in the transaction. As with any unsecured debt obligation
purchased for a Fund, the Investment Adviser seeks to minimize the risk of loss
through repurchase agreements by analyzing the creditworthiness of the obligor,
in this case, the seller. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
security, in which case a Fund may incur a loss if the proceeds to that Fund of
the sale of the security to a third party are less than the repurchase price.
However, if the market value of the securities subject to the repurchase
agreement becomes less than the repurchase price (including interest), the Fund
involved will direct the seller of the security to deliver additional securities
so that the market value of all securities subject to the repurchase agreement
will equal or exceed the repurchase price. It is possible that a Fund will be
unsuccessful in seeking to enforce the seller's contractual obligation to
deliver additional securities.
MONEY MARKET FUNDS. Each Fund may under certain circumstances invest a
portion of its assets in money market investment companies. The 1940 Act
prohibits a Fund from investing more than 5% of the value of its total assets in
any one investment company, or more than 10% of the value of its total assets in
investment companies in the aggregate, and also restricts its investment in any
investment company to 3% of the voting securities of such investment company.
Investment in a
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money market investment company involves payment of such company's pro rated
share of advisory and administrative fees charged by such company, in addition
to those paid by the Funds.
WARRANTS. Each Fund may invest a portion of its assets in warrants. A
warrant gives the holder a right to purchase at any time during a specified
period a predetermined number of shares of common stock at a fixed price. Unlike
convertible debt securities or preferred stock, warrants do not pay a fixed
coupon or dividend. Investments in warrants involve certain risks, including the
possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of a Fund's
entire investment therein).
FOREIGN SECURITIES. Subject to each Fund's investment policies and
quality standards, the Funds may invest in the securities of foreign issuers.
Because the Funds may invest in foreign securities, an investment in the Funds
involve risks that are different in some respects from an investment in a fund
which invests only in securities of U.S. domestic issuers. Foreign investments
may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations. There may be less publicly available information
about a foreign company than about a U.S. company, and foreign companies may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies. There may be less
governmental supervision of securities markets, brokers and issuers of
securities. Securities of some foreign companies are less liquid or more
volatile than securities of U.S. companies, and foreign brokerage commissions
and custodian fees are generally higher than in the United States. Settlement
practices may include delays and may differ from those customary in United
States markets. Investments in foreign securities may also be subject to other
risks different from those affecting U.S. investments, including local political
or economic developments, expropriation or nationalization of assets,
restrictions on foreign investment and repatriation of capital, imposition of
withholding taxes on dividend or interest payments, currency blockage (which
would prevent cash from being brought back to the United States), and difficulty
in enforcing legal rights outside the United States.
WRITING COVERED CALL OPTIONS (THE MEDICAL SPECIALISTS FUND, THE
TECHNOLOGY LEADERS FUND, AND THE TECHNOLOGY INNOVATORS FUND ONLY). The Medical
Specialists Fund, The Technology Leaders Fund, and The Technology Innovators
Fund may write covered call options on equity securities or futures contracts to
earn premium
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income, to assure a definite price for a security that those Funds
have considered selling, or to close out options previously purchased. A call
option gives the holder (buyer) the right to purchase a security or futures
contract at a specified price (the exercise price) at any time until a certain
date (the expiration date). A call option is "covered" if a Fund owns the
underlying security subject to the call option at all times during the option
period. A covered call writer is required to deposit in escrow the underlying
security in accordance with the rules of the exchanges on which the option is
traded and the appropriate clearing agency.
The writing of covered call options is a conservative investment
technique which the Investment Adviser believes involves relatively little risk.
However, there is no assurance that a closing transaction can be effected at a
favorable price. During the option period, the covered call writer has, in
return for the premium received, given up the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase, but has retained the risk of loss should the price of the
underlying security decline.
WRITING COVERED PUT OPTIONS (THE MEDICAL SPECIALISTS FUND, THE
TECHNOLOGY LEADERS FUND, AND THE TECHNOLOGY INNOVATORS FUND ONLY). The Medical
Specialists Fund, The Technology Leaders Fund, and The Technology Innovators
Fund may write covered put options on equity securities and futures contracts to
assure a definite price for a security if they are considering acquiring the
security at a lower price than the current market price or to close out options
previously purchased. A put option gives the holder of the option the right to
sell, and the writer has the obligation to buy, the underlying security at the
exercise price at any time during the option period. The operation of put
options in other respects is substantially identical to that of call options.
When a Fund writes a covered put option, it maintains in a segregated account
with its Custodian cash or liquid securities in an amount not less than the
exercise price at all times while the put option is outstanding.
The risks involved in writing put options include the risk that a
closing transaction cannot be effected at a favorable price and the possibility
that the price of the underlying security may fall below the exercise price, in
which case a Fund may be required to purchase the underlying security at a
higher price than the market price of the security at the time the option is
exercised.
OPTIONS TRANSACTIONS GENERALLY. Option transactions in which the Funds
may engage involve the specific risks described above as well as the following
risks: the writer of an option may be assigned an exercise at any time during
the option period; disruptions in the markets for underlying instruments could
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result in losses for options investors; imperfect or no correlation between the
option and the securities being hedged; the insolvency of a broker could present
risks for the broker's customers; and market imposed restrictions may prohibit
the exercise of certain options. In addition, the option activities of a Fund
may affect its portfolio turnover rate and the amount of brokerage commissions
paid by a Fund. The success of a Fund in using the option strategies described
above depends, among other things, on the Investment Adviser's ability to
predict the direction and volatility of price movements in the options, futures
contracts and securities markets and the Investment Adviser's ability to select
the proper time, type and duration of the options.
By writing options, a Fund forgoes the opportunity to profit from an
increase in the market price of the underlying security or stock index above the
exercise price except insofar as the premium represents such a profit. Each Fund
may also seek to earn additional income through receipt of premiums by writing
covered put options. The risk involved in writing such options is that there
could be a decrease in the market value of the underlying security or stock
index. If this occurred, the option could be exercised and the underlying
security would then be sold to the Fund at a higher price than its then current
market value. The Funds may purchase put and call options to attempt to provide
protection against adverse price effects from anticipated changes in prevailing
prices of securities or stock indices. The purchase of a put option generally
protects the value of portfolio holdings in a falling market, while the purchase
of a call option generally protects cash reserves from a failure to participate
in a rising market. In purchasing a call option, a Fund would be in a position
to realize a gain if, during the option period, the price of the security or
stock index increased by an amount greater than the premium paid. A Fund would
realize a loss if the price of the security or stock index decreased or remained
the same or did not increase during the period by more than the amount of the
premium. If a put or call option purchased by a Fund were permitted to expire
without being sold or exercised, its premium would represent a realized loss to
the Fund. When writing put options a Fund will be required to segregate cash
and/or liquid securities to meet its obligations. When writing call options a
Fund will be required to own the underlying financial instrument or segregate
with its Custodian cash and/or liquid securities to meet its obligations under
written calls. By so doing, a Fund's ability to meet current obligations, to
honor redemptions or to achieve its investment objective may be impaired. The
staff of the Securities and Exchange Commission has taken the position that
over-the-counter options and the assets used as "cover" for over-the-counter
options are illiquid securities.
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The imperfect correlation in price movement between an option and the
underlying financial instrument and/or the costs of implementing such an option
may limit the effectiveness of the strategy. A Fund's ability to establish and
close out options positions will be subject to the existence of a liquid
secondary market. Although the Funds generally will purchase or sell only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If an option purchased by a Fund
expires unexercised, the Fund will lose the premium it paid. In addition, a Fund
could suffer a loss if the premium paid by the Fund in a closing transaction
exceeds the premium income it received. When a Fund writes a call option, its
ability to participate in the capital appreciation of the underlying obligation
is limited.
It is the present intention of the Adviser not to commit greater than
30% of a Fund's net assets to option strategies.
BORROWING. The use of borrowing by the Funds involves special risk
considerations that may not be associated with other funds having similar
policies. Since substantially all of a Fund's assets fluctuate in value, whereas
the interest obligation resulting from a borrowing will be fixed by the terms of
the Fund's agreement with their lender, the asset value per share of the Fund
will tend to increase more when its portfolio securities increase in value and
decrease more when its portfolio securities decrease in value than would
otherwise be the case if the Fund did not borrow funds. In addition, interest
costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend its portfolio
securities subject to the restrictions stated in its Prospectus. Under
applicable regulatory requirements (which are subject to change), the loan
collateral must, on each business day, at least equal the value of the loaned
securities. To be acceptable as collateral, letters of credit must obligate a
bank to pay amounts demanded by a Fund if the demand meets the terms of the
letter. Such terms and the issuing bank must be satisfactory to the Fund. The
Funds receive amounts equal to the dividends or interest on loaned securities
and also receive one or more of (a) negotiated loan fees, (b) interest on
securities used as collateral, or (c) interest on short-term debt securities
purchased with such collateral; either type of interest may be shared with the
borrower. The Funds may also pay fees to placing brokers as well as custodian
and administrative fees in
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connection with loans. Fees may only be paid to a placing broker provided that
the Trustees determine that the fee paid to the placing broker is reasonable and
based solely upon services rendered, that the Trustees separately consider the
propriety of any fee shared by the placing broker with the borrower, and that
the fees are not used to compensate the Adviser or any affiliated person of the
Trust or an affiliated person of the Adviser or other affiliated person. The
terms of the Funds' loans must meet applicable tests under the Internal Revenue
Code and permit the Funds to reacquire loaned securities on five days' notice or
in time to vote on any important matter.
ILLIQUID SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), securities which are otherwise not readily marketable and
securities such as repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemption requirements. A mutual fund might
also have to register such restricted securities in order to dispose of them,
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. The Board of Trustees may determine that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
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Each Fund does not intend presently to invest more than 5% of its net
assets in illiquid securities. In the event that a Fund's investments in
illiquid securities are deemed to exceed 5% of its net assets due to changes in
the liquidity of securities already held, the Fund will expeditiously dispose of
such securities in order to satisfy the 5% limitation.
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS
The ratings of Moody's and Standard & Poor's for CORPORATE BONDS in
which the Funds may invest are as follows:
MOODY'S
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
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STANDARD & POOR'S
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
The ratings of Moody's and Standard & Poor's for PREFERRED STOCKS in
which the Funds may invest are as follows:
MOODY'S
aaa - An issue which is rated aaa is considered to be a top- quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa - An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a - An issue which is rated a is considered to be an upper- medium
grade preferred stock. While risks are judged to be somewhat greater than in the
aaa and aa classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa - An issue which is rated baa is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
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STANDARD & POOR'S
AAA - This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA - A preferred stock issue rated AA also qualifies as a high-quality
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A - An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the diverse
effects of changes in circumstances and economic conditions.
BBB - An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following investment restrictions as
matters of fundamental investment policy (except where noted below), which
restrictions may not be changed with respect to any Fund without the approval of
a majority of the outstanding voting securities of that Fund. Each Fund may not:
1. Underwrite the securities of other issuers, except that the
Fund may, as indicated in the Prospectus, acquire restricted
securities under circumstances where, if such securities are
sold, the Fund might be deemed to be an underwriter for
purposes of the Securities Act of 1933. The Fund does not
intend to invest more than 5% of net assets in restricted
securities.
2. Purchase or sell real estate or interests in real estate, but
the Fund may purchase marketable securities of companies
holding real estate or interests in real estate.
3. Purchase or sell commodities or commodity contracts, including
futures contracts, except that The Medical Specialists Fund,
The Technology Leaders Fund and The Technology Innovators Fund
may purchase and sell futures contracts to the extent
authorized by the
Board of Trustees.
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<PAGE>
4. Make loans to other persons except (i) by the purchase
of a portion of an issue of publicly distributed
bonds, debentures or other debt securities or privately sold
bonds, debentures or other debt securities immediately
convertible into equity securities, such purchases of
privately sold debt securities not to exceed 5% of the
Fund's total assets, and (ii) the entry into portfolio
lending agreements (i.e. loans of portfolio securities)
provided that the value of securities subject to such
lending agreements may not exceed 30% of the value of
the Fund's total assets. See Prospectus, "Investment
Objectives, Policies and Risk Considerations."
5. Purchase securities on margin, but the Fund may obtain such
short-term credits as may be necessary for the clearance of
purchases and sales of securities.
6. Borrow money from banks except for temporary or emergency (not
leveraging) purposes, including the meeting of redemption
requests that might otherwise require the untimely disposition
of securities, in an aggregate amount not exceeding 25% of the
value of the Fund's total assets at the time any borrowing is
made. While the Fund's borrowings are in excess of 5% of its
total assets, the Fund will not purchase portfolio securities.
7. Purchase or sell puts and calls on securities, except that The
Medical Specialists Fund, The Technology Leaders Fund and The
Technology Innovators Fund may purchase and sell puts and
calls on stocks and stock
indices.
8. Make short sales of securities.
9. Participate on a joint or joint and several basis in any
securities trading account.
10. Purchase the securities of any other investment company except
in compliance with the 1940 Act.
With respect to the percentages adopted by the Trust as maximum
limitations on the Funds' investment policies and restrictions, an excess above
the fixed percentage (except for the percentage limitations relative to the
borrowing of money) will not be a violation of the policy or restriction unless
the excess results immediately and directly from the acquisition of any security
or the action taken. The Medical Specialists Fund, The Technology Leaders Fund
and The Technology Innovators Fund have not invested, and do not presently
intend to invest, in futures contracts.
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<PAGE>
MANAGEMENT OF THE TRUST
The business of the Trust is managed under the direction of the Board
of Trustees in accordance with the Declaration of Trust of the Trust, which
Declaration of Trust has been filed with the Securities and Exchange Commission
and is available upon request. Pursuant to the Declaration of Trust, the
Trustees shall elect officers including a president, secretary and treasurer.
The Board of Trustees retains the power to conduct, operate and carry on the
business of the Trust and has the power to incur and pay any expenses which, in
the opinion of the Board of Trustees, are necessary or incidental to carry out
any of the Trust's purposes. The Trustees, officers, employees and agents of the
Trust, when acting in such capacities, shall not be subject to any personal
liability except for his or her own bad faith, willful misfeasance, gross
negligence or reckless disregard of his or her duties. Following is a list of
the Trustees and executive officers of the Trust and their compensation from the
Trust for the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD AGGREGATE COMPENSATION**
- ---- --- ------------- ------------------------
<S> <C> <C> <C>
*Kevin M. Landis 37 Trustee/President $ 0
*Kendrick W. Kam 37 Trustee/Secretary 0
Michael T. Lynch 36 Trustee 2,700
Mark K. Taguchi 42 Trustee 2,700
Yakoub Billawala 32 Treasurer 0
* This Trustee is an "interested person" (as defined in section 2(a)(19) of
the 1940 Act) by virtue of his affiliation with the Investment Adviser.
** The Trust does not maintain pension or retirement plans.
</TABLE>
The principal occupations of the Trustees and officers of the Trust during
the past five years are set forth below:
KENDRICK W. KAM, 101 Park Center Plaza, Suite 1300, San Jose,
California 95113, has been President of Interactive Research Advisers, Inc.
since its founding in August 1993.
KEVIN M. LANDIS, 101 Park Center Plaza, Suite 1300, San Jose,
California 95113, has been Vice President and Secretary of Interactive Research
Advisers, Inc. since its founding in August 1993.
MICHAEL T. LYNCH, 523 E. Hods Hollow Drive, Kaysville, Utah 84037, is
currently a Product Manager for Iomega Corp. Mr. Lynch served as a Product
Manager for Adaptec, Inc. during 1995. He served as Product Line Manager for
Calera Recognition Systems, Inc., a manufacturer of Optical Character
Recognition Software, from 1990 to 1995.
MARK K. TAGUCHI, 526 Occidental Avenue, San Mateo, California 94402,
is currently strategic relations manager for the WebFORCE group at Silicon
Graphics, Inc. Mr. Taguchi is also
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<PAGE>
a principal with Renaissance Management, a business development firm. From
1990-1993 he was a Vice President of Postal Buddy Corporation, a delivery
services company.
YAKOUB BILLAWALA, 101 Park Center Plaza, Suite 1300, San Jose,
California 95113, is Chief Operating Officer for Interactive Research Advisers,
Inc. He was previously the Database Marketing Manager for Silicon Graphics, Inc.
(1995- 1996); the Director of Product Management and Product Marketing for
Starbase Corporation (1994-1995); and a Senior Product Manager for Oracle
Corporation (1989-1994).
PRINCIPAL SECURITY HOLDERS
As of February 1, 1998, the following persons owned of record 5% or
more of the shares of the Funds:
THE TECHNOLOGY VALUE FUND:
NAME SHARES % OWNERSHIP
Charles Schwab & Co. 2,641,259 34.68%
101 Montgomery Street
San Francisco, California 94104
Donaldson, Lufkin & 1,063,395 13.96%
Jenrette Securities Corp.
P.O. Box 2052
Jersey City, New Jersey 07303
National Financial 1,690,730 22.20%
Services Corp.
One World Financial Center
200 Liberty Street, 5th Floor
New York, New York 10281
THE MEDICAL SPECIALISTS FUND:
NAME SHARES % OWNERSHIP
Charles Schwab & Co. 94,039 28.91%
101 Montgomery Street
San Francisco, California 94104
Donaldson, Lufkin & 32,678 10.05%
Jenrette Securities Corp.
P.O. Box 2052
Jersey City, New Jersey 07303
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<PAGE>
National Financial Services Corp. 63,252 19.45%
One World Financial Center
200 Liberty Street, 5th Floor
New York, New York 10281
THE TECHNOLOGY LEADERS FUND:
NAME SHARES % OWNERSHIP
Charles Schwab & Co. 116,407 18.34%
101 Montgomery Street
San Francisco, California 94104
Donaldson, Lufkin & 48,632 7.66%
Jenrette Securities Corp.
P.O. Box 2052
Jersey City, New Jersey 07303
National Financial Services Corp. 270,204 42.57%
One World Financial Center
200 Liberty Street, 5th Floor
New York, New York 10281
Charles Schwab & Co., a corporation organized in California, may be
deemed to control The Technology Value Fund and The Medical Specialists Fund.
National Financial Services Corp., a corporation organized in New York, may be
deemed to control The Technology Leaders Fund. For purposes of voting on matters
submitted to shareholders, any person who owns more than 50% of the outstanding
shares of a Fund generally would be able to cast the deciding vote.
As of February 1, 1998, the Trustees and officers of the Trust owned of
record or beneficially less than 1% of each Fund's outstanding shares.
17
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER
Interactive Research Advisers, Inc., a California corporation, 101 Park
Center Plaza, Suite 1300, San Jose, California 95113 (the "Investment Adviser"),
is registered as an investment adviser with the Securities and Exchange
Commission under the Investment Advisers Act of 1940. The Investment Adviser is
controlled by Kendrick W. Kam and Kevin M. Landis.
The Investment Advisory and Management Agreement (the "Advisory
Agreement") between the Trust and the Investment Adviser has been approved by
the Board of Trustees of the Trust, including a majority of the Trustees who
were not a party to the Advisory Agreement or "interested persons" (as defined
in the 1940 Act) of a party to the Advisory Agreement.
Under the Advisory Agreement, the Investment Adviser (i) manages the
investment operations of each Fund and the composition of its portfolio,
including the purchase, retention and disposition of securities in accordance
with each Fund's investment objective, (ii) provides all statistical, economic
and financial information reasonably required by the Funds and reasonably
available to the Investment Adviser, (iii) provides the Custodian of the Funds'
securities on each business day with a list of trades for that day, and (iv)
provides persons satisfactory to the Trust's Board of Trustees to act as
officers and employees of the Trust.
By its terms, the Advisory Agreement remains in force from year to
year, subject to annual approval by (a) the Board of Trustees or (b) a vote of
the majority of a Fund's outstanding voting securities; provided that in either
event continuance is also approved by a majority of the Trustees who are not
interested persons of the Trust, by a vote cast in person at a meeting called
for the purpose of voting such approval. The Advisory Agreement may be
terminated at any time, on 60 days' written notice, without the payment of any
penalty, by the Board of Trustees, by a vote of the majority of a Fund's
outstanding voting securities, or by the Investment Adviser. The Advisory
Agreement automatically terminates in the event of its assignment, as defined by
the 1940 Act and the rules thereunder.
Pursuant to the Advisory Agreement, each Fund pays to the Investment
Adviser, on a monthly basis, an advisory fee equal to 1.50% per annum of its
average daily net assets. The Advisory Agreement requires the Investment Adviser
to waive its management fees and, if necessary, reimburse expenses of the Funds
to the extent necessary to limit each Fund's total operating expenses to 1.95%
of its average net assets up to $200 million, 1.90% of such assets from $200
million to $500 million, 1.85% of such assets
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<PAGE>
from $500 million to $1 billion, and 1.80% of such assets in excess of $1
billion. For the fiscal years ended December 31, 1997, 1996 and 1995, The
Technology Value Fund paid advisory fees of $1,830,251, $122,185, and $13,192,
respectively. For the fiscal year ended December 31, 1997, The Medical
Specialists Fund and The Technology Leaders Fund paid advisory fees of $1,238
and $1,769, respectively.
The Investment Adviser may act as an investment adviser to other
persons, firms or corporations (including investment companies), and may have
numerous advisory clients besides the Funds.
THE UNDERWRITER
CW Fund Distributors, Inc. (the "Underwriter"), 312 Walnut
Street, 21st Floor, Cincinnati, Ohio 45202, serves as principal
underwriter for the Trust pursuant to an Underwriting Agreement.
Shares are sold on a continuous basis by the Underwriter. The Underwriter has
agreed to use its best efforts to solicit orders for the sale of Trust shares,
but it is not obliged to sell any particular amount of shares. The Underwriting
Agreement provides that, unless sooner terminated, it will continue in effect
for two years from the date of its execution, and for continuous one-year
periods thereafter if such continuance is approved at least annually (i) by the
Board of Trustees or a vote of a majority of the outstanding shares, and (ii) by
a majority of the Trustees who are not interested persons of the Trust or of the
Underwriter by vote cast in person at a meeting called for the purpose of voting
on such approval.
The Underwriting Agreement may be terminated by the Trust at any time,
without the payment of any penalty, by vote of a majority of the entire Board of
Trustees of the Trust or by vote of a majority of the outstanding shares of the
Funds on 60 days' written notice to the Underwriter, or by the Underwriter at
any time, without the payment of any penalty, on 60 days' written notice to the
Trust. The Underwriting Agreement will automatically terminate in the event of
its assignment.
19
<PAGE>
THE ADMINISTRATION AGREEMENT
The Board of Trustees of the Trust has approved an Administration
Agreement with the Investment Adviser wherein the Investment Adviser is
responsible for the provision of administrative and supervisory services to the
Funds. The Investment Adviser, at its expense, shall supply the Trustees and the
officers of the Trust with all statistical information and reports reasonably
required by it and reasonably available to the Investment Adviser. The
Investment Adviser shall oversee the maintenance of all books and records with
respect to the Funds' security transactions and the Funds' books of account in
accordance with all applicable federal and state laws and regulations. The
Investment Adviser will arrange for the preservation of the records required to
be maintained by the 1940 Act.
Pursuant to the Administration Agreement, each Fund will pay to the
Investment Adviser, on a monthly basis, a fee equal to .45% per annum of its
average daily net assets up to $200 million, .40% of such assets from $200
million to $500 million, .35% of such assets from $500 million to $1 billion,
and .30% of such assets in excess of $1 billion. For the fiscal years ended
December 31, 1997, 1996 and 1995, The Technology Value Fund paid administrative
fees of $778,503, $101,257 and $13,192, respectively. For the fiscal year ended
December 31, 1997, The Medical Specialists Fund and The Technology Leaders Fund
paid administrative fees of $371 and $531, respectively.
The Administration Agreement may be terminated by the Trust at any
time, on 60 days' notice to the Investment Adviser, without penalty either (1)
by vote of the Board of Trustees of the Trust, or (2) by vote of a majority of
the outstanding voting securities of a Fund. It may be terminated at any time by
the Investment Adviser on 60 days' written notice to the Trust.
COUNTRYWIDE FUND SERVICES, INC.
Countrywide Fund Services, Inc. ("Countrywide"), 312 Walnut Street,
Cincinnati, Ohio 45202, is retained by the Investment Adviser to maintain the
records of each shareholder's account, process purchases and redemptions of the
Funds' shares and act as dividend and distribution disbursing agent. Countrywide
also provides administrative services to the Funds, calculates daily net asset
value per share and maintains such books and records as are necessary to enable
Countrywide to perform its duties. For the performance of these services, the
Investment Adviser (not the Funds) pays Countrywide (i) a fee for administrative
services at the annual rate of .1% of the average value of each Fund's daily net
assets up to $100,000,000, .075% of such assets from
20
<PAGE>
$100,000,000 to $200,000,000 and .05% of such assets in excess of $200,000,000;
(ii) a fee for transfer agency and shareholder services at the annual rate of
$16 per shareholder account of the Funds; and (iii) a monthly fee for accounting
and pricing services which will vary according to each Fund's average net assets
during such month. In addition, the Investment Adviser reimburses Countrywide
for out-of-pocket expenses, including but not limited to, postage, stationery,
checks, drafts, forms, reports, record storage, communication lines and the
costs of external pricing services.
Countrywide is an indirect wholly owned subsidiary of Countrywide
Credit Industries, Inc., a New York Stock Exchange listed company principally
engaged in the business of
residential mortgage lending.
SECURITIES TRANSACTIONS
The Investment Adviser furnishes advice and recommendations with
respect to the Funds' portfolio decisions and, subject to the supervision of the
Board of Trustees of the Trust, determines the broker to be used in each
specific transaction. In executing the Funds' portfolio transactions, the
Investment Adviser seeks to obtain the best net results for the Funds, taking
into account such factors as the overall net economic result to the Funds
(involving both price paid or received and any commissions and other costs
paid), the efficiency with which the specific transaction is effected, the
ability to effect the transaction where a large block is involved, the known
practices of brokers and the availability to execute possibly difficult
transactions in the future and the financial strength and stability of the
broker. While the Investment Adviser generally seeks reasonably competitive
commission rates, the Funds do not necessarily pay the lowest commission or
spread available.
The Investment Adviser may direct the Funds' portfolio transactions to
persons or firms because of research and investment services provided by such
persons or firms if the amount of commissions in effecting the transactions is
reasonable in relationship to the value of the investment information provided
by those persons or firms. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. These services may be used by the Investment Adviser in connection
with all of its investment activities, and some of the services obtained in
connection with the execution of transactions for the Funds may be used in
managing the Investment Adviser's other investment accounts.
21
<PAGE>
The Funds may deal in some instances in securities which are not listed
on a national securities exchange but are traded in the over-the-counter market.
The Funds may also purchase listed securities through the "third market" (i.e.,
otherwise than on the exchanges on which the securities are listed). When
transactions are executed in the over-the-counter market or the third market,
the Investment Adviser will seek to deal with primary market makers and to
execute transactions on the Funds' own behalf, except in those circumstances
where, in the opinion of the Investment Adviser, better prices and executions
may be available elsewhere. The Funds do not allocate brokerage business in
return for sales of the Funds' shares.
Neither the Investment Adviser nor any affiliated person thereof will
participate in commissions paid by the Funds to brokers or dealers or will
receive any reciprocal business, directly or indirectly, as a result of such
commissions.
The Technology Value Fund paid brokerage commissions of $275,303,
$57,050, and $6,298 during the fiscal years ended December 31, 1997, 1996 and
1995, respectively. The Medical Specialists Fund and The Technology Leaders Fund
paid brokerage commissions of $994 and $876, during the fiscal year ended
December 31, 1997, respectively.
The Board of Trustees reviews periodically the allocation of brokerage
orders to monitor the operation of these policies.
PURCHASE, REDEMPTION AND PRICING OF SHARES
CALCULATION OF SHARE PRICE
The share price (net asset value) of the shares of each Fund is
determined as of the close of the regular session of trading on the New York
Stock Exchange (currently 4:00 p.m., eastern time), on each day the Trust is
open for business. The Trust is open for business on every day except Saturdays,
Sundays and the following holidays: New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. The Trust may also be open for business on other
days in which there is sufficient trading in a Fund's portfolio securities that
its net asset value might be materially affected. For a description of the
methods used to determine the share price, see "Calculation of Share Price" in
the Prospectus.
In valuing a Fund's assets for the purpose of determining net asset
value, readily marketable portfolio securities listed on a national securities
exchange are valued at the last sale price on such exchange on the business day
as of which such value is being determined. If there has been no sale on such
exchange on such day, the security is valued at the closing bid price on
22
<PAGE>
such day. If no bid price is quoted on such exchange on such day, then the
security is valued by such method as the Investment Adviser under the
supervision of the Board of Trustees determines in good faith to reflect its
fair value. Readily marketable securities traded only in the over-the-counter
market are valued at the current bid price. If no bid price is quoted on such
day, then the security is valued by such method as the Investment Adviser under
the supervision of the Board of Trustees determines in good faith to reflect its
fair value. All other assets of the Funds, including restricted securities and
securities that are not readily marketable, are valued in such manner as the
Investment Adviser under the supervision of the Board of Trustees in good faith
deems appropriate to reflect their fair value.
PURCHASE OF SHARES
Orders for shares received by the Trust in proper form prior to the
close of business on the New York Stock Exchange (the "Exchange") on each day
during such periods that the Exchange is open for trading are priced at net
asset value per share computed as of the close of the regular session of trading
on the Exchange. Orders received in proper form after the close of the Exchange,
or on a day it is not open for trading, are priced at the close of such Exchange
on the next day on which it is open for trading at the next determined net asset
value per share.
REDEMPTION OF SHARES
The right of redemption may not be suspended or the date of payment
upon redemption postponed for more than seven calendar days after a
shareholder's redemption request made in accordance with the procedures set
forth in the Prospectus, except for any period during which the Exchange is
closed (other than customary weekend and holiday closing) or during which the
Securities and Exchange Commission determines that trading thereon is
restricted, or for any period during which an emergency (as determined by the
Securities and Exchange Commission) exists as a result of which disposal by a
Fund of securities owned by it is not reasonably practicable or as a result of
which it is not reasonably practicable for a Fund to fairly determine the value
of its net assets, or for such other period as the Securities and Exchange
Commission may by order permit for the protection of security holders of the
Funds.
The Trust will redeem all or any portion of a shareholder's shares of
the Funds when requested in accordance with the procedures set forth in the "How
to Redeem Shares" section of the Prospectus.
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<PAGE>
REDEMPTION IN KIND
Payment of the net redemption proceeds may be made either in cash or in
portfolio securities (selected in the discretion of the Investment Adviser under
supervision of the Board of Trustees and taken at their value used in
determining the net asset value), or partly in cash and partly in portfolio
securities. However, payments will be made wholly in cash unless the Board of
Trustees believes that economic conditions exist which would make such a
practice detrimental to the best interests of a Fund. If payment for shares
redeemed is made wholly or partly in portfolio securities, brokerage costs may
be incurred by the investor in converting the securities to cash. The Trust has
filed an election with the Securities and Exchange Commission pursuant to which
a Fund will effect a redemption in portfolio securities only if the particular
shareholder of record is redeeming more than $250,000 or 1% of net assets,
whichever is less, during any 90-day period. The Trust expects, however, that
the amount of a redemption request would have to be significantly greater than
$250,000 or 1% of net assets before a redemption wholly or partly in portfolio
securities would be made.
PERFORMANCE INFORMATION
A Fund's total returns are based on the overall dollar or percentage
change in value of a hypothetical investment in the Fund, assuming all dividends
and distributions are reinvested. Average annual total return reflects the
hypothetical annually compounded return that would have produced the same
cumulative total return if the Fund's performance had been constant over the
entire period presented. Because average annual total returns tend to smooth out
variations in the Fund's returns, investors should recognize that they are not
the same as actual year-by- year returns.
For the purposes of quoting and comparing the performance of the Funds
to that of other mutual funds and to other relevant market indices in
advertisements, performance will be stated in terms of average annual total
return. Under regulations adopted by the Securities and Exchange Commission,
funds that intend to advertise performance must include average annual total
return quotations calculated according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5, or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-, 5-, or 10-
year period, at the end of such period (or
fractional portion thereof).
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<PAGE>
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and will
cover 1, 5, and 10 year periods of a Fund's existence or shorter periods dating
from the commencement of the Fund's operations. In calculating the ending
redeemable value, all dividends and distributions by the Fund are assumed to
have been reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. Additionally, redemption of shares is
assumed to occur at the end of each applicable time period.
The foregoing information should be considered in light of a Fund's
investment objectives and policies, as well as the risks incurred in the Fund's
investment practices. Future results will be affected by the future composition
of a Fund's portfolio, as well as by changes in the general level of interest
rates, and general economic and other market conditions.
The average annual total returns of the Technology Value Fund for the
periods ended December 31, 1997 are as follows:
1-Year 6.46%
Since inception (May 20, 1994) 40.82%
Each Fund may also advertise total return (a "nonstandardized
quotation") which is calculated differently from average annual total return. A
nonstandardized quotation of total return may be a cumulative return which
measures the percentage change in the value of an account between the beginning
and end of a period, assuming no activity in the account other than reinvestment
of dividends and capital gains distributions. The Technology Value Fund's total
returns as calculated in this manner for each of its past three fiscal years are
as follows:
PERIOD ENDED
December 31, 1995 61.17%
December 31, 1996 60.55%
December 31, 1997 6.46%
A nonstandardized quotation may also indicate average annual compounded rates of
return over periods other than those specified for average annual total return.
A nonstandardized quotation of total return will always be accompanied by a
Fund's average annual total return as described above.
The performance quotations described above are based on historical
earnings of The Technology Value Fund only and are not intended to indicate
future performance of any of the Funds.
25
<PAGE>
To help investors better evaluate how an investment in the Funds might
satisfy their investment objective, advertisements regarding each Fund may
discuss various measures of Fund performance, including current performance
ratings and/or rankings appearing in financial magazines, newspapers and
publications which track mutual fund performance. Advertisements may also
compare performance (using the calculation methods set forth in the Prospectus)
to performance as reported by other investments, indices and averages. When
advertising current ratings or rankings, the Funds may use the following
publications or indices to discuss or compare Fund performance:
Lipper Mutual Fund Performance Analysis measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of sales loads. The Funds may provide comparative
performance information appearing in any appropriate category published by
Lipper Analytical Services, Inc. In addition, the Funds may use comparative
performance information of relevant indices, including the S&P 500 Index, the
Dow Jones Industrial Average, the Russell 2000 Index, the NASDAQ Composite Index
and the Value Line Composite Index. The S&P 500 Index is an unmanaged index of
500 stocks, the purpose of which is to portray the pattern of common stock price
movement. The Dow Jones Industrial Average is a measurement of general market
price movement for 30 widely held stocks listed on the New York Stock Exchange.
The Russell 2000 Index, representing approximately 11% of the U.S. equity
market, is an unmanaged index comprised of the 2,000 smallest U.S. domiciled
publicly-traded common stocks in the Russell 3000 Index (an unmanaged index of
the 3,000 largest U.S. domiciled publicly- traded common stocks by market
capitalization representing approximately 98% of the U.S. publicly-traded equity
market). The NASDAQ Composite Index is an unmanaged index which averages the
trading prices of more than 3,000 domestic over-the-counter companies. The Value
Line Composite Index is an unmanaged index comprised of approximately 1,700
stocks, the purpose of which is to portray the pattern of common stock price
movement.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Funds to calculate
their performance. In addition, there can be no assurance that the Funds will
continue this performance as compared to such other averages.
TAXES
Each Fund has elected, and intends to qualify annually, for the special
tax treatment afforded regulated investment companies under Subchapter M of the
Internal Revenue Code of
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1986, as amended (the "Code"). To qualify as a regulated investment company,
a Fund must, among other things, (a) derive in each taxable year at least 90% of
its gross income from dividend, interest, payments with respect to securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income (including gains from options, futures and
forward contracts) derived with respect to their business of investing in such
stock, securities or currencies; (b) diversify its holdings so that, at the end
of each quarter of the taxable year, (i) at least 50% of the market value of the
Fund's assets are represented by cash, U.S. Government securities, the
securities of other regulated investment companies, and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets are invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies) or in two or more issuers which the Funds
control and which are engaged in the same or similar trades or businesses; and
(c) distribute at least 90% of its investment company taxable income (which
includes dividends, interest and net short-term capital gains in excess of any
net long-term capital losses) each taxable year.
As regulated investment companies, each Fund will not be subject to
U.S. Federal income tax on its investment company taxable income and net capital
gains (any long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers available from the eight prior
years), if any, that it distributes to shareholders. Each Fund intends to
distribute annually to its shareholders substantially all of its investment
company taxable income and any net capital gains. In addition, amounts not
distributed by a Fund on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. To avoid
the tax, a Fund must distribute during each calendar year an amount equal to the
sum of (1) at least 98% of its ordinary income (with adjustment) and its net
capital gain (not taking into account any capital gains or losses from sales and
exchanges) for the calendar year and (2) at least 98% of its capital gains in
excess of its capital losses (and adjusted for certain ordinary losses) for the
12 month period ending on October 31 of the calendar year, and (3) all ordinary
income and capital gains for previous years that were not distributed during
such years. In order to avoid application of the excise tax, each Fund intends
to make distributions in accordance with these distribution requirements.
In view of each Fund's investment policies, it is expected that
dividends received from domestic and certain foreign corporations will be part
of each Fund's gross income. Distributions by the Funds of such dividends to
corporate shareholders may be eligible for the "70% dividends received"
27
<PAGE>
deduction, subject to the holding period and debt-financing limitations of the
Code. However, the portion of each Fund's gross income attributable to dividends
received from qualifying corporations is largely dependent on its investment
activities for a particular year and therefore cannot be predicted with
certainty. In addition, for purposes of the dividends received deduction
available to corporations, a capital gain dividend received from a regulated
investment company is not treated as a dividend. Corporate shareholders should
be aware that availability of the dividends received deduction is subject to
certain restrictions. For example, the deduction is not available if Fund shares
are deemed to have been held for less than 46 days (within the 90-day period
that begins 45 days before the ex-dividend date and ends 45 days after the
ex-dividend date) and is reduced to the extent such shares are treated as debt-
financed under the Code. Dividends, including the portions thereof qualifying
for the dividends received deduction, are includible in the tax base on which
the federal alternative minimum tax is computed. Dividends of sufficient
aggregate amount received during a prescribed period of time and qualifying for
the dividends received deduction may be treated as "extraordinary dividends"
under the Code, resulting in a reduction in a corporate shareholder's federal
tax basis in its Fund shares.
Each Fund may invest as much as 15% of its net assets in securities of
foreign companies and may therefore be liable for foreign withholding and other
taxes, which will reduce the amount available for distribution to shareholders.
Tax conventions between the United States and various other countries may reduce
or eliminate such taxes. A foreign tax credit or deduction is generally allowed
for foreign taxes paid or deemed to be paid. A regulated investment company may
elect to have the foreign tax credit or deduction claimed by the shareholders
rather than the company if certain requirements are met, including the
requirement that more than 50% of the value of the company's total assets at the
end of the taxable year consist of securities in foreign corporations. Because
the Funds do not anticipate investment in securities of foreign corporations to
this extent, the Funds will likely not be able to make this election and foreign
tax credits will be allowed only to reduce a Fund's tax liability, if any.
Under the Code, upon disposition of securities denominated in a foreign
currency, gains or losses attributable to fluctuations in the value of the
foreign currency between the date of acquisition of the securities and the date
of disposition are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of a Fund's investment company taxable income.
28
<PAGE>
Any dividend or distribution received shortly after a share purchase
will have the effect of reducing the net asset value of such shares by the
amount of such dividend or distribution. Such dividend or distribution is fully
taxable. Accordingly, prior to purchasing shares of the Funds, an investor
should carefully consider the amount of dividends or capital gains distributions
which are expected to be or have been announced.
Generally, the Code's rules regarding the determination and character
of gain or loss on the sale of a capital asset apply to a sale, redemption or
repurchase of shares of the Funds that are held by the shareholder as capital
assets. However, if a shareholder sells shares of the Funds which he has held
for less than six months and on which he has received distributions of capital
gains, any loss on the sale or exchange of such shares must be treated as
long-term capital loss to the extent of such distributions. Any loss realized on
the sale of shares of the Funds will be disallowed by the "wash sale" rules to
the extent the shares sold are replaced (including through the receipt of
additional shares through reinvested dividends) within a period of time
beginning 30 days before and ending 30 days after the shares are sold. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Provided that a Fund qualifies as a regulated investment company under
the Code, it will not be liable for California corporate taxes, other than a
minimum franchise tax, if all of its income is distributed to shareholders for
each taxable year.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Funds. The law firm of Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Funds.
Shareholders are advised to consult with their own tax advisors concerning the
application of foreign, federal, state and local taxes to an investment in the
Funds.
CUSTODIAN
Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45201, has been
retained to act as Custodian for each Fund's investments. Star Bank, N.A. acts
as each Fund's depository, safekeeps its portfolio securities, collects all
income and other payments with respect thereto, disburses funds as instructed
and maintains records in connection with its duties.
29
<PAGE>
LEGAL COUNSEL AND AUDITORS
The law firm of Paul, Hastings, Janofsky & Walker LLP, 345 California
Street, 29th Floor, San Francisco, California 94104, acts as legal counsel for
the Trust and the Trust's independent Trustees.
The firm of Tait, Weller & Baker, 8 Penn Center Plaza, Philadelphia,
Pennsylvania 19103, has been selected as independent auditors for the Trust for
the fiscal year ending December 31, 1998. Tait, Weller & Baker performs an
annual audit of the Trust's financial statements and will advise the Trust
as to certain accounting matters.
MISCELLANEOUS INFORMATION
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Trust's registration statement filed
with the Securities and Exchange Commission under the Securities Act with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The registration statement, including the exhibits filed therewith,
may be examined at the offices of the Securities and Exchange Commission in
Washington, D.C.
Statements contained herein and in the Prospectus as to the
contents of any contract or other documents referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other documents filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements of The Technology Value Fund, The
Medical Specialists Fund and The Technology Leaders Fund as of December 31, 1997
appear in the reports which are attached to this Statement of Additional
Information.
30
<PAGE>
[LOGO]
INTERACTIVE INVESTMENTS
Annual Report to Shareholders
December 31, 1997
INTERACTIVE INVESTMENTS
101 Park Center Plaza
Suite 1300
San Jose, CA 95113
BOARD OF TRUSTEES
Kevin M. Landis, Chairman
Kendrick W. Kam
Michael T. Lynch
Mark K. Taguchi
OFFICERS
Kevin M. Landis, President
Kendrick W. Kam, Secretary
Yakoub Billawala, Treasurer
INVESTMENT ADVISER
Interactive Research Advisers, Inc.
101 Park Center Plaza
Suite 1300
San Jose, CA 95113
TRANSFER AGENT/ADMINISTRATOR
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, OH 45201
(Toll-Free) 888-884-2675
This report is authorized for distribution only when it is accompanied
or preceded by a current prospectus of Interactive Investments Trust.
<PAGE>
TECHNOLOGY VALUE FUND
TVFQX Performance as of December 31, 1997
(Average Annual Returns)
3-Year Return (12/31/94 - 12/31/97) + 40.18%
1-Year Return (12/31/96 - 12/31/97) + 6.46%
Since Inception Return (05/20/94 - 12/31/97) + 40.82%
Past performance is not a guarantee of future results. Investment return and
principal value will fluctuate so that any investor's shares, when redeemed,
maybe worth more or less than their original cost.
1997 RESULTS
1997 was a disappointing year for the Technology Value Fund (TVF). A return of
6.46% lagged not only the broad market indices (as shown in the table below),
but also our peer group, as measured by the Lipper Science & Technology Index,
which returned 7.84%.
Looking back, 1997 was a year of great peaks and valleys, with some important
lessons learned along the way.
Some highlights:
The Fund suffered a Q1 loss of 9.20%, due almost entirely to declines in our
networking investments. Q2 was one of our best ever, as the Fund gained 31.50%.
Performance was led by the Electronic Design Automation and Semiconductor
groups.
Third quarter gains of 9.69% were healthy, but lagged our peer group.
Performance was led by Peripherals, Semiconductors and Semiconductor Capital
Equipment.
The Fund stumbled badly during the fourth quarter (our worst quarter to date),
losing 18.72%. While the Fund lost money in every sector, the Semiconductor
Capital Equipment group bore the brunt of "Asian Contagion," and was clearly the
hardest hit. Although the recent sell-off hit technology mutual funds especially
hard, it is important to note that we underperformed not only the broad indices,
but our peer group as well.
Technology Value Fund Performance Chart
as of 12/31/97
Avg.Ann.
05/20/94 -
Q4 `97 1997 12/31/97
TVF -18.72% 6.46% 40.82%
DJIA 0.00% 24.93% 25.66%
S&P 500 2.87% 33.36% 26.04%
NASDAQ -6.73% 22.15% 24.20%
<PAGE>
Long Term Performance
The chart below shows the monthly performance of the Technology Value Fund
(since inception) versus the three most commonly referenced market indices: The
Dow Jones Industrial Average, the Standard & Poor's 500 index, and the NASDAQ
composite index. (Note: Each of these indices represent an unmanaged,
broad-based basket of stocks. They are typically used as a proxy for overall
market performance.)
<TABLE>
<CAPTION>
[LINE CHART]
Relative Performance
Technology Value Fund vs. Market Indices
TVF S&P 500 DJIA NASDAQ
<S> <C> <C> <C> <C>
May 10040 10013 10004 10108
Jun 9190 9768 9666 9706
9430 10088 10045 9929
10510 10502 10489 10527
Sep 11190 10246 10320 10510
12160 10475 10504 10690
11830 10094 10094 10316
Dec 12530 10244 10372 10339
12412 10509 10407 10386
13215 10919 10905 10926
Mar 13344 11241 11325 11260
14436 11572 11778 11634
14543 12034 12217 11930
Jun 15743 12314 12487 12890
17981 12722 12913 13832
19213 12754 12691 14103
Sep 20680 13293 13206 14435
20048 13245 13122 14335
20294 13827 14053 14663
Dec 20195 14093 14194 14577
20064 14573 14976 14687
21454 14708 15274 15255
Mar 21586 14849 15581 15273
26985 15068 15539 16513
30752 15457 15801 17251
Jun 27971 15516 15855 16444
26317 14830 15519 14997
27401 15143 15817 15845
Sep 30292 15996 16594 17035
29252 16437 17023 16962
32788 17679 18470 17922
Dec 32423 17329 18293 17934
34916 18411 19337 19170
31888 18556 19579 18189
Mar 29439 17793 18771 16980
31039 18856 19998 17532
38053 20004 20972 19484
Jun 38713 20075 21974 20075
43857 22563 23565 22195
42281 21299 21898 22110
Sep 42466 22465 22855 23487
38142 21715 21418 22211
37311 22720 22576 22316
Dec 34517 23110 22854 21907
</TABLE>
Note: The Fund's performance information assumes reinvestment of all dividends
and includes all fund expenses. Past performance does not guarantee future
results. Both the return from and the principal value of an investment in the
Fund will fluctuate so that any investor's shares, when redeemed, may be worth
more or less than their original cost.
<PAGE>
Portfolio Discussion
The pie chart below shows the Fund's holdings by sector as of year-end. For the
4th quarter, TVF's medical investments outperformed the overall fund by losing
less, but still underperformed the NASDAQ during the same period. Medical stocks
gained steadily throughout the first three quarters (including a very strong
spring) before declining in Q4. We steadily expanded our medical holdings from
12.44% to 34.82%. For the year, medical stocks trailed only Semiconductors as
the Fund's strongest group.
Our quarterly weighting in Semiconductors varied from 18.05% to 44.75%.
As a group, Semiconductors were our best performing stocks, so the heavy
weighting worked out well. At year-end the Fund had over 27% invested in
the group.
The Semiconductor Capital Equipment group was another story. Sector weighting
ranged from 0.76% to 7.07% at year end. Unfortunately, we were largely out
of the group early in the year (when they were doing well), and more heavily
weighted in Q4 (when they were falling dramatically).
Electronic Design Automation (EDA) stocks performed well in the spring, but lost
money in the second half. Our weighting began the year at 12.76% and declined
steadily to 3.69% by year-end.
Our investments in Peripherals performed almost as well as the Medical group,
however, our weighting was consistently light. Peripherals began the year
at 2.97% of the portfolio, crested at 6.65% at the end of Q3, and finished
the year at 5.27%.
We established new positions in the Communications Equipment sector
during Q3. These investments were marginally profitable, and ended the year
with a 7.92% weighting.
<TABLE>
<CAPTION>
[PIE CHART]
Technology Value Fund Portfolio by Sector*
as of 12/31/97
<S> <C>
Medical 34.82%
Semiconductors 27.17%
Networking 11.88%
Comm. Equip. 7.92%
Semi. Equip. 7.07%
Peripherals 5.27%
Elec. Design Automation 3.69%
Cash 2.18%
</TABLE>
*shown as a percentage of investments
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SNAPSHOT
TECHNOLOGY VALUE FUND
December 31, 1997
Securities Shares Price Value
<S> <C> <C> <C>
3Com Corp. 171,250 34.9375 $5,983,047
Advanced Fibre Communications, Inc. 195,000 29.1250 5,679,375
Affymetrix, Inc. 163,800 31.1250 5,098,275
Altera Corp. 365,000 33.1250 12,090,625
ANADIGICS, Inc. 270,500 30.1250 8,148,813
Applied Micro Circuits Corp. 797,500 12.3750 9,869,062
Applied Science & Technology, Inc. 97,500 11.2500 1,096,875
Ascend Communications, Inc. 349,000 24.5000 8,550,500
Boston Scientific Corp. 140,000 45.8750 6,422,500
CardioThoracic Systems, Inc. 545,000 5.5000 2,997,500
Cardiovascular Dynamics, Inc. 554,800 5.5000 3,051,400
Centocor, Inc. 175,000 33.2500 5,818,750
Cisco Systems, Inc. 156,000 55.7500 8,697,000
Cymer, Inc. 335,000 15.0000 5,025,000
Endocardial Solutions, Inc. 515,400 10.1250 5,218,425
EndoSonics Corp. 695,000 10.7500 7,471,250
HCIA, Inc. 456,600 11.8750 5,422,125
Heartport, Inc. 54,000 20.3750 1,100,250
HMT Technology Corp. 506,200 13.0000 6,580,600
Immunex Corp. 130,000 54.0000 7,020,000
Integrated Process Equipment Corp. 490,000 15.7500 7,717,500
Intel Corp. 10,000 70.2500 702,500
Iomega Corp. 300,000 12.4375 3,731,250
Level One Communications, Inc. 82,700 28.2500 2,336,275
Mariner Health Group, Inc. 463,000 16.2500 7,523,750
MedCath, Inc. 29,100 15.1250 440,137
Medtronic, Inc. 135,000 52.3125 7,062,187
Medwave, Inc. 23,500 10.0000 235,000
PairGain Technologies, Inc. 179,250 19.3750 3,472,969
PMC-Sierra, Inc. 340,000 31.0000 10,540,000
Quality Semiconductor, Inc. 237,800 3.8750 921,475
Technology Modeling Associates, Inc. 678,900 10.6250 7,213,313
Tellabs, Inc. 120,000 52.8750 6,345,000
TranSwitch Corp. 15,000 7.5000 112,500
United States Surgical Corp. 110,000 29.3125 3,224,375
Vitesse Semiconductor Corp. 223,000 37.7500 8,418,250
- -Cash and cash equivalents- 4,271,801
- -------------------------------------------------------------------------------------------
TOTAL $195,609,654
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Our worst performing sector for 1997, Networking, is the clear culprit for the
Fund's poor performance. Not only was this the only sector to lose money in
three out of the four quarters, it was one of only two to show a negative return
for the entire year (EDA posted a small loss). Our weighting in Networking began
the year at 20.77%, but eventually declined to 11.88% by year-end.
The Fund's cash position ranged from the low single digits (2.18% at year-end)
to the low teens (12.99% at mid year). In general, we do not attempt to time the
market, so larger cash positions usually represent recent inflows which the
managers are selectively working into the portfolio.
Tech Outlook: Surviving the Asian Flu
The recent banking and capital markets crisis in the Far East sent a shudder
through world financial markets and raised a number of questions regarding
dependencies among various countries, industries and individual firms.
One connection which quickly affected the Fund was the interdependence of Asian
capital markets. Perfectly sound semiconductor manufacturers in Korea and Japan
(such as Samsung, Hyundai, NEC, Hitachi, Mitsubishi, etc.) draw their capital
from the same pool of bankers and bond holders as do companies in Indonesia and
Thailand.
Healthy or not, each of these companies has been forced to revisit its capital
spending plans, as the pool of available capital has dwindled rapidly. As a
direct result of this, semiconductor capital equipment companies (many of which
are based in the U.S.) have drastically cut their 1998 revenue forecasts.
Affected companies include such well known suppliers as Applied Materials, Lam
Research, Novellus, Teradyne and KLA/Tencor, as well as smaller players, such as
Cymer, IPEC and PRI Automation.
As a group, the semiconductor capital equipment stocks have suffered one of the
worst stock market routs in history. Fourth quarter declines of 50-70% were
common. The silver lining: The worldwide semiconductor industry still needs
these companies, and their 1999 and 2000 sales and profits should be quite
strong.
If Asian companies are likely to spend less on capital equipment, then what are
Asian consumers likely to shy away from? One answer seems to be cellular
telephones. In a similar, though less severe sell-off, the stocks of Ericsson,
Motorola and Nokia now reflect greatly reduced expectations. The sell-off has
also affected their suppliers, hitting component and infrastructure
manufacturers equally hard.
Like many complex phenomena, it's difficult to trace the cause and effect chain
beyond a few links -- the interdependencies quickly become too complex. Beyond a
direct examination of a firm's customer list, and their customers' customer
lists, most people give up on the bottoms-up (micro) approach, and rely on the
top-down (macro) view, which is currently very negative for the entire
technology sector.
Therein lies our opportunity.
In keeping with our long-standing philosophy of buying great companies at great
prices, we are emphasizing strong companies with little or no direct exposure to
Asian markets. While we realize that no company is totally unaffected, we
believe that there are many fine companies that are only mildly affected, yet
are steeply discounted at present.
The best way to identify these companies is through our usual firsthand company
analysis. As always, there is no substitute for doing your homework.
<PAGE>
Top 5 Stocks by $ Gain in Q4 1997
---------------------------------------------------------
Stock Symbol $ Gain % Gain
Applied Micro Circuits Corp. AMCC 2,111,559 27.22
PMC-Sierra PMCS 1,913,740 21.44
Cisco Systems CSCO 1,736,454 13.20
Medtronic MDT 1,066,575 8.70
Arterial Vascular AVEI 499,102 4.63
Bottom 5 Stocks by $ Loss in Q4 1997
---------------------------------------------------------
Stock Symbol $ Loss % Loss
Technology Modeling TMAI -3,123,870 -30.22
Texas Instruments TXN -3,832,458 -32.45
Cymer, Inc. CYMI -4,223,066 -45.66
Altera ALTR -4,535,216 -19.63
Int. Process Equip IPEC -7,785,437 -50.22
Medical Outlook
As previously discussed, the market was afflicted in the fourth quarter with
what the popular press has dubbed the "Asian Flu." Since October, the market has
sold-off the companies and sectors it anticipates will be adversely affected by
the financial instability of South Korea, Thailand, Indonesia, Hong Kong, and
even Japan.
Our results show that our medical investments did not escape the sell-off.
However, since most of our medical investments have very little operational
exposure to Asia, I am confident that they will be among the first to recover
when the "crisis" recedes. Our medical investments now account for about 35% of
TVF's assets.
<PAGE>
MEDICAL SPECIALISTS FUND
On December 10, 1997, the Medical Specialists Fund ("MSF") opened to the public
at an initial share price of $10.00. MSF ended the year at $10.12 up 1.20% while
the NASDAQ composite declined 3.10% over the same period.
Unlike the Technology Value Fund, MSF is a pure medical fund. Although MSF will
invest in many of the same stocks as the medical side of TVF, MSF will also
provide a home for the more aggressive medical investments that may take longer
than TVF's 2-year investment horizon to play out. This will open the possibility
of including more early stage medical device and biotech companies in the
portfolio.
The table below shows the Fund's holdings as of 12/31/97. Please note that the
portfolio is very young, and therefore has an unusually small number of
positions.
The valuations of these companies depend less on the traditional standards of
value such as sales and earnings, and more on other factors, such as clinical
effectiveness and managerial integrity, that are not as easily analyzed in a
spreadsheet. This is the segment where firsthand experience in the industry
counts the most and also where the market tends to be somewhat less "efficient"
if only because not many analysts feel confident here.
The Medical Specialists Fund is managed by Ken Kam.
PORTFOLIO SNAPSHOT
MEDICAL SPECIALISTS FUND
December 31, 1997
Securities Shares Price Value
Affymetrix, Inc. 3,000 31.1250 $ 93,375
Boston Scientific Corp. 2,000 45.8750 91,750
Cardiocvascular Dynamics, Inc. 1,200 5.5000 6,600
CardioThoracic Systems, Inc. 5,000 5.5000 27,500
Centocor, Inc. 5,000 33.2500 166,250
Cytyc Corp. 600 25.0000 15,000
Endocardial Solutions, Inc. 3,500 10.1250 35,438
EndoSonics Corp. 10,000 10.7500 107,500
Guidant Corp. 2,000 62.2500 124,500
Heartport, Inc. 6,000 20.3750 122,250
HCIA, Inc. 4,000 11.8750 47,500
Immunex Corp. 1,000 54.0000 54,000
MedCath, Inc. 2,000 15.1250 30,250
Novoste Corp. 2,000 21.5000 43,000
- -Cash and cash equivalents- 1,478,188
- ---------------------------------------------------------------------------
TOTAL $ 2,443,101
- ---------------------------------------------------------------------------
<PAGE>
TECHNOLOGY LEADERS FUND
On December 10, 1997, the Technology Leaders Fund ("TLF") opened to the public
at an initial share price of $10.00. TLF ended the year at $10.07 up 0.70% while
the NASDAQ composite declined 3.10% over the same period.
The Fund is comprised of companies which fit a very specific profile: leaders.
In order to qualify as a leader, a company must demonstrate a dominant
competitive advantage and a history of success, which usually results in clear
product and market share leadership.
The table below shows the Fund's holdings as of 12/31/97. Please note that the
portfolio is very young, and therefore has an unusually small number of
positions.
Although "high tech" is often thought of as a single industry, it is actually a
collection of interdependent industry segments: microprocessors, memory,
programmable logic, computer storage, networking, etc. Where possible, the
manager seeks to identify the dominant company in each of the most promising
segments for inclusion in the portfolio.
Although TLF is not explicitly defined as a "large-cap" fund, it is comprised of
established, successful companies, which tend to have larger market
capitalizations. We expect TLF to have the highest average market capitalization
of the three funds.
TLF tends towards a buy and hold philosophy, adding and dropping companies only
when the portfolio manager perceives a "changing of the guard" within an
industry sector, or a reduced attractiveness of a particular segment. We expect
TLF to have low portfolio turnover.
The Technology Leaders Fund is managed by Kevin Landis.
PORTFOLIO SNAPSHOT
TECHNOLOGY LEADERS FUND
December 31, 1997
Securities Shares Price Value
Altera Corp. 5,000 33.1250 $ 165,625
Applied Materials, Inc. 5,000 30.1250 150,625
Cisco Systems, Inc. 3,000 55.7500 167,250
Intel Corp. 4,000 70.2500 281,000
KLA-Tencor Corp. 4,000 38.6250 154,500
Lucent Technologies, Inc. 1,000 79.8750 79,875
PairGain Technologies, Inc. 20,750 19.3750 402,032
PMC-Sierra, Inc. 2,400 31.0000 74,400
Vitesse Semiconductor Corp. 8,000 37.7500 302,000
- -Cash and cash equivalents- 2,069,575
- ---------------------------------------------------------------------------
TOTAL $ 3,846,882
- ---------------------------------------------------------------------------
<PAGE>
OUTLOOK
While we are disappointed with our 1997 performance, we recognize that investing
in science and technology companies is an inherently volatile proposition. Our
recent poor performance and strong long term track record both illustrate the
value of a long time horizon in counterbalancing that volatility. We appreciate
our shareholders' confidence in us through a difficult year.
Looking forward, we will continue with our proven approach of applying firsthand
experience and industry inputs to basic company research.
/s/ Kevin Landis
Kevin Landis
Portfolio Manager, Electronic Technology
Technology Value Fund
Technology Leaders Fund
/s/ Kendrick Kam
Kendrick Kam
Portfolio Manager, Medical Technology
Technology Value Fund
Medical Specialists Fund
Important Legal Disclosures
This report is provided for the general information of TVF shareholders and is
not authorized for distribution to prospective investors in the Funds unless
preceded or accompanied by a current prospectus. Past performance is not a
guarantee of future results. Investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Investing in high technology and medical technology
stocks entails certain risks, including increased volatility of share value.
Investors are encouraged to read the prospectus carefully. Copies of the most
recent prospectus are available on Interactive Investments' web site, or by
calling 1 (888) TVF-FUND. You may also request the most recent prospectus from
the following brokers: Charles Schwab's OneSource, Fidelity Investments, Jack
White & Co., and National Investors Service Corporation.
<PAGE>
STAYING CURRENT ON THE FUNDS
Web Site........................................ www.techfunds.com
TVF Newspaper Listing........................... Tech Value
TVF Ticker Symbol............................... TVFQX
Getting Info Via E-Mail......................... Send any e-mail message to:
General Info & Portfolio List.......... [email protected]
Prospectus............................. [email protected]
Getting Info Via U.S. Mail...................... 1-888-TVF-FUND
24-hour Share Price &
Direct Account Info............................. 1-888-884-2675
The Technology Leaders Fund and Medical Specialists Fund will soon have
newspaper listings and ticker symbols. In the meantime, information about these
new funds is available in our new prospectus and at our web site.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
Interactive Investments
San Jose, California
We have audited the accompanying statements of assets and liabilities
of Interactive Investments comprising, respectively, the Technology Value Fund,
Technology Leaders Fund and Medical Specialists Fund, including the portfolios
of investments as of December 31, 1997, and the related statements of
operations, changes in net assets and the financial highlights for the periods
then ended. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial statements and financial highlights for the year ended
December 31, 1996 and prior for the Technology Value Fund were audited by other
auditors whose report dated January 15, 1997 expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
positions of Interactive Investments as of December 31, 1997, the results of
operations, the changes in net assets, and the financial highlights for the
periods then ended, in conformity with generally accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
January 23, 1998
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1997
Technology Medical Technology
Value Specialists Leaders
Fund Fund Fund
<S> <C> <C> <C>
ASSETS
Investments in securities:
At acquisition cost $227,405,256 $ 2,407,338 $ 3,823,912
============ ============ ============
At value (Note 1) $191,337,853 $ 2,443,101 $ 3,846,882
Investments in repurchase agreements (Note 1) 4,271,000 -- --
Cash 801 -- --
Receivable for securities sold 2,804,473 -- --
Receivable for capital shares sold 1,028,532 46,055 113,764
Interest and dividends receivable 682 368 544
Other assets 17,580 -- --
------------ ------------ ------------
TOTAL ASSETS 199,460,921 2,489,524 3,961,190
------------ ------------ ------------
LIABILITIES
Payable for securities purchased 3,337,439 127,314 380,120
Payable for capital shares redeemed 1,748,151 -- --
Other accrued expenses and liabilities 1,788 -- 240
------------ ------------ ------------
TOTAL LIABILITIES 5,087,378 127,314 380,360
------------ ------------ ------------
NET ASSETS $194,373,543 $ 2,362,210 $ 3,580,830
============ ============ ============
Net assets consist of:
Paid-in capital $233,488,824 $ 2,324,890 $ 3,555,603
Distribution in excess of realized gains
from security transactions (Note 1) (3,047,878) -- --
Undistributed net investment income -- 1,557 2,257
Net unrealized appreciation (depreciation)
on investments (36,067,403) 35,763 22,970
------------ ------------ ------------
Net assets $194,373,543 $ 2,362,210 $ 3,580,830
============ ============ ============
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) 7,458,967 233,313 355,432
============ ============ ============
Net asset value, offering price and
redemption price per share (Note 1) $ 26.06 $ 10.12 $ 10.07
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Year Ended December 31, 1997
Technology Medical Technology
Value Specialists Leaders
Fund Fund(A) Fund(A)
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 412,570 $ 2,798 $ 4,013
Dividends 268,881 368 544
------------ ------------ -----------
TOTAL INVESTMENT INCOME 681,451 3,166 4,557
------------ ------------ -----------
EXPENSES
Investment advisory fees (Note 3) 1,830,251 1,238 1,769
Administrative fees (Note 3) 778,503 371 531
------------ ------------ -----------
TOTAL EXPENSES 2,608,754 1,609 2,300
------------ ------------ -----------
NET INVESTMENT INCOME (LOSS) (1,927,303) 1,557 2,257
------------ ------------ -----------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains from security transactions 14,064,022 -- --
Net change in unrealized appreciation/
(depreciation) on investments (38,292,641) 35,763 22,970
------------ ------------ -----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS (24,228,619) 35,763 22,970
------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS $(26,155,922) $ 37,320 $ 25,227
============ ============ ============
<FN>
(A) Represents the period from the commencement of operations
(December 10, 1997) through December 31, 1997.
</FN>
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
Technology Medical Technology
Value Specialists Leaders
Fund Fund Fund
--------------------------- ------------------------
Year Year Period Period
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1997 1996 1997(A) 1997(A)
--------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ (1,927,303) $ (103,853) $ 1,557 $ 2,257
Net realized gains
from security transactions 14,064,022 2,546,140 -- --
Net change in unrealized appreciation/
(depreciation) on investments (38,292,641) 1,675,722 35,763 22,970
-------------- ------------ ---------- --------
Net increase (decrease) in net assets from operations (26,155,922) 4,118,009 37,320 25,227
-------------- ------------ ---------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gains (12,334,200) (2,244,807) -- --
In excess of net realized gains (3,047,878) -- -- --
-------------- ------------ ---------- --------
Decrease in net assets from distributions
to shareholders (15,382,078) (2,244,807) -- --
-------------- ------------ ---------- --------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 335,357,889 35,670,929 2,350,090 3,716,034
Net asset value of shares issued in
reinvestment of distributions
to shareholders 13,072,987 1,153,485 -- --
Payments for shares redeemed (147,623,435) (6,274,508) (25,200) (160,431)
-------------- ------------ ---------- --------
Net increase in net assets from
capital share transactions 200,807,441 30,549,906 2,324,890 3,555,603
-------------- ------------ ---------- ----------
TOTAL INCREASE IN NET ASSETS 159,269,441 32,423,108 2,362,210 3,580,830
-------------- ------------ ---------- ----------
NET ASSETS:
Beginning of period 35,104,102 2,680,994 -- --
-------------- ------------ ---------- ----------
End of period $194,373,543 $ 35,104,102 $2,362,210 $ 3,580,830
============== ============ ========== ==========
UNDISTRIBUTED NET
INVESTMENT INCOME $ -- $ -- $ 1,557 $ 2,257
============== =========== ========== ============
Capital Share Activity:
Shares sold 10,437,757 1,435,204 235,882 371,478
Shares issued in reinvestment of
distributions to shareholders 517,449 43,942 -- --
Shares redeemed (4,812,871) (307,953) (2,569) (16,046)
-------------- ------------ ---------- ----------
Net increase in shares outstanding 6,142,335 1,171,193 233,313 355,432
Shares outstanding, beginning of period 1,316,632 145,439 -- --
-------------- ------------ ---------- -----------
Shares outstanding, end of period 7,458,967 1,316,632 233,313 355,432
============== ============ ========== ===========
<FN>
(A) Represents the period from the commencement of operations
(December 10, 1997) through December 31, 1997.
</FN>
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
TECHNOLOGY VALUE FUND
FINANCIAL HIGHLIGHTS
Selected Per Share Data and Ratios for a Share Outstanding Throughout Each Period
Year Year Year Period
Ended Ended Ended Ended
12/31/97 12/31/96 12/31/95 12/31/94(A)
<S> <C> <C> <C> <C>
Net asset value at beginning of period $ 26.66 $ 18.44 $ 11.70 $ 10.00
------------ ------------ ---------- -----------
Income from investment operations:
Net investment loss (0.26) (0.08) (0.14) (0.03)
Net realized and unrealized
gains on investments 1.90 11.20 7.28 2.56
------------ ------------ ---------- -----------
Total from investment operations 1.64 11.12 7.14 2.53
------------ ------------ ---------- -----------
Less distributions:
From net realized gains (1.80) (2.90) (0.40) (0.83)
In excess of net realized gains (.44) -- -- --
------------ ------------ ---------- -----------
Total distributions (2.24) (2.90) (0.40) (0.83)
------------ ------------ ---------- -----------
Net asset value at end of period $ 26.06 $ 26.66 $ 18.44 $ 11.70
============ ============ ========== ===========
Total return 6.46% 60.55% 61.17% 25.30%(B)
============ ============ ========== ===========
Net assets at end of period (millions) $ 194.4 $ 35.1 $ 2.7 $ 0.2
============ ============ ========== ===========
Ratio of expenses to average net assets 1.93% 1.81% 1.98% 1.96%(C)
Ratio of net investment loss
to average net assets (1.43%) (0.55%) (1.45%) (1.29%)(C)
Portfolio turnover rate 101% 43% 45% 56%
Average commission paid
per investment security traded $ 0.033 $ 0.0426 N/A N/A
<FN>
(A) Represents the period from the commencement of operations
(May 20, 1994) to December 31, 1994.
(B) Not annualized
(C) Annualized
</FN>
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL SPECIALISTS FUND
FINANCIAL HIGHLIGHTS
Selected Per Share Data and Ratios for a Share Outstanding Throughout Each Period
Period
Ended
12/31/97(A)
<S> <C>
Net asset value at beginning of period $ 10.00
--------------
Income from investment operations:
Net investment income 0.01
Net realized and unrealized
gains on investments 0.11
--------------
Total from investment operations 0.12
--------------
Less distributions:
Dividends from net investment income --
Distributions from net realized gains --
--------------
Total distributions --
--------------
Net asset value at end of period $ 10.12
==============
Total Return(B) 1.20%
==============
Net assets at end of period (millions) $ 2.4
==============
Ratio of expenses to average net assets(C) 1.81%
Ratio of net investment income
to average net assets(C) 1.75%
Portfolio turnover rate 0%
Average commission paid per investment security traded $ 0.0266
<FN>
(A) Represents the period from commencement of operations
(December 10, 1997) to December 31, 1997.
(B) Not annualized.
(C) Annualized.
</FN>
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
TECHNOLOGY LEADERS FUND
FINANCIAL HIGHLIGHTS
Selected Per Share Data and Ratios for a Share Outstanding Throughout Each Period
Period
Ended
12/31/97(A)
<S> <C>
Net asset value at beginning of period $ 10.00
--------------
Income from investment operations:
Net investment income 0.01
Net realized and unrealized
gains on investments 0.06
--------------
Total from investment operations 0.07
--------------
Less distributions:
Dividends from net investment income --
Distributions from net realized gains --
--------------
Total distributions --
--------------
Net asset value at end of period $ 10.07
==============
Total return(B) 0.70%
==============
Net assets at end of period (millions) $ 3.6
==============
Ratio of expenses to average net assets (C) 1.80%
Ratio of net investment income
to average net assets(C) 1.77%
Portfolio turnover rate 0%
Average commission paid per investment security traded $ 0.0300
<FN>
(A) Represents the period from commencement of operations
(December 10, 1997) to December 31, 1997.
(B) Not annualized.
(C) Annualized.
</FN>
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
TECHNOLOGY VALUE FUND
PORTFOLIO OF INVESTMENTS
December 31, 1997
Unrealized
Gain
Common Stocks Shares Cost Market Value (Loss)
<S> <C> <C> <C> <C>
COMMUNICATIONS EQUIPMENT -- 8.0%
Advanced Fibre Communications, Inc.* 195,000 $ 5,631,563 $ 5,679,375 $ 47,812
PairGain Technologies, Inc.* 179,250 3,758,901 3,472,969 (285,932)
Tellabs, Inc.* 120,000 6,999,065 6,345,000 (654,065)
----------- ----------- ---------
Total Communications Equipment 16,389,529 15,497,344 (892,185)
----------- ----------- ---------
ELECTRONIC DESIGN AUTOMATION -- 3.7%
Technology Modeling Associates. Inc. * 678,900 9,384,410 7,213,313 (2,171,097)
----------- ----------- ---------
Total Electronic Design Automation 9,384,410 7,213,313 (2,171,097)
----------- ----------- ---------
MEDICAL -- 35.0%
HCIA, Inc. * 456,600 7,341,451 5,422,125 (1,919,326)
Affymetrix, Inc. * 163,800 5,601,039 5,098,275 (502,764)
Boston Scientific Corp.* 140,000 8,862,534 6,422,500 (2,440,034)
Cardiovascular Dynamics, Inc.* 554,800 4,912,292 3,051,400 (1,860,892)
CardioThoracic Systems, Inc. * 545,000 6,806,383 2,997,500 (3,808,883)
Centocor, Inc. * 175,000 7,141,087 5,818,750 (1,322,337)
Endocardial Solutions, Inc. * 515,400 5,821,711 5,218,425 (603,286)
EndoSonics Corp. * 695,000 7,814,435 7,471,250 (343,185)
Heartport, Inc.* 54,000 1,202,752 1,100,250 (102,502)
Immunex Corp.* 130,000 8,520,188 7,020,000 (1,500,188)
Mariner Health Group, Inc. * 463,000 5,605,435 7,523,750 1,918,315
MedCath, Inc. * 29,100 498,980 440,137 (58,843)
Medtronic, Inc. 135,000 6,029,275 7,062,187 1,032,912
Medwave, Inc. * 23,500 263,956 235,000 (28,956)
United States Surgical Corp. 110,000 3,335,400 3,224,375 (111,025)
----------- ----------- ---------
Total Medical 79,756,918 68,105,924 (11,650,994)
----------- ----------- ---------
NETWORKING -- 12.0%
3Com Corp. * 171,250 6,909,326 5,983,047 (926,279)
Ascend Communications, Inc. * 349,000 18,784,597 8,550,500 (10,234,097)
Cisco Systems, Inc. * 156,000 7,456,250 8,697,000 1,240,750
----------- ----------- ---------
Total Networking 33,150,173 23,230,547 (9,919,626)
----------- ----------- ---------
PERIPHERAL -- 5.3%
HMT Technology Corp. * 506,200 7,274,399 6,580,600 (693,799)
Iomega Corp. * 300,000 3,280,968 3,731,250 450,282
----------- ----------- ---------
Total Peripheral 10,555,367 10,311,850 (243,517)
----------- ----------- ---------
<PAGE>
<CAPTION>
TECHNOLOGY VALUE FUND
PORTFOLIO OF INVESTMENTS
(continued)
Unrealized
Gain
Common Stocks Shares/Par Cost Market Value (Loss)
<S> <C> <C> <C> <C>
SEMICONDUCTOR EQUIPMENT -- 7.1%
Applied Science & Technology, Inc.* 97,500 1,323,200 1,096,875 (226,325)
Cymer, Inc.* 335,000 10,907,676 5,025,000 (5,882,676)
Intergrated Process Equipment Corp.* 490,000 13,758,816 7,717,500 (6,041,316)
------------- ------------ -------------
Total Semiconductor Equipment 25,989,692 13,839,375 (12,150,317)
------------- ------------ -------------
SEMICONDUCTORS -- 27.3%
Altera Corp.* 365,000 16,437,502 12,090,625 (4,346,877)
ANADIGICS, Inc.* 270,500 9,827,356 8,148,813 (1,678,543)
Applied Micro Circuits Corp.* 797,500 7,757,504 9,869,062 2,111,558
Intel Corp. 10,000 791,250 702,500 (88,750)
Level One Communications, Inc.* 82,700 1,370,405 2,336,275 965,870
PMC-Sierra, Inc.* 340,000 5,603,537 10,540,000 4,936,463
Quality Semiconductor, Inc.* 237,800 2,048,394 921,475 (1,126,919)
TranSwitch Corp.* 15,000 151,875 112,500 (39,375)
Vitesse Semiconductor Corp.* 223,000 8,191,344 8,418,250 226,906
------------- ------------ -------------
Total Semiconductors 52,179,167 53,139,500 960,333
------------- ------------ -------------
TOTAL COMMON STOCKS-- 98.4% 227,405,256 191,337,853 (36,067,403)
------------- ------------ -------------
REPURCHASE AGREEMENTS(1) -- 2.2%
Star Bank, 5.75%, dated 12/31/97,
due 1/02/98, repurchase proceeds $4,272,364 $ 4,271,000 4,271,000 4,271,000
------------- ------------
Total Investments and
Repurchase Agreements at Value-- 100.6% $231,676,256 $195,608,853 $(36,067,403)
============ ============
Liabilities in Excess of Other Assets-- (0.6%) (1,235,310)
------------
Net Assets-- 100.0% $194,373,543
============
<FN>
* Non-income producing security.
(1) Repurchase agreements are fully collateralized by
U.S. Government obligations.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL SPECIALISTS FUND
PORTFOLIO OF INVESTMENTS
December 31, 1997
Unrealized
Gain
Common Stocks Shares/Par Cost Market Value (Loss)
<S> <C> <C> <C> <C>
MEDICAL -- 40.8%
HCIA, Inc. * 4,000 $ 49,120 $ 47,500 $ (1,620)
Affymetrix, Inc. * 3,000 95,590 93,375 (2,215)
Boston Scientific Corp.* 2,000 83,185 91,750 8,565
Cardiovascular Dynamics, Inc.* 1,200 6,711 6,600 (111)
CardioThoracic Systems, Inc. * 5,000 24,400 27,500 3,100
Centocor, Inc. * 5,000 167,006 166,250 (756)
Cytyc Corp.* 600 14,643 15,000 357
Endocardial Solutions, Inc. * 3,500 36,168 35,438 (730)
EndoSonics Corp. * 10,000 103,750 107,500 3,750
Guidant Corp. 2,000 108,060 124,500 16,440
Heartport, Inc.* 6,000 119,617 122,250 2,633
Immunex Corp.* 1,000 49,530 54,000 4,470
MedCath, Inc. * 2,000 29,060 30,250 1,190
Novoste Corp.* 2,000 42,310 43,000 690
---------- ---------- ----------
Total Medical 929,150 964,913 35,763
---------- ---------- ----------
TOTAL COMMON STOCKS-- 40.8% 929,150 964,913 35,763
---------- ---------- ----------
CASH EQUIVALENTS -- 62.6%
Star Treasury Fund $1,478,188 1,478,188 1,478,188
---------- ----------
Total Investments and Cash Equivalents
at Value-- 103.4% $2,407,338 $2,443,101 $ 35,763
========== ==========
Liabilities in Excess of Other Assets-- (3.4%) (80,891)
----------
Net Assets-- 100.0% $2,362,210
==========
<FN>
* Non-income producing security.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TECHNOLOGY LEADERS FUND
PORTFOLIO OF INVESTMENTS
December 31, 1997
Unrealized
Gain
Common Stocks Shares/Par Cost Market Value (Loss)
<S> <C> <C> <C> <C>
COMMUNICATIONS EQUIPMENT -- 13.5%
Lucent Technologies, Inc. 1,000 $ 77,030 $ 79,875 $ 2,845
PairGain Techn Inc.* 20,750 387,645 402,032 14,387
---------- ---------- ---------
Total Communications Equipment 464,675 481,907 17,232
---------- ---------- ---------
NETWORKING -- 4.6%
Cisco Systems, Inc. * 3,000 163,371 167,250 3,879
---------- ---------- ---------
Total Networking 163,371 167,250 3,879
---------- ---------- ---------
SEMICONDUCTOR EQUIPMENT -- 8.5%
Applied Materials, Inc.* 5,000 150,938 150,625 (313)
KLA-Tencor Corp.* 4,000 155,120 154,500 (620)
---------- ---------- ---------
Total Semiconductor Equipment 306,058 305,125 (933)
---------- ---------- ---------
SEMICONDUCTORS -- 23.0%
Altera Corp.* 5,000 179,900 165,625 (14,275)
Intel Corp. 4,000 284,870 281,000 (3,870)
PMC-Sierra, Inc.* 2,400 61,097 74,400 13,303
Vitesse Semiconductor Corp.* 8,000 294,366 302,000 7,634
---------- ---------- ---------
Total Semiconductors 820,233 823,025 2,792
---------- ---------- ---------
TOTAL COMMON STOCKS-- 49.6% 1,754,337 1,777,307 22,970
CASH EQUIVALENTS -- 57.8%
Star Treasury Fund $2,069,575 2,069,575 2,069,575
---------- ----------
Total Investments and Cash Equivalents
at Value-- 107.4% $3,823,912 $3,846,882 $ 22,970
========== =========
Liabilities in Excess of Other Assets-- (7.4%) (266,052)
----------
Net Assets-- 100.0% $3,580,830
==========
<FN>
* Non-income producing security.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Significant Accounting Policies
The Technology Value Fund, the Medical Specialists Fund and the Technology
Leaders Fund (the Funds) are each a non-diversified series of Interactive
Investments (the Trust), an open-end management investment company registered
under the Investment Company Act of 1940. The Trust was organized as a Delaware
business trust on November 8, 1993. The Technology Value Fund commenced
operations on May 20, 1994. The public offering of shares of the Technology
Value Fund commenced on January 3, 1995. The public offering of shares of the
Medical Specialists Fund and the Technology Leaders Fund commenced on December
10, 1997.
Each Fund's investment objective is long-term capital appreciation.
The TECHNOLOGY VALUE FUND seeks to achieve its objective by investing primarily
in securities of companies in the electronic technology and medical technology
fields which Interactive Research Advisers, Inc. (the "Investment Adviser")
considers to be undervalued and have potential for capital appreciation.
The MEDICAL SPECIALISTS FUND seeks to achieve its objective by investing
primarily in securities of companies in the health and biotechnology field which
the Investment Adviser considers to have a strong earnings growth outlook and
potential for capital appreciation.
The TECHNOLOGY LEADERS FUND seeks to achieve its objective by investing
primarily in securities of companies in the high technology field which the
Investment Adviser considers to have the strongest competitive position.
The following is a summary of the Funds' significant accounting policies:
Securities valuation -- Each Fund's portfolio securities are valued as of the
close of business of the regular session of trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time). Securities which are traded on a
national stock exchange or are quoted by NASDAQ are valued based upon the last
reported sale price as of the close of the regular session of trading on the New
York Stock Exchange, or, if not traded, at the most recent bid price. Securities
which are traded over-the-counter, and which are not quoted by NASDAQ, are
valued based on the most recent bid price as obtained from one or more of the
major market makers for such securities.
Repurchase agreements -- Repurchase agreements, which are collateralized by U.S.
Government obligations, are valued at cost which, together with accrued
interest, approximates market. At the time each Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying securities,
including accrued interest, will at all times be equal to or exceed the face
amount of the repurchase agreement.
Share valuation -- The net asset value per share of each Fund is calculated
daily by dividing the total value of each Fund's assets, less liabilities, by
the number of shares outstanding, rounded to the nearest cent. The offering and
redemption price per share of each Fund is equal to the net asset value per
share.
Investment income -- Dividend income is recorded on the ex-dividend date.
Interest income is accrued as earned.
Distributions to shareholders -- Distributions to shareholders arising from net
investment income and net realized capital gains, if any, are distributed at
least once each year. Dividends from net investment income and capital gain
distributions are determined in accordance with income tax regulations, which
may differ from generally accepted accounting principles.
<PAGE>
Security transactions -- Security transactions are accounted for on the trade
date. Securities sold are valued on a specific identification basis.
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 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.
Federal income tax -- It is each Fund's policy to comply with the special
provisions of the Internal Revenue Code (the Code) available to regulated
investment companies. As provided therein, in any fiscal year in which a Fund so
qualifies and distributes at least 90% of its taxable net income, the Fund (but
not the shareholders) will be relieved of federal income tax on the income
distributed. Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also each Fund's intention to declare as dividends
in each calendar year at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains (earned during the
twelve months ended October 31) plus undistributed amounts from prior years.
The following information is based upon Federal income tax cost of portfolio
investments (excluding repurchase agreements) as of December 31, 1997.
<TABLE>
<CAPTION>
Technology Medical Technology
Value Fund Specialists Fund Leaders Fund
<S> <C> <C> <C>
Gross unrealized appreciation $ 14,080,648 $ 46,093 $ 42,048
Gross unrealized depreciation (51,298,796) (10,330) (19,078)
--------------------- ------------------ -------------
Net unrealized appreciation (depreciation) $ (37,218,148) $ 35,763 $ 22,970
===================== ================== ==============
Federal income tax cost $ 228,556,001 $ 2,407,338 $ 3,823,912
===================== ================== ==============
</TABLE>
The Technology Value Fund realized net capital losses of $2,167,536 during the
period from November 1, 1997 through December 31, 1997, which are treated for
federal income tax purposes as arising in the tax year ending December 31, 1998.
Reclassification of capital accounts -- For the year ended of December 31, 1997,
the Technology Value Fund had a net investment loss of $1,927,303 which has been
reclassified to undistributed net realized gains from security transactions on
the Statement of Assets and Liabilities. The reclassification, a result of
permanent differences between financial statement and income tax reporting
requirements, has no effect on the Fund's net assets or net asset value per
share.
2. Investment Transactions
Investment transactions (excluding short-term investments) were as follows
for the periods ended December 31, 1997.
<TABLE>
<CAPTION>
Technology Medical Technology
Value Fund Specialists Fund Leaders Fund
<S> <C> <C> <C>
Purchases of investment securities $ 309,656,195 $ 929,150 $ 1,754,337
================= ============= ===============
Proceeds from sales and maturities
of investment securities $ 127,875,280 $ -- $ --
================= ============= ===============
</TABLE>
<PAGE>
3. Transactions with Affiliates
Certain trustees and officers of the Trust are also officers of Interactive
Research Advisers, Inc. (the Adviser) or of Countrywide Fund Services, Inc., the
administrative services agent, shareholder servicing and transfer agent, and
accounting services agent for the Trust.
INVESTMENT ADVISORY AGREEMENT
Each Fund's investments are managed by the Adviser pursuant to the terms of an
Investment Advisory Agreement (the Advisory Agreement). Under the Advisory
Agreement, the Adviser furnishes advice and recommendations with respect to each
Fund's portfolio of securities and investments and provides persons satisfactory
to the Trust's Board of Trustees to act as officers and employees of the Trust
responsible for the overall management and administration of the Trust, subject
to the supervision of the Trust's Board of Trustees. The Adviser is responsible
for (i) the compensation of any of the Trust's trustees, officers and employees
who are directors, officers, employees or shareholders of the Adviser, (ii)
compensation of the Adviser's personnel and payment of other expenses in
connection with the provision of portfolio management services under the
Advisory Agreement, and (iii) expenses of printing and distributing each Fund's
Prospectus and sales and advertising materials to prospective clients.
For the services provided by the Adviser under the Advisory Agreement, the
Adviser receives from each Fund a management fee, computed and accrued daily and
paid monthly, equal to 1.50% per annum of each Fund's average daily net assets.
The Advisory Agreement requires the Investment Adviser to waive its management
fees and, if necessary, reimburse expenses of the Funds to the extent necessary
to limit each Fund's total operating expenses to 1.95% of its average net assets
up to $200 million, 1.90% of such assets from $200 million to $500 million,
1.85% of such assets from $500 million to $1 billion, and 1.80% of such assets
in excess of $1 billion. There were no fee waivers for the periods ended
December 31, 1997.
ADMINISTRATION AGREEMENT
The Trust has entered into a separate contract with the Adviser wherein the
Adviser is responsible for providing administrative and supervisory services to
each Fund (the Administration Agreement). Under the Administration Agreement,
the Adviser oversees the maintenance of all books and records with respect to
each Fund's securities transactions and each Fund's book of accounts in
accordance with all applicable federal and state laws and regulations. The
Adviser also arranges for the preservation of journals, ledgers, corporate
documents, brokerage account records and other records which are required to be
maintained pursuant to the 1940 Act.
Under the Administration Agreement, the Adviser is responsible for the
equipment, staff, office space and facilities necessary to perform its
obligations. The Adviser has also assumed responsibility for payment of all of
each Fund's operating expenses except for brokerage and commission expenses and
any extraordinary and non-recurring expenses.
For the services rendered by the Adviser under the Administration Agreement, the
Adviser receives a fee at the annual rate of .45% of each Fund's average daily
net assets up to $200 million, .40% of such assets from $200 million to $500
million, .35% of such assets from $500 million to $1 billion, .30% of such
assets in excess of $1 billion.
The Adviser has retained Countrywide Fund Services, Inc. (the Transfer Agent) to
serve as each Fund's transfer agent, dividend paying agent and shareholder
service agent, to provide accounting and pricing services to each Fund, and to
assist the Adviser in providing executive, administrative and regulatory
services to each Fund. The Transfer Agent is an indirect wholly owned subsidiary
of Countrywide Credit Industries, Inc., a New York Stock Exchange-listed company
principally engaged in the business of residential mortgage lending. The Adviser
(not the Funds) pays the Transfer Agent's fees for these services.
