FILE NO. 33-73832
811-8268
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 5
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 10
(Check appropriate box or boxes.)
INTERACTIVE INVESTMENTS
(Exact name of Registrant as Specified in Charter)
101 PARK CENTER PLAZA, SUITE 1300, SAN JOSE, CALIFORNIA 95113
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(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, including Area Code (408)294-2200
Kevin M. Landis
Interactive Research Advisers, Inc.
101 PARK CENTER PLAZA, SUITE 1300, SAN JOSE, CALIFORNIA 95113
(Name and Address of Agent for Service)
Copies of all communications to:
Julie Allecta, Esq.
Paul, Hastings, Janofsky & Walker
345 California Street, 29th Floor
San Francisco, CA 94104
It is proposed that this filing will become effective (check appropriate
box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 75 days after filing pursuant to paragraph (a)
/X/ on May 1, 1998 pursuant to paragraph (a) of Rule 485
Registrant has registered an indefinite number of shares under the Securities
Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940.
Registrant's Rule 24f-2 Notice for the fiscal year ended December 31, 1996 was
filed with the Commission on February 25, 1997.
<PAGE>
INTERACTIVE INVESTMENT TRUST
Cross Reference Sheet
Pursuant to Rule 481(a)
UNDER THE SECURITIES ACT OF 1933
PART A
ITEM NO. REGISTRATION STATEMENT CAPTION CAPTION IN PROSPECTUS
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1. Cover Page Cover Page
2. Synopsis Prospectus Summary;
Summary of Fund Expenses
3. Condensed Financial Information Financial Highlights;
Performance Information
4. General Description of Registrant General Information;
Investment Objectives,
Policies and Risk
Considerations
5. Management of the Fund Investment Avisory and
Other Services;
General Information
5A. Management's Discussion of Management Discussion
Fund Performance and Analysis (Annual
Report)
6. Capital Stock and Other Securities Cover Page; General
Information; Dividends
and Distributions; Taxes
7. Purchase of Securities Being Offered How to Purchase Shares;
Shareholder Services;
Calculation of Share
Price
8. Redemption or Repurchase How to Redeem Shares
9. Pending Legal Proceedings Not Applicable
PART B
ITEM NO. REGISTRATION STATEMENT CAPTION CAPTION IN PROSPECTUS
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10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Investment and History The Trust
<PAGE>
13. Investment Objectives and Policies Definitions, Policies and
Risk Considerations;
Quality Ratings of
Corporate Bonds and
Preferred Stocks;
Investment Restrictions;
Securities Transactions
14. Management of the Fund Management of the Trust
15. Control Persons and Principal Principal Security
Holders of Securities Holders
16. Investment Advisory and Other Investment Advisory and
Other Services;
Services Custodian; Auditors;
Securities Transactions
17. Brokerage Allocation and Other Securities Transactions
Practices
18. Capital Stock and Other Securities The Trust; Management of
the Trust
19. Purchase, Redemption and Pricing Purchase, Redemption and
of Securities Being Offered and Pricing of Shares
20. Tax Status Taxes
21. Underwriters Investment Management and
Other Services
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
PART C
The information to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
February 13, 1998
FIRSTHAND FUNDS
101 PARK CENTER PLAZA, SUITE 1300
SAN JOSE, CALIFORNIA 95113
(408)294-2200
THE TECHNOLOGY VALUE FUND
THE MEDICAL SPECIALISTS FUND
THE TECHNOLOGY LEADERS FUND
THE TECHNOLOGY INNOVATORS FUND
No-Load Funds
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 February 13, 1998
has been filed with the Securities and Exchange Commission and is hereby
incorporated be 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) . . . . . . . . . . . . . . 888-884-2675
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.
<PAGE>
FIRSTHAND FUNDS
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
UNDERWRITER
CW Fund Distributors, Inc.
312 Walnut Street
Cincinnati, Ohio 45202
TRANSFER AGENT
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, OH 45201
(Toll-free) 888-884-2675
TABLE OF CONTENTS
Prospectus Summary....................................................
Summary of Fund Expenses. . . ........................................
Financial Highlights .................................................
Investment Objective, Policies and Risk Considerations................
Investment Advisory and Other Services................................
How to Purchase Shares................................................
How to Redeem Shares..................................................
Shareholder Services..................................................
Exchange Privilege ...................................................
Dividends and Distributions...........................................
Taxes.................................................................
Calculation of Share Price ...........................................
Performance Information...............................................
General Information. . . . ...........................................
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<PAGE>
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
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
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 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.
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<PAGE>
Each Fund may also invest a portion of its assets in securities that
entail certain risks, such as foreign securities, securities of unseasoned
issuers and options on futures. 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.
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.
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<PAGE>
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."
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<PAGE>
SUMMARY OF FUND EXPENSES
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>
<CAPTION>
Shareholder Transaction Expenses
The Medical The Technology
The Technology Specialists The 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*
</TABLE>
* 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.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (as a percentage of average net assets):
<S> <C> <C> <C> <C>
Management Fees 1.50%(A) 1.50%(A) 1.50%(A) 1.50%(A)
12b-1 Fees None None None None
Other Expenses .43% .45% .45% .45%
Total Fund Operating Expenses 1.93%(A) 1.95%(A) 1.95%(A) 1.95%(A)
</TABLE>
(A) 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 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.
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>
The Medical The Technology
The Technology Specialists The Technology Innovators
Value Fund Fund Leaders Fund Fund
<S> <C> <C> <C> <C>
1 Year .................... $20 $20 $20 $20
3 Years.................... 61 $61 $61 $61
5 Years.................... 104
10 Years.................... 225
</TABLE>
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. 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 Annual Fund Operating 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.
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<PAGE>
FINANCIAL HIGHLIGHTS
The following information is an integral part of The Technology Value
Fund's 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
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 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.
<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>
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<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>
-8-
<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>
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<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
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<PAGE>
best positioned to introduce successful new products. In assessing a company's
capacity for innovation, the 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.
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
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<PAGE>
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
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<PAGE>
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.
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.
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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.
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
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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 segment 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. 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
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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.
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.
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<PAGE>
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.
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.
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<PAGE>
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 Fund has 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 Fund. The Underwriter is an indirect wholly-owned subsidiary of
Countrywide Credit Industries, Inc., a New York Stock Exchange listed company
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<PAGE>
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.
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
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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.
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 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.
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<PAGE>
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 Interactive Investments, 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.
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<PAGE>
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.
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 888-884-2675) for
additional information about the shareholder services described below.
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<PAGE>
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.
Automatic Investment Plan
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.
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. Shares of the Short Term Government Income Fund
acquired via exchange may be re-exchanged for shares of any Fund at net asset
value.
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<PAGE>
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.
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.
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.
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<PAGE>
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
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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.
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
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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.
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 Technology Value Fund's Annual Report
contains additional performance information and is available on
- 27 -
<PAGE>
request and without charge by calling 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 245.17% 131.78% 128.08% 117.02%
Annualized Total
Return Since
Inception 40.82% 26.15% 25.59% 23.87%
</TABLE>
*Fund Inception Date
**Measures price appreciation only; dividends not included.
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.
- 28 -
<PAGE>
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.
- 29 -
<PAGE>
FIRSTHAND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
February 13, 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 February 13, 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).
2
<PAGE>
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
3
<PAGE>
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
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
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.
8
<PAGE>
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.
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
9
<PAGE>
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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<PAGE>
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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<PAGE>
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.
12
<PAGE>
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.
13
<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.
14
<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
<FN>
* 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.
</FN>
</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
a principal with Renaissance Management, a business development
15
<PAGE>
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:
<TABLE>
<CAPTION>
THE TECHNOLOGY VALUE FUND:
NAME SHARES % OWNERSHIP
<S> <C> <C>
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
<CAPTION>
THE MEDICAL SPECIALISTS FUND:
NAME SHARES % OWNERSHIP
<S> <C> <C>
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
National Financial Services Corp. 63,252 19.45%
One World Financial Center
200 Liberty Street, 5th Floor
New York, New York 10281
16
<PAGE>
<CAPTION>
THE TECHNOLOGY LEADERS FUND:
NAME SHARES % OWNERSHIP
<S> <C> <C>
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
</TABLE>
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
18
<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.
23
<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).
24
<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 periods
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
26
<PAGE>
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 34519 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.
<PAGE>
INTERACTIVE INVESTMENTS
Part C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) (i) Financial Statements included in Part A:
Financial Highlights of The Technology Value Fund,
The Medical Specialists Fund and The Technology
Leaders Fund
(ii) Financial Statements included in Part B:
Statements of Assets and Liabilities,
December 31, 1997
Statements of Operations for the Period Ended
December 31, 1997
Statements of Changes in Net Assets for the
Years Ended December 31, 1997 and 1996
Schedules of Investments, December 31, 1997
Financial Highlights
Notes to Financial Statements, December 31, 1997
Independent Auditor's Report
(b) Exhibits
(1) Agreement and Declaration of Trust*
(2) Bylaws*
(3) Inapplicable
(4) Inapplicable
(5) Advisory Agreement with Interactive Research
Advisers, Inc.*
(6) Inapplicable
(7) Inapplicable
(8) Custody Agreement with Star Bank, N.A.*
(9)(i) Administration Agreement with Interactive Research
Advisers, Inc.*
(ii) Transfer, Dividend Disbursing, Shareholder Service
and Plan Agency Agreement with Countrywide Fund
Services, Inc.*
<PAGE>
(iii) Administration Agreement with Countrywide Fund
Services, Inc.*
(iv) Accounting Services Agreement with Countrywide Fund
Services, Inc.*
(10) Opinion and Consent of Counsel relating to Issuance
of Shares*
(11) Consent of Independent Public Accountants
(12) Inapplicable
(13) Agreement Relating to Initial Capital*
(14) Prototype Individual Retirement Account*
(15) Inapplicable
(16) Computation for Performance Quotations*
(17) Financial Data Schedules
(18) Inapplicable
* Incorporated by reference to Registration Statement on Form N-1A.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
No person is directly or indirectly controlled by or under
common control with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of January 31, 1998, there were 2,853 holders of the shares
of beneficial interest of The Technology Value Fund series of
Registrant, 124 holders of the shares of beneficial interest
of The Medical Specialists Fund series of Registrant, and 135
holders of the shares of beneficial interest of The Technology
Leaders Fund series of Registrant.
Item 27. INDEMNIFICATION.
Under section 3817(a) of the Delaware Business Trust Act, a
Delaware business trust has the power to indemnify and hold
harmless any trustee, beneficial owner or other person from
and against any and all claims and demands whatsoever.
Reference is made to sections 5.1 and 5.2 of the Declaration
of Trust of Interactive Investments (the "Trust") pursuant to
which no trustee, officer, employee or agent of the Trust
<PAGE>
shall be subject to any personal liability, when acting in his
or her individual capacity, except for his own bad faith,
willful misfeasance, gross negligence or reckless disregard of
his or her duties. The Trust shall indemnify each of its
trustees, officers, employees and agents against all
liabilities and expenses reasonably insurred by him or her in
connection with the defense or disposition of any actions,
suits or other proceedings by reason of his or her being or
having been a trustee, officer, employee or agent, except with
respect to any matter as to which he or she shall have been
adjudicated to have acted in or with bad faith, willful
misfeasance, gross negligence or reckless disregard of his or
her duties. The Trust will comply with Section 17(h) of the
Investment Company Act of 1940, as amended (the "1940 Act")
and 1940 Act Releases number 7221 (June 9, 1972) and number
11330 (September 2, 1980).
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Trust pursuant to the
foregoing, the Trust has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification
is against public policy and therefore may be unenforceable.
In the event that a claim for indemnification (except insofar
as it provides for the payment by the Trust of expenses
incurred or paid by a trustee, officer or controlling person
in the successful defense of any action, suit or proceeding)
is asserted against the Trust by such trustee, officer or
controlling person and the Securities and Exchange Commission
is still of the same opinion, the Trust will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by
it is against public policy as expressed in the Securities Act
of 1933 and will be governed by the final adjudication of such
issue.
Indemnification provisions exist in the Advisory Agreement and
the Administration Agreement which are substantially identical
to those in the Declaration of Trust noted above.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT
ADVISER
(a) Inapplicable
(b) Inapplicable
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Countrywide Investments, Inc. serves as the principal underwriter for the
Trust. Countrywide Investments, Inc. also serves as principal underwriter for
the following investment companies: Countrywide Tax-Free Trust, Countrywide
Investment Trust, Countrywide Strategic Trust, Profit Funds Investment Trust and
Brundage, Story and Rose Investment Trust.
(b) The following persons serve as directors or officers of Countrywide
Investments, Inc. Unless otherwise indicated by an asterisk (*), the address of
the persons listed below is 312 Walnut Street, Cincinnati, Ohio 45202. the
address of those persons denoted by an asterisk (*) is 4500 Park Granada Road,
Calabasas, California 91302.
<TABLE>
<CAPTION>
Positions and
Name and Principal Positions and Offices Offices with
Business Address with Underwriter Registrant
- ----------------- ---------------------- --------------------
<S> <C> <C>
Angelo R. Mozilo* Chairman and Director None
Robert H. Leshner President and Director None
Andrew S. Bielanski* Director None
Thomas H. Boone* Director None
Marshall M. Gates* Director None
John J. Goetz Vice President and None
Chief Investment Officer
Maryellen Peretzky Vice President - None
Administration, Human
Resources and Operations
Sharon L. Karp Vice President - None
Marketing
John F. Splain Secretary and Assistant
General Counsel Secretary
Robert G. Dorsey Treasurer Assistant
Vice President
Susan F. Flischel Vice President - None
Investments
Scott Weston Assistant Vice President None
- Investments
(c) Inapplicable
</TABLE>
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder will
be maintained by the Registrant at its offices
located at 101 Park Center Plaza, Suite 1300, San
Jose, California 95113 or at the offices of the
Registrant's transfer agent located at 312 Walnut
Street, Cincinnati, Ohio 45202.
ITEM 31. MANAGEMENT SERVICES NOT DISCUSSED IN
PARTS A AND B.
Inapplicable
ITEM 32. UNDERTAKINGS.
(a) Inapplicable
(b) The Registrant undertakes to file a post-
effective amendment, using financial
statements which need not be certified,
within four to six months from the
effective date of The Medical Specialists
Fund series, The Technology Leaders Fund
series and The Technology Innovators Fund
series.
(c) The Registrant undertakes that, if so
requested, it will furnish each person
to whom a prospectus is delivered with
a copy of Registrant's latest annual
report to shareholders without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed below on its behalf by the undersigned,
thereunto duly authorized, in the City of San Jose and the State of California
on the 13th of February, 1998.
INTERACTIVE INVESTMENTS
By: /S/ KEVIN M. LANDIS
Kevin M. Landis, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ KEVIN M. LANDIS President and February 13, 1998
- -------------------- Trustee
Kevin M. Landis
/S/ KENDRICK W. KAM Secretary/Treasurer February 13, 1998
- -------------------- and trustee
Kendrick W. Kam
Michael T. Lynch* Trustee By:/S/JOHN F. SPLAIN
John F. Splain
Attorney-in-Fact*
February 13, 1998
Mark K. Taguchi* Trustee
INDEX TO EXHIBITS
(1) Agreement and Declaration of Trust*
(2) Bylaws*
(3) Inapplicable
(4) Inapplicable
(5) Advisory Agreement with Interactive Research
Advisers, Inc.*
(6) Inapplicable
(7) Inapplicable
(8) Custody Agreement with Star Bank, N.A.*
(9)(i) Administration Agreement with Interactive
Research Advisers, Inc.*
(ii) Transfer, Dividend Disbursing, Shareholder
Service and Plan Agency Agreement with
Countrywide Fund Services, Inc.*
(iii) Administration Agreement with Countrywide Fund
Services, Inc.*
(iv) Accounting Services Agreement with Countrywide
Fund Services, Inc.*
(10) Opinion and Consent of Counsel relating to
issuance of shares*
(11) Consent of Independent Public Accountants
(12) Inapplicable
(13) Agreement Relating to Initial Capital*
(14) Prototype Individual Retirement Account*
(15) Inapplicable
(16) Computation for Performance Quotations*
(17) Financial Data Schedules
(18) Inapplicable
*Incorporated by reference to Registration Statement on Form N-1A.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in Post-Effective Amendment No. 5 to
the Registration Statement on Form N-1A of Interactive Investments comprising,
respectively, the Technology Value Fund, Technology Leaders Fund and Medical
Specialists Fund and to the use of our report dated January 23, 1998 on the
financial statements and financial highlights. Such financial statements and
financial highlights are incorporated by reference in the Statement of
Additional Information, which is a part of such Registration Statement.
/s/Tait, Weller and Baker
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
February 12, 1998.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> INTERACTIVE INVESTMENTS - THE TECHNOLOGY VALUE FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 231,676,256
<INVESTMENTS-AT-VALUE> 195,608,853
<RECEIVABLES> 3,833,687
<ASSETS-OTHER> 17,580
<OTHER-ITEMS-ASSETS> 801
<TOTAL-ASSETS> 199,460,921
<PAYABLE-FOR-SECURITIES> 3,337,439
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,749,939
<TOTAL-LIABILITIES> 5,087,378
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 233,488,824
<SHARES-COMMON-STOCK> 7,458,967
<SHARES-COMMON-PRIOR> 1,316,632
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 3,047,878
<ACCUM-APPREC-OR-DEPREC> (36,067,403)
<NET-ASSETS> 194,373,543
<DIVIDEND-INCOME> 268,881
<INTEREST-INCOME> 412,570
<OTHER-INCOME> 0
<EXPENSES-NET> 2,608,754
<NET-INVESTMENT-INCOME> (1,927,303)
<REALIZED-GAINS-CURRENT> 14,064,022
<APPREC-INCREASE-CURRENT> (38,292,641)
<NET-CHANGE-FROM-OPS> (26,155,922)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 12,334,200
<DISTRIBUTIONS-OTHER> 3,047,878
<NUMBER-OF-SHARES-SOLD> 10,437,757
<NUMBER-OF-SHARES-REDEEMED> 4,812,871
<SHARES-REINVESTED> 517,449
<NET-CHANGE-IN-ASSETS> 159,269,441
<ACCUMULATED-NII-PRIOR> (125,410)
<ACCUMULATED-GAINS-PRIOR> 300,692
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,830,251
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,608,754
<AVERAGE-NET-ASSETS> 135,135,299
<PER-SHARE-NAV-BEGIN> 26.66
<PER-SHARE-NII> (.26)
<PER-SHARE-GAIN-APPREC> 1.90
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.80
<RETURNS-OF-CAPITAL> .44
<PER-SHARE-NAV-END> 26.06
<EXPENSE-RATIO> 1.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> INTERACTIVE INVESTMENTS - THE MEDICAL SPECIALISTS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,407,338
<INVESTMENTS-AT-VALUE> 2,443,101
<RECEIVABLES> 46,423
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,489,524
<PAYABLE-FOR-SECURITIES> 127,314
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 127,314
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,324,890
<SHARES-COMMON-STOCK> 233,313
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,557
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 35,763
<NET-ASSETS> 2,362,210
<DIVIDEND-INCOME> 368
<INTEREST-INCOME> 2,798
<OTHER-INCOME> 0
<EXPENSES-NET> 1,609
<NET-INVESTMENT-INCOME> 1,557
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 35,763
<NET-CHANGE-FROM-OPS> 37,320
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 235,882
<NUMBER-OF-SHARES-REDEEMED> 2,569
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,362,210
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,238
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,609
<AVERAGE-NET-ASSETS> 2,362,210
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.12
<EXPENSE-RATIO> 1.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INTERACTIVE INVESTMENTS - THE TECHNOLOGY LEADERS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,823,912
<INVESTMENTS-AT-VALUE> 3,846,882
<RECEIVABLES> 114,308
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,961,190
<PAYABLE-FOR-SECURITIES> 380,120
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 240
<TOTAL-LIABILITIES> 380,360
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,555,603
<SHARES-COMMON-STOCK> 355,432
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2,257
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22,970
<NET-ASSETS> 3,580,830
<DIVIDEND-INCOME> 544
<INTEREST-INCOME> 4,013
<OTHER-INCOME> 0
<EXPENSES-NET> 2,300
<NET-INVESTMENT-INCOME> 2,257
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 22,970
<NET-CHANGE-FROM-OPS> 25,227
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 371,478
<NUMBER-OF-SHARES-REDEEMED> 16,046
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3,580,830
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,769
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,300
<AVERAGE-NET-ASSETS> 3,580,830
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> .06
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.07
<EXPENSE-RATIO> 1.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
