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.
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Post-Effective Amendment No. 6
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 11
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(Check appropriate box or boxes.)
FIRSTHAND FUNDS
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(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
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Kevin M. Landis
Interactive Research Advisers, Inc.
101 Park Center Plaza, Suite 1300, San Jose, California 95113
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(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)
/ / days after filing pursuant to paragraph (a)
/X/ on May 1, 1999 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, 1998 was
filed with the Commission on February 22, 1999.
<PAGE>
FIRSTHAND FUNDS
Cross Reference Sheet
Pursuant to Rule 481(a)
Under the Securities Act of 1933
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PART A
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Item No. Registration Statement Caption Caption in Prospectus
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1. Front and Back Cover Pages Cover Pages
2. Risk/Return Summary: Risk/Return Summary
Investments, Risks, and Performance
3. Risk/Return Summary: Fee Table Expense Information
4. Investment Objectives, Principal Additional Investment
Investment Strategies, and Related Strategies and Risk
Risks Considerations
5. Management's Discussion of Management Discussion
Fund Performance and Analysis (Annual
Report)
6. Management, Organization, and Operation of the Fund
Capital Structure
7. Shareholder Information How to Purchase Shares;
How to Redeem Shares
Shareholder Services;
Exchange Privilege;
Dividends and
Distributions; Taxes;
Calculation of Share
Price
8. Distribution Arrangements Not Applicable
9. Financial Highlights Information Financial Highlights
<PAGE>
PART B
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Item No. Registration Statement Caption Caption in Prospectus
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10. Cover Page and Table of Contents Cover Page; Table of
Contents
11. Fund History The Trust
12. Description of the Fund and Definitions, Policies and
Its Investment and Risks Risk Considerations;
Quality Ratings of
Corporate Bonds and
Preferred Stocks;
Investment Restrictions;
Securities Transactions;
Portfolio Turnover
13. Management of the Fund Trustees and Officers
14. Control Persons and Principal Principal Security
Holders of Securities Holders
15. Investment Advisory and Other Investment Advisory and
Services Other Services;
Securities Transactions;
Custodian; Legal Counsel
and Auditors; Countrywide
Fund Services, Inc.
16. Brokerage Allocation and Other Securities Transactions
Practices
17. Capital Stock and Other Securities The Trust; Trustees and
Officers
18. Purchase, Redemption and Pricing Purchase, Redemption and
of Shares and Pricing of Shares
19. Taxation of the Fund Taxes
20. Underwriters The Underwriter
21. Calculation of Performance Data Historical Performance
Information
22. Financial Statements Annual Report
PART C
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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
May 1, 1999
FIRSTHAND FUNDS
101 PARK CENTER PLAZA, SUITE 1300
SAN JOSE, CALIFORNIA 95113
www.techfunds.com
THE TECHNOLOGY VALUE FUND
THE MEDICAL SPECIALISTS FUND
THE TECHNOLOGY LEADERS FUND
THE TECHNOLOGY INNOVATORS FUND
NO-LOAD FUNDS
Firsthand Funds (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 (individually, a
"Fund," and collectively, the "Funds"). Each Fund is non-diversified and has as
its investment objective 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.
The initial minimum investment in each Fund is $10,000 unless the
investment is made by a Firsthand Funds Individual Retirement Account ("IRA"),
in which case the minimum initial investment is $2,000. IRA accounts which are
not Firsthand Funds IRAs are subject to the $10,000 minimum. 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. (the "Investment Adviser") manages the
Funds' investments. The Investment Adviser intends to focus its research on the
objective of long-term growth.
This Prospectus has information you should know before you invest. Please
read it carefully and keep it with your investment records. Although these
securities have been registered with the Securities and Exchange Commission, the
Commission has not judged them for investment merit and does not guarantee the
accuracy or adequacy of the information in this Prospectus. Anyone who informs
you otherwise is committing a criminal offense.
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FOR INFORMATION OR ASSISTANCE IN OPENING AN ACCOUNT, PLEASE CALL:
Nationwide (Toll-Free):1.888.884.2675
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<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 Bellawala, 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, Ohio 45201
(Toll-free) 1.888.884.2675
TABLE OF CONTENTS
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Risk/Return Summary.........................................................
Expense Information. . . ...................................................
Additional Investment Strategies
and Risk Considerations..................................................
Operation of the Funds......................................................
How to Purchase Shares......................................................
How to Redeem Shares........................................................
Shareholder Services........................................................
Exchange Privilege..........................................................
Dividends and Distributions.................................................
Taxes.......................................................................
Calculation of Share Price..................................................
Financial Highlights........................................................
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<PAGE>
RISK/RETURN SUMMARY
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
Each Fund's investment objective is long-term growth of capital.
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
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 the Investment Adviser considers to be undervalued and
have potential for capital appreciation.
THE MEDICAL SPECIALISTS FUND seeks to achieve its objective by investing
primarily in securities of companies in the health and biotechnology fields
which the Investment Adviser considers to have a strong earnings growth outlook
and potential for capital appreciation. The 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 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. 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 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. In assessing a company's capacity for innovation, the Investment
Adviser may consider a number of factors, including technical vision, marketing
acumen, proprietary technological advantages and a demonstrated ability to bring
products to market quickly. The high technology field includes the
semiconductor, computer, computer peripheral, software, telecommunication and
mass storage device segments of the technology industry.
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<PAGE>
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS?
The return on and value of an investment in the Funds will fluctuate in
response to stock market movements. Stocks and other equity securities are
subject to market risks and fluctuations in value due to earnings, economic
conditions and other factors beyond the control of the Investment Adviser. As a
result, there is a risk that you could lose money by investing in the Funds.
The Funds will be subject to greater risk because of their concentration of
investments in the technology industry and within certain segments of the
technology industry. Although the Investment Adviser currently believes that
investments by the Funds in the technology industry may offer greater
opportunity for growth of capital than investments in other industries, the
value of such investments can and often do fluctuate dramatically and may expose
you to greater than average financial and market risk.
Each Fund may also invest a portion of its assets in securities that entail
certain risks, such as foreign securities securities of unseasoned issuers.
Please see "Additional Investment Strategies and Risk Considerations" in this
Prospectus for additional information.
PERFORMANCE SUMMARY
The bar charts and performance tables shown below provide an indication of
the risks of investing in the Funds by showing the changes in the performance of
the Funds from year to year since the Funds' inception and by showing how the
average annual returns of the Funds compare to those of broad-based securities
market indices. No performance information is presented for The Technology
Innovators Fund, as that Fund has less than one full year of operating history
as of the date of this Prospectus. How the Funds have performed in the past is
not necessarily an indication of how the Funds will perform in the future.
THE TECHNOLOGY VALUE FUND
23.71% 6.46% 60.55% 61.17%
[bar charts]
1998 1997 1996 1995
During the period shown in the bar chart, the highest return for a quarter was
60.64% during the quarter ended December 31, 1998 and the lowest return for a
quarter was -29.68% during the quarter ended September 30, 1998.
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<PAGE>
THE TECHNOLOGY LEADERS FUND
78.15%
[bar charts]
1998
During the period shown in the bar chart, the highest return for a quarter was
58.90% during the quarter ended December 31, 1998 and the lowest return for a
quarter was -12.62% during the quarter ended September 30, 1998.
THE MEDICAL SPECIALISTS FUND
- -4.55%
[bar charts]
1998
During the period shown in the bar chart, the highest return for a quarter was
31.97% during the quarter ended December 31, 1998 and the lowest return for a
quarter was -19.74% during the quarter ended June 30, 1998.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 1998
One Year Since Inception*
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The Technology Value Fund 23.71% 37.24%
Dow Jones Industrial Average(1) 18.13% 27.28%
Standard & Poor's 500 Index(2) 28.58% 30.42%
NASDAQ Composite Index(3) 39.63% 31.78%
The Technology Leaders Fund 78.15% 73.54%
Dow Jones Industrial Average(1) 18.13% 15.21%
Standard & Poor's 500 Index(2) 28.58% 26.22%
NASDAQ Composite Index(3) 39.63% 33.05%
The Medical Specialists Fund -4.55% -3.21%
Dow Jones Industrial Average(1) 18.13% 15.21%
Standard & Poor's 500 Index(2) 28.58% 26.22%
NASDAQ Composite Index(3) 39.63% 33.05%
* The public offering of shares of The Technology Value Fund commenced on
December 15, 1994 and the public offering of shares of The Technology
Leaders Fund and The Medical Specialists Fund commenced on December 10,
1997.
(1) 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.
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<PAGE>
(2) The Standard & Poor's 500 Index is a widely recognized, unmanaged index of
common stock prices.
(3) The NASDAQ Composite Index is an unmanaged index which averages the trading
prices of more than 3,000 domestic over-the-counter companies.
EXPENSE INFORMATION
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY IF YOU BUY AND
HOLD SHARES OF THE FUNDS.
SHAREHOLDER FEES (fees paid directly from your investment):
<TABLE>
<CAPTION>
The Medical The Technology
The Technology Specialists The Technology Innovators
Value Fund Fund Leaders Fund Fund
---------- ---- ------------ ----
<S> <C> <C> <C> <C>
Sales load
imposed on purchases None None None None
Sales load
imposed on reinvested dividends None None None None
Deferred sales load None None None None
Exchange fee 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. See
"How to Redeem Shares."
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):
<S> <C> <C> <C> <C>
Management Fees 1.50% 1.50% 1.50% 1.50%
Distribution (12b-1) Fees None None None None
Other Expenses .45% .45% .45% .45%
----- ----- ----- -----
Total Annual Fund Operating Expenses(A) 1.95% 1.95% 1.95% 1.95%
===== ===== ===== =====
</TABLE>
(A) The Advisory Agreement limits each Fund's total annual operating expenses
to 1.95% of the Fund's average daily net assets up to $200 million, 1.90%
of such assets from $200 million to $500 million, 1.85% of such assets from
$500 million to $1 billion, and 1.80% of such assets in excess of $1
billion.
EXAMPLE:
This Example is intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. It assumes that you
invest $10,000 in a Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that a Fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
The Medical The Technology
The Technology Specialists The Technology Innovators
Value Fund Fund Leaders Fund Fund
<S> <C> <C> <C> <C>
1 Year .................... $ 198 $ 198 $ 198 $ 198
3 Years.................... 612 612 612 612
5 Years.................... 1,052 1,052 1,052
10 Years.................... 2,275 2,275 2,275
</TABLE>
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<PAGE>
ADDITIONAL INVESTMENT STRATEGIES
AND RISK CONSIDERATIONS
INVESTMENT TECHNIQUES AND STRATEGIES
The equity securities in which the Funds may invest include common stock,
convertible long-term corporate debt obligations, preferred stock, convertible
preferred stock and warrants. The securities selected will typically be traded
on a national securities exchange, the NASDAQ System or over-the-counter, and
may include securities of both large, well-known companies as well as smaller,
less well-known companies, including foreign securities listed on a foreign
securities exchange or traded in the United States. Although certain of the
Funds' investments may produce dividends, interest or other income, current
income is not a consideration in selecting a Fund's investments.
The Investment Adviser's analysis of a potential investment will focus on
valuing an enterprise and purchasing securities of the enterprise when the
Investment Adviser believes that value exceeds the market price. The Investment
Adviser intends to focus on the fundamental worth of the companies under
consideration, where fundamental worth is defined as the value of the basic
businesses of the firm, including products, technologies, customer relationships
and other sustainable competitive advantages. For purposes of the Investment
Adviser's analysis, fundamental worth is a reflection of the value of an
enterprise's assets and its earning power, and will be determined by use of
price-earnings ratios and comparison with sales of comparable assets to
independent third party buyers in arms' length transactions. Balance sheet
strength, the ability to generate earnings and a strong competitive position are
the major factors the Investment Adviser will use in appraising an investment.
Applicable price-earnings ratios depend on the earnings potential of an
enterprise as determined by the Investment Adviser. For example, an enterprise
that is a relatively high growth company would normally command a higher
price-earnings ratio than lower growth companies because expected future profits
would be higher.
Each Fund may purchase shares in an initial public offering (IPOs). Due to
the typically small size of the IPO allocation available to the Funds and the
nature and market capitalization of the companies involved in IPOs, most of the
shares are purchased by The Technology Innovators Fund and The Medical
Specialists Fund. Because IPO shares frequently are volatile in price, the Funds
may hold IPO shares for a very short period of time.
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<PAGE>
RISK CONSIDERATIONS
EQUITY SECURITIES. 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, 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.
SMALL CAPITALIZATION COMPANIES. 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.
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.
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<PAGE>
TEMPORARY DEFENSIVE MEASURES. For defensive purposes, each Fund may
temporarily hold all or a portion of its assets in money market instruments.
Such action may help a Fund minimize or avoid losses during adverse market,
economic or political conditions. During such a period, a Fund may not achieve
its investment objective. For example, should the market advance during this
period, a Fund may not participate as much as it would have if it had been more
fully invested.
CONCENTRATION OF INVESTMENTS IN THE TECHNOLOGY AND MEDICAL INDUSTRIES. The
Technology Value Fund will invest primarily in a combination of companies within
the electronic and medical technology segments, while The Medical Specialists
Fund will invest primarily in companies within the health and biotechnology
segments and each of The Technology Leaders Fund and The Technology Innovators
Fund will invest primarily in companies within the high technology segment. The
Funds will be subject to greater risk because of their concentration of
investments in a single industry and within certain segments of the industry.
For example, investments in the health and biotechnology segments include the
risk that the economic prospects, and the share prices, of health and
biotechnology companies can fluctuate dramatically due to changes in the
regulatory or competitive environments. Investments in the high technology
segment include the risk that certain high technology products and services are
subject to competitive pressures and aggressive pricing. Investments in
companies that offer new products in the high technology segment, such as
investments in that area by The Technology Innovators Fund, include the risk
that the new products will not meet expectations or even reach the marketplace.
Additionally, health, biotechnology and high technology segment products and
services are subject to risk of rapid obsolescence caused by scientific
developments and technological advances. Also, the technology and medical
industries are generally more susceptible to effects caused by changes in the
economic climate, broad market swings, moves in a dominant industry stock or
regulatory changes.
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.
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<PAGE>
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
YEAR 2000 PROBLEM. The Funds and their service providers depend upon the
smooth functioning of their computer systems. Unfortunately, because of the way
dates are encoded and calculated, many computer systems in use today cannot
recognize the year 2000, but revert to 1900 or another incorrect date. Computer
failures due to the year 2000 problem could negatively impact the handling of
securities trades and pricing and account services.
The Funds' software vendors and service providers have assured the Funds
that their systems will be adapted in sufficient time to avoid serious problems.
There can be no guarantee, however, that all of their computer systems will be
adapted in time. The Funds do not expect year 2000 conversion costs to be
substantial for the Funds because those costs are borne by the Funds' vendors
and service providers and not directly by the Funds.
Brokers and other intermediaries that hold shareholder accounts may still
experience incompatibility problems. It is also important to keep in mind that
year 2000 issues may negatively impact the companies in which the Funds invest
and, by extension, the value of those companies' shares held by the Funds.
OPERATION OF THE FUNDS
The Trust retains Interactive Research Advisers, Inc. (the "Investment
Adviser"), 101 Park Center Plaza, Suite 1300, San Jose, California 95113, to
manage the investments of each Fund. 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
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<PAGE>
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.
The Investment Adviser receives from each Fund a management fee at the
annual rate of 1.50% 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
from $500 million to $1 billion, and 1.80% of such assets in excess of $1
billion.
The Trust has entered into a separate contract (the "Administration
Agreement") with the Investment Adviser wherein the Investment Adviser is
responsible for providing administrative and general supervisory services to the
Funds. 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. 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 from each Fund at the annual rate of .45% 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.
CW Fund Distributors, Inc. (the "Underwriter"), 312 Walnut Street,
Cincinnati, Ohio 45202, serves as principal underwriter for the Funds and as
such, is the exclusive agent for the distribution of shares of the Funds. The
Underwriter is an indirect wholly-owned subsidiary of Countrywide Credit
Industries, Inc., a New York Stock Exchange listed company principally engaged
in the business of residential mortgage lending.
HOW TO PURCHASE SHARES
You may purchase shares directly through the Funds' Transfer Agent or
through a brokerage firm or financial institution that has agreed to sell the
Funds' shares. Your initial investment in the Funds ordinarily must be at least
$10,000 per Fund (or $2,000 per Fund for Firsthand Funds IRAs). Lower minimums
are available
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<PAGE>
to investors purchasing shares of the Funds through certain brokerage firms.
Shares of each Fund are sold on a continuous basis at the net asset value next
determined after receipt of a purchase order by the Trust or an agent of the
Trust. 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."
Third party checks will not be accepted. An account application is included with
this Prospectus.
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.
The Funds' account application contains provisions in favor of the Trust,
the Transfer Agent and certain of their 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.
If an order to purchase shares is cancelled 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 bank wire. Please telephone the
Transfer Agent (Nationwide call toll-free 1.888.884.2675) for instructions. You
should be prepared to give the name of the Fund in which you wish to purchase
shares, the name in which the account is to be established, the address,
telephone number and taxpayer identification number for the account, and the
name of the bank which will wire the money. Your investment will be made at the
next determined net asset value after your wire is received together with the
account information indicated above. If the
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<PAGE>
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 must mail a completed account application
to the Transfer Agent. Your bank may impose a charge for sending your wire.
There is presently no fee for receipt of wired funds, but the Transfer Agent
reserves the right to charge shareholders for this service upon thirty days'
prior notice to shareholders.
You may purchase and add shares to your account ($50 minimum) by mail or by
bank wire. Checks should be sent to Firsthand Funds, P.O. Box 5354, Cincinnati,
Ohio 45201-5354. Checks should be made payable to "Firsthand Funds." Bank wires
should be sent as outlined above. Each additional purchase request must contain
the account name and number to permit proper crediting.
HOW TO REDEEM SHARES
You may redeem shares of each Fund on each day that the Trust 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, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations. If the name(s) or the address on your account has been changed
within 30 days of your redemption request, you will be required to request the
redemption in writing with your signature guaranteed, regardless of the value of
shares being redeemed.
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.
- 13 -
<PAGE>
You will receive the net asset value per share next determined after
receipt by the Transfer Agent (or other agents of the Funds) of your redemption
request in the form described above. Payment is normally 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.
You may also redeem your shares through a brokerage firm or financial
institution that has been authorized to accept orders on behalf of the Trust at
a Fund's net asset value next determined after your order is received by such
organization in proper form before 4:00 p.m., eastern time, or such earlier time
as may be required by such organization. These organizations may be authorized
to designate other intermediaries to act in this capacity. Such an organization
may charge you transaction fees on redemptions of Fund shares and may impose
other charges or restrictions or account options that differ from those
applicable to shareholders who redeem shares directly through the Transfer
Agent.
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. Under
unusual circumstances, when the Board of Trustees deems it appropriate, the
Trust may make payment for shares redeemed in portfolio securities of the Funds
taken at current value.
- 14 -
<PAGE>
SHAREHOLDER SERVICES
Contact the Transfer Agent (nationwide call toll-free 1.888.884.2675) for
additional information about the shareholder services described below.
Tax-Deferred Retirement Plans
- -----------------------------
Shares of each Fund are available for purchase in connection with the
following tax-deferred retirement plans:
-- Keogh Plans for self-employed individuals
-- Individual retirement account (IRA) plans for individuals and their
non-employed spouses, including Roth IRAs and Education IRAs
-- Qualified pension and profit-sharing plans for employees, including
those profit-sharing plans with a 401(k) provision
-- 403(b)(7) custodial accounts for employees of public school systems,
hospitals, colleges and other non-profit organizations meeting certain
requirements of the Internal Revenue Code (the "Code")
Direct Deposit Plans
- --------------------
Shares of each Fund may be purchased through direct deposit plans offered
by certain employers and government agencies. These plans enable a shareholder
to have all or a portion of his or her payroll or Social Security checks
transferred automatically to purchase shares of the Funds.
Automatic Investment Plan
- -------------------------
By completing the Automatic Investment Plan section of the account
application, you may make automatic monthly investments in each Fund from your
bank, savings and loan or other depository institution account. The minimum
investment must be $50 under the plan. The Transfer Agent pays the costs
associated with these transfers, but reserves the right, upon thirty days'
written notice, to make reasonable charges for this service. Your depository
institution may impose its own charge for debiting your account which would
reduce your return from an investment in the Funds. You may change the amount of
the investment or discontinue the plan at any time by writing to the Transfer
Agent.
- 15 -
<PAGE>
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 reexchanged for shares of any Fund at net asset
value.
You may request an exchange by sending 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. An exchange will
be effected at the next determined net asset value after receipt of a request by
the Transfer Agent. Your request is subject to the Fund's cut-off times.
The telephone exchange privilege is automatically available to all
shareholders. Neither the Trust, the Transfer Agent, nor their respective
affiliates will be liable for complying with telephone instructions they
reasonably believe to be genuine for any loss, damage, cost or expense in acting
on such telephone instructions. The affected shareholders will bear the risk of
any such loss. The Trust or the Transfer Agent, or both, will employ reasonable
procedures to determine that telephone instructions are genuine. If the Trust
and/or the Transfer Agent do not employ such procedures, they may be liable for
losses due to unauthorized or fraudulent instructions. These procedures may
include, among others, requiring forms of personal identification prior to
acting upon telephone instructions, providing written confirmation of the
transactions and/or tape recording telephone instructions.
Exchanges may only be made for shares of 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. Before making
an exchange for shares of the Short Term Government Income Fund, contact the
Transfer Agent to obtain a current prospectus and more information about
exchanges among the Funds.
- 16 -
<PAGE>
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. All distributions will be
based on the net asset value in effect on the payable date.
If you elect to receive dividends in cash and the U.S. Postal Service
cannot deliver your checks or if your checks remain uncashed for six months,
your dividends may be reinvested in your account at the then-current net asset
value and your account will be converted to the Share Option. No interest will
accrue on amounts represented by uncashed distribution checks.
TAXES
Each Fund has qualified in all prior years and 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 (whether received in cash
or reinvested in additional shares) 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 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 (the excess of net long-term capital
gains over net short-term capital losses) by a Fund to its shareholders are
taxable to you as capital gains, without regard to the length of time you have
held your Fund shares. Capital gains distributions may be taxable at different
rates depending on the length of time a Fund holds its assets.
- 17 -
<PAGE>
Redemptions of shares of the Funds are taxable events on which you may
realize a gain or loss. An exchange of a Fund's shares for shares of another
Fund will be treated as a sale of such shares and any gain on the transaction
may be subject to federal income tax.
The Trust will mail a statement to you annually indicating the amount and
federal income tax status of all distributions made during the year. The Funds'
distributions may be subject to federal income tax whether received in cash or
reinvested in additional shares. In addition to federal taxes, you may be
subject to state and local taxes on distributions.
CALCULATION OF SHARE PRICE
On each day that the Trust 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 (normally 4:00 p.m., eastern
time). The Trust 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. The price at which a
purchase or redemption of Fund shares is effected is based on the next
calculation of net asset value after the order is placed.
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
last sale price (or, if the last sale price is not readily available, at the
most recent bid price as quoted by brokers that make markets in the securities)
as of the close of the regular session of trading on the New York Stock Exchange
on the day the securities are being valued, (3) securities which are traded both
in the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market, and (4) securities (and other
assets) for which market quotations are not readily available are valued at
their fair value as determined in good faith in accordance with consistently
applied procedures established by and under the general supervision of the Board
of Trustees. The net asset value per share of each Fund will fluctuate with the
value of the securities it holds.
- 18 -
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Funds' financial performance. Certain information reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned or lost on an investment in the Funds (assuming
reinvestment of all dividends and distributions). This information has been
audited by Tait, Weller & Baker, whose report, along with the Funds' financial
statements, are included in the Statement of Additional Information, which is
available upon request.
<TABLE>
<CAPTION>
TECHNOLOGY VALUE FUND
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
======================================================================================================================
Year Year Year Year Period
Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94(A)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 26.06 $ 26.66 $ 18.44 $ 11.70 $ 10.00
----------------------------------------------------------------
Income from investment operations:
Net investment loss (0.59) (0.26) (0.08) (0.14) (0.03)
Net realized and unrealized gains on investments 6.77 1.90 11.20 7.28 2.56
----------------------------------------------------------------
Total from investment operations 6.18 1.64 11.12 7.14 2.53
----------------------------------------------------------------
Less distributions:
Distributions from net realized gains -- (1.80) (2.90) (0.40) (0.83)
Distributions in excess of net realized gains -- (0.44) -- -- --
----------------------------------------------------------------
Total distributions -- (2.24) (2.90) (0.40) (0.83)
----------------------------------------------------------------
Net asset value at end of period $ 32.24 $ 26.06 $ 26.66 $ 18.44 $ 11.70
================================================================
Total return 23.71% 6.46% 60.55% 61.17% 25.30%(B)
================================================================
Net assets at end of period (millions) $ 178.1 $ 194.4 $ 35.1 $ 2.7 $ 0.2
================================================================
Ratio of expenses to average net assets 1.95% 1.93% 1.81% 1.98% 1.96%(C)
Ratio of net investment loss to average net assets (1.80%) (1.43%) (0.55%) (1.45%) (1.29%)(C)
Portfolio turnover rate 126% 101% 43% 45% 56%
</TABLE>
(A) Represents the period from the commencement of operations (May 20, 1994)
through December 31, 1994.
(B) Not annualized.
(C) Annualized.
<PAGE>
<TABLE>
<CAPTION>
TECHNOLOGY LEADERS FUND
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
=======================================================================================
Year Period
Ended Ended
12/31/98 12/31/97(A)
=======================================================================================
<S> <C> <C>
Net asset value at beginning of period $ 10.07 $ 10.00
----------------------
Income from investment operations:
Net investment income (loss) (0.09) 0.01
Net realized and unrealized gains on investments 7.96 0.06
----------------------
Total from investment operations 7.87 0.07
----------------------
Less distributions:
Dividends from net investment income -- --
Distributions from net realized gains -- --
----------------------
Total distributions -- --
----------------------
Net asset value at end of period $ 17.94 $ 10.07
======================
Total return 78.15% 0.70%(B)
======================
Net assets at end of period (millions) $ 42.8 $ 3.6
======================
Ratio of expenses to average net assets 1.94% 1.80%(C)
Ratio of net investment income (loss) to average net assets (1.03%) 1.77%(C)
Portfolio turnover rate 105% 0%
</TABLE>
(A) Represents the period from the commencement of operations (December 10,
1997) through December 31, 1997.
(B) Not annualized.
(C) Annualized.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL SPECIALISTS FUND
Selected Per Share Data and Ratios for a Share Outstanding Throughout Each Period
=====================================================================================
Year Period
Ended Ended
12/31/98 12/31/97(A)
=====================================================================================
<S> <C> <C>
Net asset value at beginning of period $ 10.12 $ 10.00
----------------------
Income from investment operations:
Net investment income (loss) (0.10) 0.01
Net realized and unrealized gains (losses)
on investments (0.36) 0.11
----------------------
Total from investment operations (0.46) 0.12
----------------------
Less distributions:
Dividends from net investment income -- --
Distributions from net realized gains -- --
----------------------
Total distributions -- --
----------------------
Net asset value at end of period $ 9.66 $ 10.12
======================
Total return (4.55%) 1.20%(B)
======================
Net assets at end of period (millions) $ 4.5 $ 2.4
======================
Ratio of expenses to average net assets 1.95% 1.81%(C)
Ratio of net investment income (loss) to average net assets (1.33%) 1.75%(C)
Portfolio turnover rate 160% 0%
</TABLE>
(A) Represents the period from the commencement of operations (December 10,
1997) through December 31, 1997.
(B) Not annualized.
(C) Annualized.
<PAGE>
TECHNOLOGY INNOVATORS FUND
Selected Per Share Data and Ratios for a Share Outstanding Throughout the Period
================================================================================
Period
Ended
12/31/98(A)
================================================================================
Net asset value at beginning of period $ 10.00
--------
Income from investment operations:
Net investment loss (0.01)
Net realized and unrealized gains on investments 6.02
--------
Total from investment operations 6.01
--------
Less distributions:
Dividends from net investment income --
Distributions from net realized gains --
--------
Total distributions --
--------
Net asset value at end of period $ 16.01
========
Total return 60.10%(B)
========
Net assets at end of period (millions) $ 6.5
========
Ratio of expenses to average net assets 1.92%(C)
Ratio of net investment loss to average net assets (0.59%)(C)
Portfolio turnover rate 188%
(A) Represents the period from the commencement of operations (May 20, 1998)
through December 31, 1998.
(B) Not annualized.
(C) Annualized.
<PAGE>
Additional information about the Funds is included in the Statement of
Additional Information ("SAI"), which is incorporated by reference in its
entirety. Additional information about the Funds' investments is available in
the Funds' annual and semiannual reports to shareholders. In the Funds' annual
report, you will find a discussion of the market conditions and strategies that
significantly affected the Funds' performance during their last fiscal year.
To obtain a free copy of the SAI, the annual and semiannual reports or
other information about the Funds, or to make inquiries about the Funds, please
call 1.888.884.2675.
Information about the Funds (including the SAI) can be reviewed and copied
at the Securities and Exchange Commission's public reference room in Washington,
D.C. Information about the operation of the public reference room can be
obtained by calling the Commission at 1-800-SEC-0330. Reports and other
information about the Funds are available on the Commission's Internet site at
http://www.sec.gov. Copies of information on the Commission's Internet site may
be obtained, upon payment of a duplicating fee, by writing to: Securities and
Exchange Commission, Public Reference Section, Washington, D.C. 20549-6009.
File No. 811-8268
<PAGE>
FIRSTHAND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
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. It should be read
in conjunction with the Prospectus of Firsthand Funds dated May 1, 1999. 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 toll-free at
1.888.884.2675.
TABLE OF CONTENTS
-----------------
The Trust......................................................................2
Definitions, Policies and Risk Considerations..................................3
Quality Ratings of Corporate Bonds and
Preferred Stocks............................................................13
Investment Restrictions.......................................................15
Trustees and Officers .......................................................17
Investment Advisory and Other Services........................................18
The Underwriter...............................................................20
Securities Transactions.......................................................20
Portfolio Turnover............................................................22
Purchase, Redemption and Pricing of Shares....................................22
Taxes.........................................................................24
Historical Performance Information............................................27
Principal Security Holders....................................................30
Custodian.....................................................................32
Legal Counsel and Auditors....................................................32
Countrywide Fund Services, Inc................................................32
Annual Report.................................................................33
<PAGE>
THE TRUST
---------
Firsthand Funds (the "Trust"), an open-end management investment company,
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 is a non-diversified series and has its own investment
objective and policies. Prior to May 1, 1998, the name of the Trust was
Interactive Investments.
Shares of each Fund have equal voting rights and liquidation rights, and
are voted in the aggregate and not by Fund except in matters where a separate
vote is required by the Investment Company Act of 1940 (the "1940 Act") or when
the matter affects only the interest of a particular Fund. When matters are
submitted to shareholders for a vote, each shareholder is entitled to one vote
for each full share owned and fractional votes for fractional shares owned. The
Trust does not normally hold annual meetings of shareholders. The Trustees shall
promptly call and give notice of a meeting of shareholders for the purpose of
voting upon removal of any Trustee when requested to do so in writing by
shareholders holding 10% or more of the Trust's outstanding shares. The Trust
will comply with the provisions of Section 16(c) of the 1940 Act in order to
facilitate communications among shareholders.
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.
2
<PAGE>
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, Investment
Strategies 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) two-thirds 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).
DEBT SECURITIES. Each Fund may 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.
3
<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 Investment 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
4
<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
5
<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 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 money market investment company involves payment of such
company's pro rata share of advisory and administrative fees charged by such
company, in addition to those paid by the Funds.
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<PAGE>
WARRANTS. Each Fund may invest a portion of its assets in warrants, but
only to the extent that such investments do not exceed 5% of a Fund's net assets
at the time of purchase. 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.
7
<PAGE>
NON-DIVERSIFICATION OF INVESTMENTS. Each Fund is operated as a
"non-diversified" portfolio. 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 regulated 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.
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
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.
8
<PAGE>
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
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
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<PAGE>
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.
The imperfect correlation in price movement between an option and the
underlying financial instrument and/or the costs of implementing such an option
may limit the effectiveness of the strategy. A Fund's ability to establish and
close out options positions will be subject to the existence of a liquid
secondary market. Although the Funds generally will purchase or sell only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If an option purchased by a Fund
expires unexercised, the Fund will lose the premium it paid. In addition, a Fund
could suffer a loss if the premium paid by the Fund in a closing transaction
exceeds the premium income it received. When a Fund writes a call option, its
ability to participate in the capital appreciation of the underlying obligation
is limited.
It is the present intention of the Adviser not to commit greater than 30%
of a Fund's net assets to option strategies.
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<PAGE>
BORROWING. Each Fund may borrow from banks for temporary or emergency
purposes in an aggregate amount not to exceed 25% of its total assets. Borrowing
magnifies the potential for gain or loss on the portfolio securities of a Fund
and, therefore, if employed, increases the possibility of fluctuation in the
Fund's net asset value. This is the speculative factor known as leverage. To
reduce the risks of borrowing, each Fund will limit its borrowings as described
above. Each Fund may pledge its assets in connection with borrowings. While a
Fund's borrowings exceed 5% of its total assets, it will not purchase additional
portfolio securities.
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 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.
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
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<PAGE>
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 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 (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
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<PAGE>
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.
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS
-------------------------------------------------------
THE RATINGS OF MOODY'S AND STANDARD & POOR'S FOR CORPORATE BONDS IN WHICH
THE FUNDS MAY INVEST ARE AS FOLLOWS:
Moody's
-------
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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Standard & Poor's
-----------------
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
THE RATINGS OF MOODY'S AND STANDARD & POOR'S FOR PREFERRED STOCKS IN WHICH
THE FUNDS MAY INVEST ARE AS FOLLOWS:
Moody's
-------
aaa - An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa - An issue which is rated aa is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a - An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the aaa
and aa classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa - An issue which is rated baa is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
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<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
-----------------------
The Trust has adopted certain fundamental investment restrictions designed
to reduce the risk of an investment in the Funds. These restrictions may not be
changed with respect to any Fund without the affirmative vote 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.
2. Purchase or sell real estate or interests in real estate, but the Fund
may purchase marketable securities of companies holding real estate or
interests in real estate.
3. Purchase or sell commodities or commodity contracts, including futures
contracts, except that The Medical Specialists Fund, The Technology
Leaders Fund and The Technology Innovators Fund may purchase and sell
futures contracts to the extent authorized by the Board of Trustees.
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<PAGE>
4. Make loans to other persons except (i) by the purchase of a portion of
an issue of publicly distributed bonds, debentures or other debt
securities or privately sold bonds, debentures or other debt
securities immediately convertible into equity securities, such
purchases of privately sold debt securities not to exceed 5% of the
Fund's total assets, and (ii) the entry into portfolio lending
agreements (i.e., loans of portfolio securities) provided that the
value of securities subject to such lending agreements may not exceed
30% of the value of the Fund's total assets.
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 a Fund's 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.
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TRUSTEES AND OFFICERS
---------------------
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, 1998.
NAME AGE POSITION HELD AGGREGATE COMPENSATION**
- ---- --- ------------- ------------------------
*Kevin M. Landis 38 Trustee/President $ 0
*Kendrick W. Kam 38 Trustee/Secretary 0
Michael T. Lynch 37 Trustee 8,000
Mark K. Taguchi 43 Trustee 8,000
Yakoub Bellawala 33 Treasurer 0
* Kevin M. Landis and Kendrick W. Kam, as affiliated persons of Interactive
Research Advisers, Inc., the Funds' investment adviser, are "interested
persons" of the Trust within the meaning of Section 2(a)(19) of the 1940
Act.
** The Trust does not maintain pension or retirement plans.
The principal occupations of the Trustees and executive 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, 2345 Clover Basin, Longmont, Colorado 80503, 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.
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<PAGE>
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 firm.
YAKOUB BELLAWALA, 101 Park Center Plaza, Suite 1300, San Jose, California
95113, is Chief Operating Officer of 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).
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------
Interactive Research Advisers, Inc. (the "Investment Adviser"), 101 Park
Center Plaza, Suite 1300, San Jose, California 95113, 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.
Under the terms of the Investment Advisory and Management Agreement (the
"Advisory Agreement") between the Trust and the Investment Adviser, 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.
Pursuant to the Advisory Agreement, each Fund pays to the Investment
Adviser, on a monthly basis, an advisory fee at an annual rate of 1.50% 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 from $500 million to $1 billion,
and 1.80% of such assets in excess of $1 billion. For the fiscal years ended
December 31, 1998, 1997 and 1996, The Technology Value Fund paid advisory fees
of $2,734,532, $1,830,251 and $122,185, respectively. For the fiscal years ended
December 31, 1998 and
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<PAGE>
1997, The Medical Specialists Fund paid advisory fees of $51,357 and $1,238,
respectively. For the fiscal years ended December 31, 1998 and 1997, The
Technology Leaders Fund paid advisory fees of $286,734 and $1,769, respectively.
For the fiscal year ended December 31, 1998, The Technology Innovators Fund paid
advisory fees of $14,782.
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.
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, 1998, 1997 and 1996, The Technology Value Fund paid administrative
fees of $816,383, $778,503 and $101,257, respectively. For the fiscal years
ended December 31, 1998 and 1997, The Medical Specialists Fund paid
administrative fees of $15,407 and $371, respectively. For the fiscal years
ended December 31, 1998 and 1997, The Technology Leaders Fund paid
administrative fees of $86,020 and $531, respectively. For the fiscal year ended
December 31, 1998, The Technology Innovators Fund paid administrative fees of
$4,435.
19
<PAGE>
The Administration Agreement may be terminated by the Trust at any time, on
60 days' notice to the Investment Adviser, without penalty either (a) by vote of
the Board of Trustees of the Trust, or (b) 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.
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 from year to year, subject to
annual approval by (a) the Board of Trustees or a vote of a majority of the
outstanding shares, and (b) 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.
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.
20
<PAGE>
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.
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 $110,003, $275,303
and $57,050 during the fiscal years ended December 31, 1998, 1997 and 1996,
respectively. The Medical Specialists Fund paid brokerage commissions of $11,239
and $994 during the fiscal years ended December 31, 1998 and 1997, respectively.
The Technology Leaders Fund paid brokerage commissions of $19,440 and $876
during the fiscal years ended December 31, 1998 and 1997, respectively. The
Technology Innovators Fund paid brokerage commissions of $1,050 during the
fiscal year ended December 31, 1998.
The Board of Trustees reviews periodically the allocation of brokerage
orders to monitor the operation of these policies.
21
<PAGE>
PORTFOLIO TURNOVER
------------------
A Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Funds. A 100% turnover rate would occur if all of a Fund's portfolio securities
were replaced once within a one year period.
Generally, each Fund intends to invest for long-term purposes. However, the
rate of portfolio turnover will depend upon market and other conditions, and it
will not be a limiting factor when the Adviser believes that portfolio changes
are appropriate. For the fiscal years ended December 31, 1998 and 1997, The
Technology Value Fund's portfolio turnover rate was 126% and 101%, respectively.
For the fiscal year ended December 31, 1998, the portfolio turnover rates of The
Medical Specialists Fund and The Technology Leaders Fund were 160% and 105%,
respectively.
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 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
22
<PAGE>
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 last sale price, if available,
otherwise at the most recent 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.
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 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 or 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.
24
<PAGE>
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) 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" 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 includable 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.
25
<PAGE>
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 certain 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.
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.
26
<PAGE>
The Trust is required to withhold and remit to the U.S. Treasury a portion
(31%) of dividend income on any account unless the shareholder provides a
taxpayer identification number and certifies that such number is correct and
that the shareholder is not subject to backup withholding.
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. Shareholders, however, may be liable for state and local income
taxes on distributions from the Funds.
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.
HISTORICAL 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:
n
P(1+T) = 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).
27
<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 Funds for the periods ended
December 31, 1998 are as follows:
Technology Value Fund:
1-Year 23.71%
Since inception (May 20, 1994) 36.93%
Since SEC effective date (December 15, 1994) 37.24%
Medical Specialists Fund:
1-Year -4.55%
Since inception (December 10, 1997) -3.21%
Technology Leaders Fund:
1-Year 78.15%
Since inception (December 10, 1997) 73.54%
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 four fiscal years are
as follows:
Period Ended
------------
December 31, 1995 61.17%
December 31, 1996 60.55%
December 31, 1997 6.46%
December 31, 1998 23.71%
28
<PAGE>
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
and are not intended to indicate future performance of the Funds.
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.
29
<PAGE>
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.
PRINCIPAL SECURITY HOLDERS
--------------------------
As of January 31, 1999, the following persons owned of record 5% or more of
the shares of the Funds:
The Technology Value Fund:
- --------------------------
Name Shares % Ownership
- ---- ------ -----------
Charles Schwab & Co. 1,955,484.104 37.93%
101 Montgomery Street
San Francisco, California 94104
Donaldson, Lufkin & 636,224.317 12.34%
Jenrette Securities Corp.
P.O. Box 2052
Jersey City, New Jersey 07303
National Financial Services Corp. 1,050,930.939 20.39%
One World Financial Center
200 Liberty Street, 5th Floor
New York, New York 10281
The Medical Specialists Fund:
- -----------------------------
Name Shares % Ownership
- ---- ------ -----------
Charles Schwab & Co. 132,879.395 23.05%
101 Montgomery Street
San Francisco, California 94104
Donaldson, Lufkin & 143,053.628 24.81%
Jenrette Securities Corp.
P.O. Box 2052
Jersey City, New Jersey 07303
National Financial Services Corp. 116,833.372 20.27%
One World Financial Center
200 Liberty Street, 5th Floor
New York, New York 10281
30
<PAGE>
The Technology Leaders Fund:
- ----------------------------
Name Shares % Ownership
- ---- ------ -----------
Charles Schwab & Co. 780,387.085 28.33%
101 Montgomery Street
San Francisco, California 94104
Donaldson, Lufkin & 274,440.429 9.96%
Jenrette Securities Corp.
P.O. Box 2052
Jersey City, New Jersey 07303
National Financial Services Corp. 1,260,857.471 45.78%
One World Financial Center
200 Liberty Street, 5th Floor
New York, New York 10281
The Technology Innovators Fund:
- -------------------------------
Name Shares % Ownership
- ---- ------ -----------
Charles Schwab & Co. 66,983.448 8.61%
101 Montgomery Street
San Francisco, California 94104
Donaldson, Lufkin & 176,957.907 22.75%
Jenrette Securities Corp.
P.O. Box 2052
Jersey City, New Jersey 07303
National Financial Services Corp. 439,514.168 56.52%
One World Financial Center
200 Liberty Street, 5th Floor
New York, New York 10281
Charles Schwab & Co., a corporation organized in California, may be deemed
to control The Technology Value Fund and The Technology Leaders Fund. National
Financial Services Corp., a corporation organized in New York, may be deemed to
control The Technology Leaders Fund and The Technology Innovators 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 January 31, 1999, the Trustees and officers of the Trust owned of
record or beneficially less than 1% of each Fund's outstanding shares.
31
<PAGE>
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.
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, 1999. Tait, Weller & Baker performs an
annual audit of the Trust's financial statements and will advise the Trust as to
certain accounting matters.
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 (1) 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 $100,000,000 to
$200,000,000 and .05% of such assets in excess of $200,000,000; (2) a fee for
transfer agency and shareholder services at the annual rate of $16 per
shareholder account of the Funds; and (3) 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.
32
<PAGE>
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. Countrywide is an affiliate of
the Underwriter by reason of common ownership.
ANNUAL REPORT
-------------
The Funds' financial statements as of December 31, 1998 appear in the
Trust's annual report which is attached to this Statement of Additional
Information.
33
<PAGE>
[LOGO]
1998
Annual Report to Shareholders
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
DO YOU LIKE THESE REPORTS?
YOU COULD BE GETTING MORE
Investors often ask if there is a way that they can get more information more
frequently than quarterly in the Shareholder Reports. The answer is yes. There
is much more information and insight available on a regular basis from Firsthand
Funds via the Internet.
We make additional information available in two ways: our Firsthand Alert e-mail
system, and our site on the World Wide Web. The table below illustrates the
types of information and benefits available from each communication channel.
- --------------------------------------------------------------------------------
QUARTERLY REPORT ALERT E-MAIL WEB SITE
Breaking News O X O
Monthly Market & News Updates O X O
Distribution Information Z X X
Performance Updates Z X X
Portfolio Manager Commentary Z X X
Performance Calculators O O X
Portfolio Holdings Z O X
O = Not available Z = Offered periodically X = Offered regularly
- --------------------------------------------------------------------------------
FIRSTHAND ALERT E-MAIL
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<PAGE>
PERFORMANCE SUMMARY
(total returns as of 12/31/98)
Q4'98 1998 AVERAGE ANNUAL TOTAL RETURN SINCE:
05/20/94* 12/15/94* 12/10/97**
- --------------------------------------------------------------------------------
TVF 60.64% 23.71% 36.93% 37.24% n/a*
TLF 58.90% 78.15% n/a** n/a** 73.54%
MSF 31.97% -4.55% n/a** n/a** -3.21%
DJIA 17.59% 18.13% 23.99% 27.28% 15.21%
S&P 500 21.30% 28.58% 26.59% 30.42% 26.22%
NASDAQ 29.45% 39.63% 27.39% 31.78% 33.05%
Composite
Q4'98 1998 CUMULATIVE TOTAL RETURN SINCE:
05/20/98***
- --------------------------------------------------------------------------------
TIF 97.41% n/a 60.10%
DJIA 17.59% n/a 2.53%
S&P 500 21.30% n/a 19.74%
NASDAQ 29.45% n/a 32.06%
Composite
*TVF inception date is 05/20/94; TVF effectiveness date is 12/15/94.
**TLF/MSF inception date is 12/10/97.
***TIF inception date is 05/20/98.
Returns assume reinvestment of dividends and distributions. Past performance is
not a guarantee of future results. Investment returns will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Each Fund concentrates its investments in the technology industry. The Funds are
subject to greater risk because of their concentration of investments in a
single industry and within certain segments of the industry. In addition, each
Fund may, from time to time, invest a substantial portion of its assets in the
securities of small capitalization companies. The securities of smaller
companies often involve higher risks and may be subject to wider price
fluctuations than securities of larger companies. There are certain risks
associated with investments in the technology and medical industries, such as
the risk that the product and services of companies in those industries are
subject to rapid obsolescence caused by scientific developments and
technological advances.
Please read the prospectus carefully before investing.
Firsthand
<PAGE>
ELECTRONIC
TECHNOLOGY SUMMARY
1998 was the year of the technology leaders and the Internet darlings. Funds
that focused in either of these categories were rewarded with exceptional
results, while the market was much less kind to most other technology funds. Our
funds showed large swings in value during the year, but all finished on a very
positive note. As the table at left shows, the Technology Leaders Fund (TLF)
solidly outperformed the broad market indices for the year. The Technology Value
Fund (TVF), without much contribution from technology leaders or Internet
stocks, lagged the NASDAQ and S&P 500 indices.
The year started out on a relatively positive note, with the technology sector
recovering from the setbacks posed by the Asian financial crisis of Q4'97.
Semiconductor equipment suppliers were some of the biggest beneficiaries of the
Q1 rally, having been severely beaten down in the prior quarter.
As we moved into Q2, the cold of the Asian financial crisis was once again in
the air. While the "Blue Chip" technology leaders continued to drive the market
indices in a positive direction, most other issues were negatively impacted by
the initial flight to quality, even in the technology sector.
The second half of the year will surely be remembered as one of the most
turbulent times in the history of the American markets. In Q3, a number of
international events including the Russian currency devaluation, slipping
economies in Brazil and Asia, and the unraveling of Long Term Capital
Management, conspired to drive the U.S. stock market down as investors expected
that the next domino to fall would be the U.S. economy. During that continued
flight to quality, large sums of money flowed out of stocks (particularly tech
stocks) and into "safer" bonds and money market issues. Technology stocks took a
beating.
1998 Annual Report to Shareholders | 3
<PAGE>
After Q3's tremendous downdraft, the markets made a spectacular recovery in Q4
as investors were reassured by solid corporate earnings reports and new fiscal
and monetary policy in the troubled economies of the world. As usual, technology
stocks were at the tip of the whip in terms of their relation to market
movements, with every movement (positive and negative) in the broad market being
magnified in the tech sector. As the table on page 2 shows, each of our funds
was up dramatically in Q4, handily beating the broad market indices.
The most talked about technology segment this year was certainly the Internet.
The run-up in the stocks of many Internet content providers has been astounding.
We continue to believe that the inflated valuations reflect much of the
Internet's promise and very little fear. Our investment strategy for the
Internet continues to be one of investing in companies providing the
infrastructure to enable Internet traffic, which is far more predictable than
who will be the leading on-line auctioneer, bookseller or portal.
The Technology Innovators Fund is our third fund to receive a ticker symbol:
- --------------------------------------------------------------------------------
Technology Value Fund TVFQX
- --------------------------------------------------------------------------------
Technology Leaders Fund TLFQX
- --------------------------------------------------------------------------------
Technology Innovators Fund TIFQX
- --------------------------------------------------------------------------------
The Medical Specialists Fund ($4.5 million in assets as of 12/31/98) will
receive symbol as soon as its assets reach $10 million.
Firsthand
<PAGE>
MEDICAL
TECHNOLOGY SUMMARY
HEALTHCARE FUNDS LAGGED
Normally, when the Micropal Health Index rises 18.75% for the year, it reflects
a good year for medical stocks. But not in 1998. When compared to the broader
market indices such as the NASDAQ composite, up 39.63%, and the S&P 500, up
28.58%, it becomes clear that healthcare funds lagged the market this year.
MICROPAL NASDAQ S&P
HEALTH INDEX COMPOSITE 500
- --------------------------------------------------------------------------------
Q4`98 18.46% 29.45% 21.30%
1998 18.75% 39.63% 28.58%
SIZE MATTERED
Not all medical stocks were out of favor. Bigger was better in 1998. The
healthcare segment of the Russell 1000 Index (large-cap stocks) rose 42.55% in
1998, versus just 3.26% for the healthcare segment of the Russell 2000
(small-cap stocks). Despite a rebound in Q4, small-cap stocks continue to sell
at lower relative valuations than anytime during the last 20 years.
The disparity in performance between large and small-cap healthcare stocks
largely explains the difference in the performance of the medical side of the
Technology Value Fund (TVF) and the Medical Specialists Fund (MSF). MSF's
emphasis on small-cap stocks was a significant drag on performance last year.
MICROPAL TVF
HEALTH INDEX MEDICAL* MSF
- --------------------------------------------------------------------------------
Q4`98 18.46% 45.32% 31.97%
1998 18.75% 22.48% -4.55%
* TVF-Medical performance numbers are estimates based on the adviser's own
portfolio attribution analysis.
1998 Annual Report to Shareholders | 5
<PAGE>
The medical portion of TVF outperformed the Micropal Health Index by a
significant amount in the fourth quarter and a smaller amount for the full year.
The Medical Specialists Fund also beat the Micropal Health Index in Q4, but
underperformed for the full year.
FUNDAMENTALS STILL STRONG
Although small-cap medical stocks did poorly in 1998, the companies continued to
perform well operationally. Many of the medical companies in our portfolios have
seen their revenues grow by more than 50% in the last 12 months. Several
achieved profitability for the first time. These stocks may be out of favor in
the near term, but eventually the market will recognize and reward the progress
these companies have made.
TECH VALUE:
ACCORDING TO PLAN?
If everything always worked according to plan, every investment we make would
double in two years producing a 41% annual return on investment. If you assume
that the portfolios are always 95% invested (5% held in reserve to meet
redemptions), then after all fees, the funds would return about 37% per year -
if everything worked according to plan.
In the real world, we know we're not perfect, so delivering 37% annually is an
unreasonable expectation. Yet since inception (for over four and a half years),
TVF has had an average annual return of 36.93% - seemingly according to plan.
However, these returns have been by no means con-stant - with 2-year returns
varying from -25% to 225%. And while we have hit our plan over the life of the
Fund, it is still unreasonable to expect it to continue.
Firsthand
<PAGE>
Of course, everyone would much prefer a steady 37% per year return. As
investors, we know that volatility can be troubling, causing upset stomach, loss
of sleep, sometimes even loss of hair. But we also know that at the end of our
investment horizon, what really matters is the total return on investment. We
would much prefer an annual average return of 37% delivered however erratically,
than a lower return delivered evenly.
When it's time to tap your investments, the total return will matter a lot. The
annual volatility of those returns will matter very little.
The change in market sentiment between Q3 and Q4 demonstrates that a stock's
price sometimes gets disconnected from the underlying company's prospects.
Trying to produce a steady return every quarter means trying to anticipate the
market's mood swings. We admit that we cannot do this.
Instead, we try to understand a company's prospects well enough to react
decisively whenever the market undervalues a stock to such a degree that there
is a decent chance of a double in two years. This investment style does not
deliver steady returns every year. But, looking back, it is gratifying to see
that it has worked fairly well for our long-term investors.
1998 Annual Report to Shareholders | 7
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
Technology Value Fund
Technology Leaders Fund
Technology Innovators Fund
Medical Specialists Fund
1998 Annual Report to Shareholders | 9
<PAGE>
TECHNOLOGY VALUE FUND
PERFORMANCE & PORTFOLIO DISCUSSION
- --------------------------------------------------------------------------------
The Technology Value Fund ("TVF", ticker symbol TVFQX) posted a strong Q4 gain
of 60.64%. Over the same period, the NASDAQ appreciated 29.45% and the S&P 500
grew 21.30%, while the Lipper Science and Technology Index gained 41.68%. On a
full-year basis, the Fund underperformed both its peer group and the broad
market indices, returning 23.71% for the year.
Nearly every sector held by the Fund showed strong growth this quarter with
Semiconductors leading the way, returning over 90% for the quarter. Only two
sectors, Communications Equipment and Health Services, posted negative returns.
The accompanying pie chart shows the Fund's holdings as of December 31.
Semiconductors remained the Fund's largest sector weighting, representing 39.2%
of the portfolio, down slightly from 42.1% at the end of Q3. Nearly all of our
semiconductor holdings, including the Fund's largest holdings, PMC-Sierra
(PMCS), Applied Micro Circuits Corp. (AMCC) and Level One (LEVL), showed very
strong growth in the quarter.
The Semiconductor Capital Equipment weighting fell from 5.1% to 3.3%. We
lightened some of our positions in this sector in anticipation of a slower
recovery period compared with those of our other holdings. FVC.COM (FVCX)
remained our single Networking holding, accounting for 2.0% of the Fund's assets
at quarter's end.
EDA holdings decreased from 8.4% to 4.2% as we trimmed our positions in Avant!
(AVNT) and Aspec (ASPCE). We also reduced our position in Adaptec (ADPT) during
the
RELATIVE PERFORMANCE:
TVF VS. MARKET INDICES
[GRAPHIC OMITTED]
S&P 500 NASDAQ DJIA TVF
------- ------ ---- ---
5/20/94 $10,000 $10,000 $10,000 $10,000
12/31/98 $29,715 $30,589 $26,997 $42,702
Past performance is not a guarantee of future results.
Firsthand
<PAGE>
- --------------------------------------------------------------------------------
TVF HOLDINGS BY SECTOR*
Semiconductors 39.2%
EDA 4.2%
Semi Equip 3.3%
Biotech 14.5%
Other Electronics** 16.6%
Cash 2.3%
Card Med Devices 18.9%
Health Services 1.0%
* Based on percentage of net assets as of December 31, 1998 (cash number net of
payables and receivables)
** Consists of Communications Equipment (0.2%), Networking (2.0%), Periphals
(2.4%) and Software (1.3%) in addition to Other Electronics (10.7%)
quarter. This sole Peripherals holding accounted for 2.4% of the Fund's assets.
We established a new position in i2 Technologies (ITWO) in Q4. This Enterprise
Resource Planning vendor is our single Software holding and represented 1.3% of
the portfolio. The weighting for the Communications Equipment sector fell from
1.5% to 0.2% as we reduced our position in PairGain (PAIR), the single holding
in this segment.
The Fund established a position in Rockwell (ROK), a diversified supplier of
semiconduc-tors and communications equipment, during the quarter. It has been
included in Other Electronics, and represents 10.7% of assets.
The Cardiac Medical Devices weighting fell slightly from 19.7% to 18.9%. During
the quarter, Medtronic (MDT) offered to acquire Arterial Vascular Engineering
(AVEI) for $54 per share, a 67% premium over the pre-announcement price.
The Fund's Biotech holdings shrank from 16.9% to 14.5% of assets. The Fund
closed out its position in Affymetrix (AFFX) in the fourth quarter and added to
its investment in Centocor (CNTO).
Health Services declined from 2.7% to 1.0% of the Fund. We sold our position in
Mariner-Paragon (MPN). Medicare has reduced the price it will pay for skilled
nursing home services to a level that will probably turn out to be unprofitable
for most providers. At the same time, fear of lawsuits prevents the industry
from cutting expenses enough to restore profitability at the new lower prices.
The Fund ended the quarter with a net cash position of 2.3%, up slightly from
last quarter's 1.7%.
1998 Annual Report to Shareholders | 11
<PAGE>
TECHNOLOGY LEADERS FUND
PERFORMANCE & PORTFOLIO DISCUSSION
- --------------------------------------------------------------------------------
The Technology Leaders Fund ("TLF", ticker symbol TLFQX) appreciated 58.90% in
the fourth quarter, outperforming the broad market indices (see performance
summary table on page 2) as well as the Lipper Science & Technology Index. This
was by far the largest quarterly gain in TLF's short history. On a full-year
basis, the Fund solidly beat the indices and outperformed nearly all other
Science & Technology mutual funds, returning 78.15%. It also ranked in the top
20 of all mutual funds.
While TLF achieved positive returns in nearly all sectors in Q4, our investments
in the Semiconductor Equipment sector performed the best, posting returns of
97.63%. The Semiconductor and Internet sectors also exhibited gains in excess of
80% for the quarter.
The accompanying pie chart shows the Fund's year-end holdings by sector. At
35.2%, the Semiconductor sector remains the Fund's largest weighting, although
it has declined as we have increased the weightings of other sectors. Among our
biggest positions are Level One (LEVL), PMC-Sierra (PMCS), Vitesse (VTSS), and
Intel (INTC).
Semiconductor Capital Equipment investments declined from 6.8% to 5.9%. The
business fundamentals in this sector have begun to stabilize and valuations are
beginning to increase again.
The Fund's weighting in the Computers sector has increased from 8.4% to 10.8%.
During the quarter, we established a position in Sun Microsystems (SUNW). Sun is
a leading supplier
RELATIVE PERFORMANCE:
TLF VS. MARKET INDICES
S&P 500 NASDAQ DJIA TLF
------- ------ ---- ---
12/10/97 $10,000 $10,000 $10,000 $10,000
12/31/98 $12,800 $13,537 $11,619 $17,940
Past performance is not a guarantee of future results.
Firsthand
<PAGE>
- --------------------------------------------------------------------------------
TLF HOLDINGS BY SECTOR*
Semiconductors 35.2%
Computers 10.8%
Comm Equip 8.9%
Networking 8.7%
Internet 3.7%
EDA 4.2%
Other Electronics 9.6%
Semi Equip 5.9%
Software 10.1%
Cash 2.9%
* Based on percentage of net assets as of December 31, 1998 (cash number net of
payables and receivables)
of engineering workstations and Internet servers. Our single networking stock,
Cisco (CSCO), grew to 8.7% of assets as it continues to deliver outstanding
results.
During the quarter, the Fund increased its position in America Online (AOL) and
added Cadence Design Systems (CDN), represent-ing the only holdings in the
Internet and EDA segments, respectively. Internet makes up 3.7% of holdings,
while the EDA sector accounts for 4.2% of net assets. A position was also
established in Rockwell (ROK), a leading communications equipment and
semiconductor provider, which comprises the Other Electronics segment and 9.6%
of the Fund.
Software investments declined slightly from 11.0% to 10.1% of assets during the
quarter, as did the weighting for the Communications Equipment segment,
shrinking from 11.3% to 8.9% of Fund assets. The Fund's net cash position
increased slightly from 1.7% in Q3 to 2.9% at the end of Q4.
1998 Annual Report to Shareholders | 13
<PAGE>
TECHNOLOGY INNOVATORS FUND
PERFORMANCE & PORTFOLIO DISCUSSION
- --------------------------------------------------------------------------------
After a disappointing third quarter, the Technology Innovators Fund ("TIF",
ticker symbol TIFQX) rebounded strongly in the fourth quarter, posting a
quarterly gain of 97.41% and a 60.10% return since the Fund's inception on May
20, 1998. The quarterly appreciation represents the largest single-quarter gain
in Firsthand Funds' history, handily outperforming the Micropal Technology and
Lipper Science & Technology indices. In fact, TIF was second-highest per-forming
fund in the U.S. in the fourth quarter. While TIF will not be recognized for its
annual return due to its May inception date, during the "stub" period from May
20 to Dec. 31, the Fund outperformed most other Science & Technology mutual
funds.
The Fund saw strong appreciation in most of its holdings during the quarter, led
by our Internet sector holdings, with gains of 86.67% for the quarter.
The accompanying pie chart shows TIF's holdings as of December 31.
Semiconductors remained the Fund's most heavily-weighted sector, at 54.2% of net
assets, reflecting our continued optimism in communication chip companies. Our
largest semiconductor hold-ings include MMC Networks (MMCN), Applied Micro
Circuits (AMCC), and TriQuint (TQNT).
Relative Performance:
TIF vs. Market Indices
S&P500 NASDAQ DJIA TIF
------ ------ ---- ---
5/20/98 $10,000 $10,000 $10,000 $10,000
12/31/98 $11,180 $11,879 $10,253 $16,010
Past performance is not a guarantee of future results.
Firsthand
<PAGE>
- --------------------------------------------------------------------------------
TIF Holdings by Sector*
EDA 0.1%
Cash 14.0%
Comm Equip 0.2%
Semi Equip 0.7%
Semiconductors 54.2%
Internet 4.0%
Networking 3.6%
Telecomm 2.3%
Photonics 5.1%
Software 15.8%
* Based on percentage of net assets as of December 31, 1998 (cash number net of
payables and receivables)
During the quarter, we increased our weighting in Software from 11.6% to 15.8%,
adding new positions in Check Point Software (CHKPF) and Concur Technologies
(CNQR). The Fund also established its first positions in Internet companies,
with purchases of InfoSpace.com (INSP), Ticketmaster Online-CitySearch (TMCS),
and Xoom.com (XMCM). Internet stocks represented 4.0% of net assets at the end
of the quarter.
After divesting our positions in Advanced Fibre Communications (AFCI) and Cienna
(CIEN), P-Com (PCMS) was the sole Communications Equipment holding, representing
just 0.2% of net assets. The Networking sector, represented by FVC.COM (FVCX),
has fallen to 3.6% of the Fund's holdings.
Qwest (QWST) remained our single telecommunications holding, representing 2.3%
of net assets. The EDA sector also remained a modest 0.1% of the Fund's
holdings. Integrated Process Equipment (IPEC) represented 0.7% of our portfolio
as the only Semiconductor Equipment holding at the quarter's end.
Since September, we've established a position in SDL, Inc. (SDLI), accompanying
Uniphase (UNPH) in the Photonics sector, which represented 5.1% of Fund
holdings. SDLI is a manufacturer of components for fiber optic networks. The
Fund's net cash position was at 14.0% at the end of the fourth quarter. We
increased the number of positions from 19 to 22 during Q4, and we continue to
look for promising companies to add to the portfolio.
1998 Annual Report to Shareholders | 15
<PAGE>
Medical Specialists Fund
Performance & Portfolio Discussion
- --------------------------------------------------------------------------------
Medical Specialists Fund ("MSF") returned 31.97% in Q4 outperforming the DJIA,
the S&P 500, the NASDAQ Composite, and the Micropal Health index. Q4's return,
however, was not enough to reverse the previous three quarters of
underperformance as MSF ended the year down 4.55%. Many of the portfolio
adjustments we made to take advantage of the bargains produced by the sell-off
in Q3 delivered a quick payoff in Q4.
Arterial Vascular Engineering (AVEI), which we loaded up on in the low $30's in
October, announced a deal to be acquired by Medtronic (MDT) for $54. At $30,
AVEI was trading at a P/E of 12 even though sales grew over 500% and earnings
grew more than 800% compared to last year. It is rare for a company in any
industry to experience such rapid revenue growth while also becoming more
profitable. It is surprising that the market accorded such a company a P/E of
12. For Medtronic, acquiring AVEI will provide an immediate boost to its
earnings per share, and help to maintain its own relatively high P/E.
We also doubled our position in Immunex (IMNX) in time to capture a good part of
its move from $55 to $126 during Q4. On November 2, 1998, Immunex received FDA
approval to market Enbrel as a treatment for rheumatoid arthritis. It's hard to
believe that after the approval was announced, Immunex's stock price actually
declined slightly, but it did. So far Enbrel sales are running ahead of
expectations and no adverse reactions have been reported.
Relative Performance:
MSF vs. Market Indices
S&P 500 NASDAQ DJIA MSF
------- ------ ---- ---
12/10/97 $10,000 $10,000 $10,000 $10,000
12/31/98 $12,800 $13,537 $11,619 $ 9,660
Past performance is not a guarantee of future results.
Firsthand
<PAGE>
- --------------------------------------------------------------------------------
MSF Holdings by Sector*
Card Med Devices 44.6%
Biotech 41.2%
Cash 9.8%
Other Med 0.7%
Health Services 3.7%
* Based on percentage of net assets as of December 31, 1998 (cash number net of
payables and receivables)
On the horizon, the only real competition for Enbrel will be Centocor's (CNTO)
Remicade. FDA approval for Remicade in rheumatoid arthritis is not anticipated
until Q4`99 so Enbrel should have the market to itself for most of 1999.
Two of our early stage biotech companies, Alteon (ALTN) and Amylin (AMLN)
announced poor phase III results for their respective drug candidates in Q4.
Although both companies are gathering additional data which may yet resurrect
their prospects, we have already reduced our ALTN holdings and closed our
position in AMLN. Recognizing these losses in 1998 helped to offset gains in
other stocks which otherwise would have resulted in a capital gain distribution
to shareholders.
In the near term, small-cap medical stocks continue to be somewhat out of favor
for reasons that have nothing to do with the underlying prospects for the
industry. However, due to their superior growth, and their historically low
relative valuations, I am confident that the long-term outlook for our medical
investments is very positive.
1998 Annual Report to Shareholders | 17
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
Electronic Perspective
Medical Perspective
1998 Annual Report to Shareholders | 19
<PAGE>
ELECTRONIC PERSPECTIVE
UPDATING A FEW TRENDS
After the wild ride in 1998, the outlook for technology stocks is a curious
mixture of excitement over the great news that many companies are reporting, and
trepidation over sky high valuations. It's not unusual for investors to have
mixed feelings toward technology, but sorting through the unknowns seems much
harder these days. We believe it makes sense to examine what's going on in the
real world first, and to consider stock valuations second. Here is our take on
some important trends to watch in the coming year.
RESIDENTIAL BROADBAND:
Like 1997 and 1998, 1999 could finally be the year that the race to offer
residential broadband services actually gets exciting. Phone companies have been
pushing Digital Subscriber Line (DSL) services over existing phone lines, while
cable companies have sought to offer services over their Hybrid Fiber Coax (HFC)
networks. At times this has felt like a turtle race, as each camp has had
serious issues to overcome. The tele-phone companies, notorious for their
ponderous, bureaucratic pace, are counting on DSL to finesse high performance
out of old copper wire, which may not always be in the best condition. The cable
companies, on the other hand, have a cleaner pipeline into the home, but it's
been connected to what were largely one-way, broadcast style networks. They
still need to substantially upgrade these networks in order to cope with the
traffic they hope to generate.
Although broadband services certainly will not reach everyone this year, they
will reach more than ever before, as large scale service roll-outs reach the
mass market for the first time. It may be a painful process at times, but it's
an important one. A lot of money will be spent on the build-out, and that spells
opportunity for many companies. The technical hurdles must and will be overcome
- - the opportunity is simply too great to pass up. At least consumers and
investors can take heart in the
Firsthand
<PAGE>
urgency each side inspires in the other. Competition is a wonderful thing.
Companies to watch include Cisco Systems, Covad Communications and
Texas Instruments.
THE INTERNET:
No one seems to be debating the importance of the Internet any longer. The
phenomenon is real, it's the stock prices that seem unreal. Many investors are
afraid to own Internet stocks, while others seem afraid not to own them. Our
take is that the dot-com stocks are just the tip of the iceberg. As the most
visible and therefore obvious group, they tend to draw more than their fair
share of investor enthusiasm. We believe that there are safer ways to ride this
trend. For the last several years we have been investing in "bandwidth"
companies, whose products enable the build-out of communications networks. This
theme has served us well, and it's still just getting started. As traffic grows,
companies such as PMC-Sierra, Level One Communications and Vitesse Semiconductor
flourish by supplying the networking and telecommunications industries.
If you count bits, bandwidth leaps out as the obvious investment play, but if
you count dollars, then you can't help but be drawn to electronic commerce.
After the first e-Christmas, the clear consensus is that e-commerce is just
getting rolling. As usual, the obvious (though not necessarily correct) stocks
have already been bid skyward. But if the e-commerce model is so compelling,
then many non-technology companies will have to embrace it in a hurry. How will
they do that? Most companies cannot build their own technology platforms
in-house, as the Internet pioneers did, so they are likely to purchase the
capability. We look for rapid growth in the demand for systems, software and
consulting to support this migration. Companies to watch include not only the
established players, such as Microsoft, Oracle and IBM, but also suppliers of
key technologies, such as i2 Technologies and Check Point Software.
1998 Annual Report to Shareholders | 21
<PAGE>
In the meantime, we would not be at all surprised to see the Internet stock
hysteria end badly. After all, stock prices reflect expectations, and when the
bar is set ever higher, disappointment comes easily.
SEMICONDUCTORS:
We expect that this will be a rebound year for the semiconductor industry at
large. Demand should pick up in the important computer, consumer and
communications markets, led by high volume products such as low cost PC's, high
performance file servers, DVD players, digital cameras and faster networking
equipment.
Semiconductor capital equipment suppliers should see orders ramping nicely as
the industry overcomes its capacity imbalance. This should ben-efit the industry
leaders, such as Applied Materials and KLA-Tencor, as well as key technology
pioneers, such as IPEC, Cymer and Novellus.
For us, the tech stock roller-coaster of 1998 serves as an important reminder
that in any market it's being on the right side of the important trends that
ultimately matters. Our approach to investing in these and other trends remains
straightforward: 1.) Identify important trends that we believe in, 2.) Select
quality companies best positioned to ride those trends, and 3.) Decide what we
are willing to pay for them. It all comes down to homework and patience.
/s/ Kevin M. Landis
Kevin M. Landis
Portfolio Manager
Technology Value Fund
Technology Leaders Fund
Technology Innovators Fund
Firsthand
<PAGE>
MEDICAL PERSPECTIVE
THE NEXT "STENT"
Stents are tiny metal coils that cardiologists use to physically hold open a
coronary artery after angioplasty has been performed. Angioplasty is usually
performed to reopen a coronary artery that has become so clogged (stenosed) that
it can no longer deliver enough oxygenated blood to keep the heart's tissue
alive.
Without a stent, roughly 35% of angioplasty patients will experience a
restenosis (re-clogging) of their coronary arteries within 6 months. These
patients typically require either another angioplasty or bypass surgery. The
cost of performing these "redos" is tremendous. But the bigger impact is the
anxiety of the patients who, having already experienced one heart attack, know
they have a 1 in 3 chance of having a recurrence.
The use of a stent reduces the risk of restenosis to about 20%. It does not
totally relieve a patient's anxiety, but, if given a choice, patients will
choose a 1 in 5 chance of a recurrence over a 1 in 3 chance every time. The
stent also saves the healthcare system the cost of performing repeat procedures
on the 15% of patients who would otherwise have restenosed. Since cardiac stents
improve medical outcomes and reduce the overall cost of care, it is not
surprising that stents were quickly and widely adopted. Today, cardiac stents
are a $2 billion industry and are used in over 70% of angioplasty cases.
But is 20% the lowest we can drive the restenosis rate? It now appears that
radiation can be used to reduce the restenosis rate even further - possibly to
around 11%. Industry giants such as Guidant (GDT), Johnson & Johnson (JNJ), and
Boston Scientific (BSX) are developing radiation-based products to reduce
restenosis. Other companies to watch in this area are Novoste (NOVT), EndoSonics
(ESON) and Radiance Medical (RADX).
Over the next 24 months a lot of value is going to be created by the companies
in this area. If you have firsthand experience with any radiation-based products
to reduce restenosis, please let us know by sending an e-mail to:
[email protected]
/s/ Kendrick W. Kam
Kendrick W. Kam
Portfolio Manager
Technology Value Fund
Medical Specialists Fund
1998 Annual Report to Shareholders | 23
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
AUDITED FINANCIAL STATEMENTS
(as of 12/31/98)
Report of Independent
Certified Public Accountants
Portfolios of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
1998 Annual Report to Shareholders | 25
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
FIRSTHAND FUNDS
San Jose, California
We have audited the accompanying statements of assets and liabilities of the
Firsthand Funds comprising, respectively, the Technology Value Fund, Technology
Leaders Fund, Technology Innovators Fund and Medical Specialists Fund, including
the portfolios of investments as of December 31, 1998, 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 disclosure in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, 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 position of the
Firsthand Funds as of December 31, 1998, 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 18, 1999
1998 Annual Report to Shareholders | 27
<PAGE>
PORTFOLIO OF TECHNOLOGY VALUE FUND
INVESTMENTS DECEMBER 31, 1998
- --------------------------------------------------------------------------------
non-income
producing % shares value
- --------------------------------------------------------------------------------
COMMON STOCKS 97.7% $ 174,059,786
(Cost $169,738,697) -------------
BIOTECHNOLOGY 14.5% 25,834,444
-------------
Centocor, Inc. * 204,000 9,205,500
Immunex Corp. * 99,500 12,518,344
Medco Research, Inc. * 158,100 4,110,600
CARDIAC MEDICAL DEVICES 18.9% 33,618,338
-------------
Arterial Vascular Engineering, Inc. * 124,400 6,531,000
Boston Scientific Corp. * 153,800 4,123,762
CardioThoracic Systems, Inc. * 553,000 3,836,438
Cardiovascular Dynamics, Inc. (1) * 554,800 1,699,075
Endocardial Solutions, Inc. (1) * 513,900 5,139,000
EndoSonics Corp. * 734,000 7,294,125
Guidant Corp. 39,000 4,299,750
Novoste Corp. * 24,500 695,188
COMMUNICATIONS EQUIPMENT 0.2% 422,812
-------------
PairGain Technologies, Inc. * 55,000 422,812
ELECTRONIC DESIGN AUTOMATION 4.2% 7,555,204
-------------
Aspec Technology, Inc. * 521,000 683,812
Avant! Corp. * 429,462 6,871,392
HEALTH SERVICES 1.0% 1,709,775
-------------
HCIA, Inc. * 402,300 1,709,775
-------------
NETWORKING 2.0% 3,520,125
-------------
FVC.COM, Inc. * 223,500 3,520,125
-------------
OTHER ELECTRONICS 10.7% 19,128,769
-------------
Rockwell International Corp. 393,900 19,128,769
PERIPHERALS 2.4% 4,215,000
-------------
Adaptec, Inc. * 240,000 4,215,000
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
Firsthand
<PAGE>
PORTFOLIO OF TECHNOLOGY VALUE FUND
INVESTMENTS DECEMBER 31, 1998
- --------------------------------------------------------------------------------
non-income
... continued ... producing % shares value
- --------------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT 3.3% $ 5,958,750
-------------
Applied Science & Technology, Inc. * 97,500 999,375
Cymer, Inc. * 80,000 1,170,000
Integrated Process Equipment Corp. * 352,500 3,789,375
SEMICONDUCTORS 39.2% 69,818,444
-------------
Applied Micro Circuits Corp. * 489,000 16,610,719
Celeritek, Inc. (1) * 522,200 1,566,600
Galileo Technology Ltd. * 335,000 9,045,000
Level One Communications, Inc. * 404,000 4,342,000
PMC-Sierra, Inc. * 291,000 18,369,375
Quality Semiconductor, Inc. * 237,800 891,750
Stellar Semiconductor, Inc. (2) * 2,040,000 2,448,000
TriQuint Semiconductor, Inc. * 340,000 6,545,000
SOFTWARE 1.3% 2,278,125
-------------
i2 Technologies, Inc. * 75,000 2,278,125
TOTAL INVESTMENT SECURITIES 97.7% 174,059,786
(Cost $169,738,697)
OTHER ASSETS IN EXCESS OF LIABILITIES 2.3% 4,071,311
-------------
NET ASSETS 100.0% $ 178,131,097
=============
(1) Denotes affiliated issuer (Note 4).
(2) Restricted security (Note 4).
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
1998 Annual Report to Shareholders | 29
<PAGE>
PORTFOLIO OF TECHNOLOGY LEADERS FUND
INVESTMENTS DECEMBER 31, 1998
- --------------------------------------------------------------------------------
non-income
producing % shares value
- --------------------------------------------------------------------------------
COMMON STOCKS 97.1% $ 41,577,094
(Cost $30,460,368) -------------
COMMUNICATIONS EQUIPMENT 8.9% 3,810,625
-------------
Lucent Technologies, Inc. 20,000 2,200,000
Telefonaktiebolaget LM Ericsson - ADR 10,000 239,375
Tellabs, Inc. * 20,000 1,371,250
COMPUTERS 10.8% 4,632,813
-------------
Hewlett-Packard Co. 13,000 888,063
International Business Machines Corp. 11,000 2,032,250
Sun Microsystems, Inc. * 20,000 1,712,500
ELECTRONIC DESIGN AUTOMATION 4.2% 1,785,000
-------------
Cadence Design Systems, Inc. * 60,000 1,785,000
INTERNET 3.7% 1,600,000
-------------
America Online, Inc. * 10,000 1,600,000
NETWORKING 8.7% 3,712,500
-------------
Cisco Systems, Inc. * 40,000 3,712,500
OTHER ELECTRONICS 9.6% 4,127,812
-------------
Rockwell International Corp. 85,000 4,127,812
SEMICONDUCTOR EQUIPMENT 5.9% 2,518,812
-------------
Applied Materials, Inc. * 15,000 640,312
KLA-Tencor Corp. * 14,000 607,250
Teradyne, Inc. * 30,000 1,271,250
SEMICONDUCTORS 35.2% 15,080,094
-------------
Altera Corp. * 30,000 1,826,250
Intel Corp. 20,000 2,371,250
Level One Communications, Inc. * 101,750 3,612,125
PMC-Sierra, Inc. * 45,000 2,840,625
Texas Instruments, Inc. 17,500 1,497,344
Vitesse Semiconductor Corp. * 50,000 2,281,250
Xilinx, Inc. * 10,000 651,250
SOFTWARE 10.1% 4,309,438
-------------
Microsoft Corp. * 15,000 2,080,313
Oracle Corp. * 45,000 1,940,625
SAP AG - ADR 8,000 288,500
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
Firsthand
<PAGE>
PORTFOLIO OF TECHNOLOGY LEADERS FUND
INVESTMENTS DECEMBER 31, 1998
- --------------------------------------------------------------------------------
non-income
... continued ... producing % shares value
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 20.3% $ 8,703,512
(Cost $8,703,512) -------------
Star Treasury Fund 8,703,512 8,703,512
TOTAL INVESTMENT SECURITIES 117.4% 50,280,606
(Cost $39,163,880)
LIABILITIES IN EXCESS OF OTHER ASSETS (17.4%) (7,445,885)
-------------
NET ASSETS 100.0% $ 42,834,721
=============
1998 Annual Report to Shareholders | 31
<PAGE>
PORTFOLIO OF TECHNOLOGY INNOVATORS FUND
INVESTMENTS DECEMBER 31, 1998
- --------------------------------------------------------------------------------
non-income
producing % shares value
- --------------------------------------------------------------------------------
COMMON STOCKS 86.0% $ 5,577,031
(Cost $4,613,985) -------------
COMMUNICATIONS EQUIPMENT 0.2% 11,953
-------------
P-Com, Inc. * 3,000 11,953
ELECTRONIC DESIGN AUTOMATION 0.1% 6,562
-------------
Aspec Technology, Inc. * 5,000 6,562
INTERNET 4.0% 261,563
-------------
InfoSpace.com, Inc. * 4,500 171,563
Ticketmaster Online - CitySearch, Inc. * 1,000 57,000
Xoom.com, Inc. * 1,000 33,000
NETWORKING 3.6% 236,250
-------------
FVC.COM, Inc. * 15,000 236,250
PHOTONICS 5.1% 327,000
-------------
SDL, Inc. * 3,000 118,875
Uniphase Corp. * 3,000 208,125
SEMICONDUCTOR EQUIPMENT 0.7% 43,000
-------------
Integrated Process Equipment Corp. * 4,000 43,000
SEMICONDUCTORS 54.2% 3,519,266
-------------
Applied Micro Circuits Corp. * 33,500 1,137,953
Elantec Semiconductor, Inc. * 2,000 7,500
Galileo Technology Ltd. * 14,000 378,000
Level One Communications, Inc. * 7,000 248,500
MMC Networks, Inc. * 62,500 828,125
RF Micro Devices, Inc. * 4,000 185,500
TranSwitch Corp. * 5,000 194,688
TriQuint Semiconductor * 28,000 539,000
SOFTWARE 15.8% 1,021,437
-------------
Check Point Software Technologies Ltd. * 5,000 205,000
Concur Technologies, Inc. * 5,000 152,500
i2 Technologies, Inc. * 15,000 455,625
PeopleSoft, Inc. * 11,000 208,312
TELECOMMUNICATIONS 2.3% 150,000
-------------
Qwest Communications Int'l, Inc. * 3,000 150,000
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
Firsthand
<PAGE>
PORTFOLIO OF TECHNOLOGY INNOVATORS FUND
INVESTMENTS DECEMBER 31, 1998
- --------------------------------------------------------------------------------
non-income
... continued ... producing % shares value
- --------------------------------------------------------------------------------
CASH EQUIVALENTS 28.1% $ 1,825,088
(Cost $1,825,088) -------------
Star Treasury Fund 1,825,088 1,825,088
TOTAL INVESTMENT SECURITIES 114.1% 7,402,119
(Cost $6,439,073)
LIABILITIES IN EXCESS OF OTHER ASSETS (14.1%) (913,020)
-------------
NET ASSETS 100.0% $ 6,489,099
=============
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
1998 Annual Report to Shareholders | 33
<PAGE>
PORTFOLIO OF MEDICAL SPECIALISTS FUND
INVESTMENTS DECEMBER 31, 1998
- --------------------------------------------------------------------------------
non-income
producing % shares value
- --------------------------------------------------------------------------------
COMMON STOCKS 90.2% $ 4,049,582
(Cost $3,666,494) -------------
BIOTECHNOLOGY 41.2% 1,852,556
-------------
Alteon, Inc. * 20,000 15,625
Amgen, Inc. * 2,000 209,125
Aurora Biosciences Corp. * 13,500 86,906
Cell Therapeutics, Inc. * 25,000 75,000
Centocor, Inc. * 12,000 541,500
IGEN International, Inc. * 6,960 213,150
Immunex Corp. * 4,000 503,250
Medco Research, Inc. * 8,000 208,000
CARDIAC MEDICAL DEVICES 44.6% 2,002,650
-------------
Arterial Vascular Engineering, Inc. * 15,000 787,500
Boston Scientific Corp. * 7,700 206,456
CardioThoracic Systems, Inc. * 50,000 346,875
Cardiovascular Dynamics, Inc. (1) * 15,000 45,938
Endocardial Solutions, Inc. (1) * 13,600 136,000
EndoSonics Corp. * 21,500 213,656
Guidant Corp. 1,900 209,475
Novoste Corp. * 2,000 56,750
HEALTH SERVICES 3.7% 164,000
-------------
QuadraMed Corp. * 8,000 164,000
OTHER MEDICAL DEVICES 0.7% 30,376
-------------
Cyberonics, Inc. * 2,250 30,376
CASH EQUIVALENTS 9.3% 419,519
(Cost $419,519) -------------
Star Treasury Fund 419,519 419,519
TOTAL INVESTMENT SECURITIES 99.5% 4,469,101
(Cost $4,086,013)
OTHER ASSETS IN EXCESS OF LIABILITIES 0.5% 20,817
-------------
NET ASSETS 100.0% $ 4,489,918
=============
(1) Denotes affiliated issuer (Note 4).
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
Firsthand
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
=========================================================================================================================
TECHNOLOGY TECHNOLOGY TECHNOLOGY MEDICAL
VALUE LEADERS INNOVATORS SPECIALISTS
FUND FUND FUND FUND
=========================================================================================================================
ASSETS
Investment securities:
<S> <C> <C> <C> <C>
At acquisition cost $ 169,738,697 $ 39,163,880 $ 6,439,073 $ 4,086,013
=================================================================
At market value (Note 1) $ 174,059,786 $ 50,280,606 $ 7,402,119 $ 4,469,101
Dividends receivable -- 3,067 6,955 911
Receivable for capital shares sold 3,498,283 469,860 10,812 120,500
Receivable for securities sold 3,844,280 -- -- 319,792
-----------------------------------------------------------------
TOTAL ASSETS 181,402,349 50,753,533 7,419,886 4,910,304
-----------------------------------------------------------------
LIABILITIES
Bank overdraft 2,333,878 2,257 -- 6,298
Payable for capital shares redeemed 629,843 1,125,995 212,741 5,225
Payable for securities purchased 13,015 6,722,838 711,460 402,737
Payable to affiliates (Note 1) 294,516 67,722 6,586 6,126
-----------------------------------------------------------------
TOTAL LIABILITIES 3,271,252 7,918,812 930,787 420,386
-----------------------------------------------------------------
NET ASSETS $ 178,131,097 $ 42,834,721 $ 6,489,099 $ 4,489,918
=================================================================
Net assets consist of:
Paid-in-capital $ 177,982,982 $ 31,012,265 $ 5,381,596 $ 4,573,655
Accumulated net realized gains (losses) from
security transactions (4,172,974) 705,730 144,457 (466,825)
Net unrealized appreciation on investments 4,321,089 11,116,726 963,046 383,088
-----------------------------------------------------------------
Net assets $ 178,131,097 $ 42,834,721 $ 6,489,099 $ 4,489,918
=================================================================
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value) 5,524,987 2,387,362 405,301 465,004
=================================================================
Net asset value, offering price and redemption
price per share (Note 1) $ 32.24 $ 17.94 $ 16.01 $ 9.66
=================================================================
</TABLE>
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
1998 Annual Report to Shareholders | 35
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998(A)
==============================================================================================================
TECHNOLOGY TECHNOLOGY TECHNOLOGY MEDICAL
VALUE LEADERS INNOVATORS SPECIALISTS
FUND FUND FUND FUND
==============================================================================================================
INVESTMENT INCOME
<S> <C> <C> <C> <C>
Interest $ 251,377 $ 151,801 $ 2,164 $ 13,417
Dividends 18,678 23,456 11,088 7,871
---------------------------------------------------------------
TOTAL INVESTMENT INCOME 270,055 175,257 13,252 21,288
---------------------------------------------------------------
EXPENSES
Investment advisory fees (Note 3) 2,734,532 286,734 14,782 51,357
Administrative fees (Note 3) 816,383 86,020 4,435 15,407
---------------------------------------------------------------
TOTAL EXPENSES 3,550,915 372,754 19,217 66,764
---------------------------------------------------------------
NET INVESTMENT LOSS (3,280,860) (197,497) (5,965) (45,476)
---------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) from security (1,125,096) 903,227 150,422 (466,825)
transactions
Net change in unrealized appreciation/
depreciation on investments 40,388,492 11,093,756 963,046 347,325
---------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS 39,263,396 11,996,983 1,113,468 (119,500)
---------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS $ 35,982,536 $ 11,799,486 $ 1,107,503 $ (164,976)
===============================================================
</TABLE>
(A) Except for the Technology Innovators Fund which represents the period from
the commencement of operations (May 20, 1998) through December 31, 1998.
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
Firsthand
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIODS ENDED DECEMBER 31, 1998 AND 1997
==================================================================================================================================
TECHNOLOGY VALUE FUND TECHNOLOGY LEADERS FUND
--------------------- -----------------------
Year Year Year Period
Ended Ended Ended Ended
12/31/98 12/31/97 12/31/98 12/31/97(A)
==================================================================================================================================
FROM OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income (loss) $ (3,280,860) $ (1,927,303) $ (197,497) $ 2,257
Net realized gains (losses) from security transactions (1,125,096) 14,064,022 903,227 --
Net change in unrealized appreciation/
depreciation on investments 40,388,492 (38,292,641) 11,093,756 22,970
-------------------------------------------------------------------
Net increase (decrease) In net assets from operations 35,982,536 (26,155,922) 11,799,486 25,227
-------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- -- (2,257) --
From net realized gains -- (12,334,200) -- --
In excess of net realized gains -- (3,047,878) -- --
-------------------------------------------------------------------
Decrease in net assets from distributions to shareholders -- (15,382,078) (2,257) --
-------------------------------------------------------------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 149,553,020 335,357,889 53,787,109 3,716,034
Net asset value of shares issued in
reinvestment of distributions to shareholders -- 13,072,987 -- --
Payments for shares redeemed (201,778,002) (147,623,435) (26,330,447) (160,431)
-------------------------------------------------------------------
Net increase (decrease) in net assets from capital share
transactions (52,224,982) 200,807,441 27,456,662 3,555,603
-------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (16,242,446) 159,269,441 39,253,891 3,580,830
NET ASSETS:
Beginning of period 194,373,543 35,104,102 3,580,830 --
-------------------------------------------------------------------
End of period $ 178,131,097 $ 194,373,543 $ 42,834,721 $ 3,580,830
===================================================================
UNDISTRIBUTED NET INVESTMENT INCOME: $ -- $ -- $ -- $ 2,257
===================================================================
CAPITAL SHARE ACTIVITY:
Shares sold 5,313,423 10,437,757 3,830,812 371,478
Shares issued in reinvestment of distributions to
shareholders -- 517,449 -- --
Shares redeemed (7,247,403) (4,812,871) (1,798,882) (16,046)
-------------------------------------------------------------------
Net increase (decrease) in shares outstanding (1,933,980) 6,142,335 2,031,930 355,432
Shares outstanding, beginning of period 7,458,967 1,316,632 355,432 --
-------------------------------------------------------------------
Shares outstanding, end of period 5,524,987 7,458,967 2,387,362 355,432
===================================================================
</TABLE>
(A) Represents the period from the commencement of operations (December 10,
1997) through December 31, 1997.
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
1998 Annual Report to Shareholders | 37
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIODS ENDED DECEMBER 31, 1998 AND 1997
===========================================================================================================
TECHNOLOGY INNOVATORS FUND MEDICAL SPECIALISTS FUND
-------------------------- ------------------------
Period Year Period
Ended Ended Ended
12/31/98(A) 12/31/98 12/31/97(B)
===========================================================================================================
FROM OPERATIONS:
<S> <C> <C> <C>
Net investment income (loss) $ (5,965) $ (45,476) $ 1,557
Net realized gains (losses) from security transactions 150,422 (466,825) --
Net change in unrealized appreciation/
depreciation on investments 963,046 347,325 35,763
----------------------------------------------
Net increase (decrease) in net assets from operations 1,107,503 (164,976) 37,320
----------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (1,557) --
From net realized gains -- -- --
In excess of net realized gains -- -- --
----------------------------------------------
Decrease in net assets from distributions to shareholders -- (1,557) --
----------------------------------------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 8,790,653 5,205,850 2,350,090
Net asset value of shares issued in
reinvestment of distributions to shareholders -- -- --
Payments for shares redeemed (3,409,057) (2,911,609) (25,200)
----------------------------------------------
Net increase in net assets from capital share
transactions 5,381,596 2,294,241 2,324,890
----------------------------------------------
TOTAL INCREASE IN NET ASSETS 6,489,099 2,127,708 2,362,210
NET ASSETS:
Beginning of period -- 2,362,210 --
----------------------------------------------
End of period $ 6,489,099 $ 4,489,918 $ 2,362,210
==============================================
UNDISTRIBUTED NET INVESTMENT INCOME $ -- $ -- $ 1,557
==============================================
CAPITAL SHARE ACTIVITY:
Shares sold 649,555 551,990 235,882
Shares issued in reinvestment of distributions to
shareholders -- -- --
Shares redeemed (244,254) (320,299) (2,569)
----------------------------------------------
Net increase in shares outstanding 405,301 231,691 233,313
Shares outstanding, beginning of period -- 233,313 --
----------------------------------------------
Shares outstanding, end of period 405,301 465,004 233,313
==============================================
</TABLE>
(A) Represents the period from the commencement of operations (May 20, 1998)
through December 31, 1998.
(B) Represents the period from the commencement of operations (December 10,
1997) through December 31, 1997.
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
Firsthand
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - TECHNOLOGY VALUE FUND
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
======================================================================================================================
Year Year Year Year Period
Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94(A)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 26.06 $ 26.66 $ 18.44 $ 11.70 $ 10.00
----------------------------------------------------------------
Income from investment operations:
Net investment loss (0.59) (0.26) (0.08) (0.14) (0.03)
Net realized and unrealized gains on investments 6.77 1.90 11.20 7.28 2.56
----------------------------------------------------------------
Total from investment operations 6.18 1.64 11.12 7.14 2.53
----------------------------------------------------------------
Less distributions:
Distributions from net realized gains -- (1.80) (2.90) (0.40) (0.83)
Distributions in excess of net realized gains -- (0.44) -- -- --
----------------------------------------------------------------
Total distributions -- (2.24) (2.90) (0.40) (0.83)
----------------------------------------------------------------
Net asset value at end of period $ 32.24 $ 26.06 $ 26.66 $ 18.44 $ 11.70
================================================================
Total return 23.71% 6.46% 60.55% 61.17% 25.30%(B)
================================================================
Net assets at end of period (millions) $ 178.1 $ 194.4 $ 35.1 $ 2.7 $ 0.2
================================================================
Ratio of expenses to average net assets 1.95% 1.93% 1.81% 1.98% 1.96%(C)
Ratio of net investment loss to average net assets (1.80%) (1.43%) (0.55%) (1.45%) (1.29%)(C)
Portfolio turnover rate 126% 101% 43% 45% 56%
</TABLE>
(A) Represents the period from the commencement of operations (May 20, 1994)
through December 31, 1994.
(B) Not annualized.
(C) Annualized.
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
1998 Annual Report to Shareholders | 39
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - TECHNOLOGY LEADERS FUND
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
=======================================================================================
Year Period
Ended Ended
12/31/98 12/31/97(A)
=======================================================================================
<S> <C> <C>
Net asset value at beginning of period $ 10.07 $ 10.00
----------------------
Income from investment operations:
Net investment income (loss) (0.09) 0.01
Net realized and unrealized gains on investments 7.96 0.06
----------------------
Total from investment operations 7.87 0.07
----------------------
Less distributions:
Dividends from net investment income -- --
Distributions from net realized gains -- --
----------------------
Total distributions -- --
----------------------
Net asset value at end of period $ 17.94 $ 10.07
======================
Total return 78.15% 0.70%(B)
======================
Net assets at end of period (millions) $ 42.8 $ 3.6
======================
Ratio of expenses to average net assets 1.94% 1.80%(C)
Ratio of net investment income (loss) to average net assets (1.03%) 1.77%(C)
Portfolio turnover rate 105% 0%
</TABLE>
(A) Represents the period from the commencement of operations (December 10,
1997) through December 31, 1997.
(B) Not annualized.
(C) Annualized.
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
Firsthand
<PAGE>
FINANCIAL HIGHLIGHTS - TECHNOLOGY INNOVATORS FUND
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
================================================================================
Period
Ended
12/31/98(A)
================================================================================
Net asset value at beginning of period $ 10.00
--------
Income from investment operations:
Net investment loss (0.01)
Net realized and unrealized gains on investments 6.02
--------
Total from investment operations 6.01
--------
Less distributions:
Dividends from net investment income --
Distributions from net realized gains --
--------
Total distributions --
--------
Net asset value at end of period $ 16.01
========
Total return 60.10%(B)
========
Net assets at end of period (millions) $ 6.5
========
Ratio of expenses to average net assets 1.92%(C)
Ratio of net investment loss to average net assets (0.59%)(C)
Portfolio turnover rate 188%
(A) Represents the period from the commencement of operations (May 20, 1998)
through December 31, 1998.
(B) Not annualized.
(C) Annualized.
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
1998 Annual Report to Shareholders | 41
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - MEDICAL SPECIALISTS FUND
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
=====================================================================================
Year Period
Ended Ended
12/31/98 12/31/97(A)
=====================================================================================
<S> <C> <C>
Net asset value at beginning of period $ 10.12 $ 10.00
----------------------
Income from investment operations:
Net investment income (loss) (0.10) 0.01
Net realized and unrealized gains (losses)
on investments (0.36) 0.11
----------------------
Total from investment operations (0.46) 0.12
----------------------
Less distributions:
Dividends from net investment income -- --
Distributions from net realized gains -- --
----------------------
Total distributions -- --
----------------------
Net asset value at end of period $ 9.66 $ 10.12
======================
Total return (4.55%) 1.20%(B)
======================
Net assets at end of period (millions) $ 4.5 $ 2.4
======================
Ratio of expenses to average net assets 1.95% 1.81%(C)
Ratio of net investment income (loss) to average net assets (1.33%) 1.75%(C)
Portfolio turnover rate 160% 0%
</TABLE>
(A) Represents the period from the commencement of operations (December 10,
1997) through December 31, 1997.
(B) Not annualized.
(C) Annualized.
- --------------------------------------------------------------------------------
see accompanying notes to financial statements
- --------------------------------------------------------------------------------
Firsthand
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
1. Significant Accounting Policies
The Technology Value Fund, the Technology Leaders Fund, the Technology
Innovators Fund and the Medical Specialists Fund (the Funds) are each a
non-diversified series of Firsthand Funds (formerly 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. The public
offering of shares of the Technology Innovators Fund commenced on May 20, 1998.
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 Adviser) considers to be
undervalued and have 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
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
Adviser considers to be best positioned to introduce successful new products.
The Medical Specialists Fund seeks to achieve its objective by investing
primarily in securities of companies in the health and biotechnology fields
which the Adviser considers to have a strong earnings growth outlook and
potential for capital appreciation.
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 the regular session of trading on the New York Stock Exchange,
currently 4:00 p.m., Eastern time. 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,
or, if not traded, at the most recent bid price. Securities which are 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. Securities 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.
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.
1998 Annual Report to Shareholders | 43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
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.
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 income 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, 1998.
<TABLE>
<CAPTION>
TECHNOLOGY TECHNOLOGY TECHNOLOGY MEDICAL
VALUE LEADERS INNOVATORS SPECIALISTS
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Gross unrealized appreciation $ 40,892,041 $ 11,203,991 $ 1,053,819 $ 785,596
Gross unrealized depreciation (37,403,579) (243,604) (106,562) (476,621)
-------------------------------------------------------------------
Net unrealized appreciation $ 3,488,462 $ 10,960,387 $ 947,257 $ 308,975
===================================================================
Federal income tax cost $ 170,571,324 $ 39,320,219 $ 6,454,862 $ 4,160,126
===================================================================
</TABLE>
The difference between the acquisition cost and the federal income tax cost of
portfolio investments is due to certain timing differences in the recognition of
capital losses under generally accepted accounting principles and income tax
regulations.
Firsthand
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
As of December 31, 1998, the Technology Value Fund and the Medical Specialists
Fund had capital loss carryforwards for federal income tax purposes of
$2,393,785 and $392,711, respectively, which expire on December 31, 2006. In
addition, the Technology Value Fund realized net capital losses of $946,562
during the period from November 1, 1998 through December 31, 1998, which are
treated for federal income tax purposes as arising in the tax year ending
December 31, 1999.
2. Investment Transactions
Investment transactions (excluding short-term investments) were as follows for
the periods ended December 31, 1998.
<TABLE>
<CAPTION>
TECHNOLOGY TECHNOLOGY TECHNOLOGY MEDICAL
VALUE LEADERS INNOVATORS SPECIALISTS
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Purchases of investment securities $221,681,480 $ 45,169,922 $ 6,957,577 $ 7,861,936
============================================================
Proceeds from sales and maturities
of investment securities $278,222,943 $ 17,367,117 $ 2,494,014 $ 4,657,767
============================================================
</TABLE>
3. Transactions with Related Parties
Certain trustees and officers of the Trust are also officers of the Adviser, or
of Countrywide Fund Services, Inc., the administrative services agent,
shareholder servicing and transfer agent, and accounting services agent for the
Trust, or of CW Fund Distributors, Inc., which provides distribution services to
the Funds under the terms of an Underwriting Agreement.
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 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
pro-vision 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 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.
1998 Annual Report to Shareholders | 45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
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 preser-vation 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 0.45% of each Fund's average daily
net assets up to $200 million, 0.40% of such assets from $200 million to $500
million, 0.35% of such assets from $500 million to $1 billion, and 0.30% 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.
4. Investments in Affiliates and Restricted Securities
Affiliated issuers, as defined by the Investment Company Act of 1940, are those
in which a Fund's holdings represent 5% or more of the outstanding voting
securities of the issuer. A summary of each Fund's investments in affiliates, if
any, for the year ended December 31, 1998 is as noted on the following page:
Firsthand
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
<TABLE>
<CAPTION>
Share Activity
-------------------------------------------------- Market
Balance Balance Realized Value Acquisition
Affiliate 12/31/97 Purchases Sales 12/31/98 Gain (Loss) 12/31/98 Cost
- --------------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY VALUE FUND
<S> <C> <C> <C> <C> <C> <C> <C>
Cardiovascular Dynamics, Inc. 554,800 -- -- 554,800 $ -- $1,699,075 $4,912,292
Celeritek, Inc. -- 524,200 2,000 522,200 (8,750) 1,566,600 6,035,926
Endocardial Solutions, Inc. 515,400 -- 1,500 513,900 7,028 5,139,000 5,799,541
TECHNOLOGY INNOVATORS FUND
Celeritek, Inc. -- 2,000 2,000 -- (8,060) -- --
MEDICAL SPECIALISTS FUND
Cardiovascular Dynamics, Inc. 1,200 15,000 1,200 15,000 189 45,938 91,863
Endocardial Solutions, Inc. 3,500 11,100 1,000 13,600 (4,248) 136,000 166,215
</TABLE>
Restricted securities are securities which have not been registered under the
Securities Act of 1933, as amended, and are subject to restrictions on resale.
Investments in restricted securities are valued at 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. As of December 31, 1998,
the Technology Value Fund had a 2,040,000 share investment in Stellar
Semiconductor, Inc., valued at $2,448,000 and representing 1.37% of net assets,
which was acquired on November 16, 1998, at a cost of $2,448,000.
1998 Annual Report to Shareholders | 47
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
[LOGO] Firsthand
This report is provided for the general information of the shareholders of the
Firsthand Funds. This report is not intended for distribution to prospective
investors in the Funds, unless preceded or accompanied by an effective
prospectus. For more information regarding any of the Funds, including charges
and expenses, visit our web site at www.FirsthandFunds.com or call
1.888.884.2675 for a free prospectus.
Please read it carefully before you invest or send money.
<PAGE>
[LOGO]
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 N. Bellawala, 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) 1-888-884-2675
DISTRIBUTOR
CW Fund Distributors, Inc.
312 Walnut Street, 21st Floor
Cincinnati, OH 45202
Firsthand
<PAGE>
INTERACTIVE INVESTMENTS
Part C. OTHER INFORMATION
Item 23. EXHIBITS
- -------- --------
(a) Declaration of Trust*
(b) Bylaws*
(c) Incorporated by reference to Declaration of Trust and Bylaws
(d) Advisory Agreement with Interactive Research Advisers, Inc.*
(e) Underwriting Agreement with CW Fund Distributors, Inc.
(f) Inapplicable
(g) Custody Agreement with Star Bank, N.A.*
(h)(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.*
(i) Opinion and Consent of Counsel relating to Issuance of
Shares*
(j) Consent of Independent Public Accountants
(k) Inapplicable
(l) Agreement Relating to Initial Capital*
(m) Inapplicable
(n) Financial Data Schedules
(o) Inapplicable
* Incorporated by reference to Registration Statement on Form N-1A.
<PAGE>
Item 24. 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 25. 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 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
incurred 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.
<PAGE>
Indemnification provisions exist in the Advisory Agreement, the
Administration Agreement and the Underwriting Agreement which are
substantially identical to those in the Declaration of Trust noted
above.
The Trust maintains a standard mutual fund and investment advisory
professional and directors and officers liability policy. The policy
provides coverage to the Trust, its Trustees and officers, and its
Investment Adviser. Coverage under the policy includes losses by
reason of any act, error, omission, misstatement, misleading
statement, neglect or breach of duty.
Item 26. Business and Other Connections of the Investment Adviser
- -------- --------------------------------------------------------
(a) Inapplicable
(b) Inapplicable
Item 27. Principal Underwriters.
- -------- -----------------------
(a) CW Fund Distributors, Inc. also acts as underwriter for the
following open-end investment companies: Atalanta/Sosnoff
Investment Trust, Brundage, Story and Rose Investment Trust, The
Caldwell & Orkin Funds, Inc., Profit Funds Investment Trust, the
Lake Shore Family of Funds, UC Investment Trust, The Winter
Harbor Fund and The James Advantage Funds.
(b) The following list sets forth the directors and executive
officers of the Distributor. Unless otherwise noted with an
asterisk(*), the address of the persons named below is 312 Walnut
Street, Cincinnati, Ohio 45202.
*The address is 4500 Park Granada Boulevard, Calabasas,
California 91302.
Position Position
with with
Name Distributor Registrant
---- ----------- ----------
*Angelo R. Mozilo Chairman of None
the Board/
Director
*Andrew S. Bielanski Director None
*Thomas H. Boone Director None
<PAGE>
*Marshall M. Gates Director None
Robert H. Leshner Vice Chairman/ None
Director
Robert G. Dorsey President Assistant
Vice
President
Maryellen Peretzky Vice President None
John F. Splain Vice President, Assistant
Secretary and Secretary
General Counsel
M. Kathleen Leugers Vice President None
Mark J. Seger Vice President Assistant
Treasurer
Terrie A. Wiedenheft Treasurer None
(c) Inapplicable
Item 28. 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 29. Management Services Not Discussed in Parts A and B.
- -------- ---------------------------------------------------
Inapplicable
Item 30. Undertakings.
- -------- -------------
Inapplicable
<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, 1999.
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, 1999
- -------------------- Trustee
Kevin M. Landis
/s/ Yakoub Bellawala Treasurer February 13, 1999
- --------------------
Yakoub Bellawala
/s/ Kendrick W. Kam Trustee February 13, 1999
- --------------------
Kendrick W. Kam
/s/Michael T. Lynch Trustee February 13, 1999
- --------------------
Michael T. Lynch
/s/Mark K. Taguchi Trustee February 13, 1999
- --------------------
Mark K. Taguchi
<PAGE>
INDEX TO EXHIBITS
(a) Declaration of Trust*
(b) Bylaws*
(c) Incorporated by reference to Declaration of Trust and Bylaws
(d) Advisory Agreement with Interactive Research Advisers, Inc.*
(e) Underwriting Agreement with CW Fund Distributors, Inc.
(f) Inapplicable
(g) Custody Agreement with Star Bank, N.A.*
(h)(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.*
(i) Opinion and Consent of Counsel relating to issuance of shares*
(j) Consent of Independent Public Accountants
(k) Inapplicable
(l) Agreement Relating to Initial Capital*
(m) Inapplicable
(n) Financial Data Schedules
(o) Inapplicable
- ---------------------------
*Incorporated by reference to Registration Statement on Form N-1A.
UNDERWRITING AGREEMENT
----------------------
This Agreement made as of May 9, 1998 by and between Firsthand Funds (the
"Company"), a Delaware business trust, Interactive Research Advisers, Inc. (the
"Manager"), a Delaware corporation, and CW Fund Distributors, Inc., a Delaware
corporation (the "Underwriter").
WHEREAS, the Company is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and is employed by the Company to
provide it with investment advisory and management services; and
WHEREAS, Underwriter is a broker-dealer registered with the Securities and
Exchange Commission and a member of the National Association of Securities
Dealers, Inc. (the "NASD") and is registered with the relevant securities
regulatory agencies in all fifty states, the District of Columbia and Puerto
Rico; and
WHEREAS, the Company and Underwriter are desirous of entering into an
agreement providing for the distribution by Underwriter of shares of beneficial
interest (the "Shares") of each series of shares of the Company (the "Series")
to the public in accordance with the applicable federal and state securities
laws;
NOW, THEREFORE, in consideration of the promises and agreements of the
parties contained herein, the parties agree as follows:
<PAGE>
1. Appointment.
------------
The Company hereby appoints, for the period of this Agreement,
Underwriter as its exclusive agent for the distribution of the Shares, and
Underwriter hereby accepts such appointment under the terms of this Agreement.
While this Agreement is in force, the Company shall not sell any Shares except
on the terms set forth in this Agreement. Notwithstanding any other provision
hereof, the Company may terminate, suspend or withdraw the offering of Shares
whenever, in its sole discretion, it deems such action to be desirable.
Underwriter will undertake and discharge its obligations hereunder as an
independent contractor and shall have no authority or power to obligate or bind
the Company by its actions, conduct or contracts except as described in this
Agreement.
2. Sale and Repurchase of Shares.
------------------------------
(a) Underwriter will have the right, as agent for the Company, to
enter into dealer agreements with responsible investment dealers, and to sell
Shares to such investment dealers against orders therefor at the public offering
price (as defined in subparagraph 2(d) hereof) stated in the Company's effective
Registration Statement on Form N-1A under the Securities Act of 1933, as
amended, including the then current prospectus and statement of additional
information (the "Registration Statement"). Upon receipt of an order to purchase
Shares from a dealer with whom Underwriter has a dealer agreement, Underwriter
will promptly cause such order to be filled by the Company.
- 2 -
<PAGE>
(b) Underwriter will also have the right, as agent for the Company, to
sell such Shares to the public against orders therefor at the public offering
price.
(c) Underwriter will also have the right to take, as agent for the
Company, all actions which, in Underwriter's judgment, are necessary to carry
into effect the distribution of the Shares.
(d) The public offering price for the Shares of each Series shall be
the respective net asset value of the Shares of that Series then in effect, plus
any applicable sales charge determined in the manner set forth in the
Registration Statement or as permitted by the Act and the rules and regulations
of the Securities and Exchange Commission promulgated thereunder. In no event
shall any applicable sales charge exceed the maximum sales charge permitted by
the Rules of the NASD. Any payments to dealers shall be governed by a separate
agreement between Underwriter and such dealer and the Registration Statement.
(e) The net asset value of the Shares of each Series shall be
determined in the manner provided in the Registration Statement, and when
determined shall be applicable to transactions as provided for in the
Registration Statement. The net asset value of the Shares of each Series shall
be calculated by the Company or by another entity on behalf of the Company.
Underwriter shall have no duty to inquire into or liability for the accuracy of
the net asset value per Share as calculated.
- 3 -
<PAGE>
(f) On every sale, the Company shall receive the applicable net asset
value of the Shares promptly, but in no event later than the third business day
following the date on which Underwriter shall have received an order for the
purchase of the Shares.
(g) Upon receipt of purchase instructions, Underwriter will transmit
such instructions to the Company or its transfer agent for registration of the
Shares purchased.
(h) Exchanges of shares between Funds will be effected in the manner
and subject to the restrictions and charges described in the Registration
Statement. The handling of exchanges will be further subject to such other
procedures as may be mutually agreed upon from time to time.
(i) Nothing in this Agreement shall prevent Underwriter or any
affiliated person (as defined in the Act) of Underwriter from acting as
underwriter or distributor for any other person, firm or corporation (including
other investment companies) or in any way limit or restrict Underwriter or any
such affiliated person from buying, selling or trading any securities for its or
their own account or for the accounts of others for whom it or they may be
acting; provided, however, that Underwriter expressly represents that it will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations to the Company under this Agreement.
(j) Underwriter, as agent of and for the account of the Company, may
repurchase the Shares at such prices and upon such
- 4 -
<PAGE>
terms and conditions as shall be specified in the Registration Statement.
3. Sale of Shares by the Company.
------------------------------
The Company reserves the right to issue any Shares at any time
directly to the holders of Shares ("Shareholders"), to sell Shares to its
Shareholders or to other persons approved by Underwriter at not less than net
asset value and to issue Shares in exchange for substantially all the assets of
any corporation or trust or for the shares of any corporation or trust.
4. Basis of Sale of Shares.
------------------------
Underwriter does not agree to sell any specific number of Shares.
Underwriter, as agent for the Company, undertakes to sell Shares on a best
efforts basis only against orders therefor.
5. Rules of NASD, etc.
-------------------
(a) Underwriter will conform to the Rules of the NASD and the
securities laws of any jurisdiction in which it sells, directly or indirectly,
any Shares.
(b) Underwriter will require each dealer with whom Underwriter has a
dealer agreement to conform to the applicable provisions hereof and the
Registration Statement with respect to the public offering price of the Shares,
and neither Underwriter nor any such dealers shall withhold the placing of
purchase orders so as to make a profit thereby.
(c) Underwriter agrees to furnish to the Company sufficient copies of
any agreements, plans or other materials it intends to use in connection with
any sales of Shares in adequate
- 5 -
<PAGE>
time for the Company to file and clear them with the proper authorities before
they are put in use, and not to use them until so filed and cleared.
(d) Underwriter, at its own expense, will qualify as dealer or broker,
or otherwise, under all applicable State or federal laws required in order that
Shares may be sold in such States as may be mutually agreed upon by the parties.
(e) Underwriter shall not make, or permit any representative, broker
or dealer to make, in connection with any sale or solicitation of a sale of the
Shares, any representations concerning the Shares except those contained in the
then current prospectus and statement of additional information covering the
Shares and in printed information approved by the Company as information
supplemental to such prospectus and statement of additional information. Copies
of the then effective prospectus and statement of additional information and any
such printed supplemental information will be supplied by the Company to
Underwriter in reasonable quantities upon request.
(f) Underwriter shall file Company advertisements, sales literature
and other marketing and sales related materials with the appropriate regulatory
agencies and shall obtain such approvals for their use as may be required by the
Securities and Exchange Commission, the NASD and/or state securities
administrators. Underwriter shall not disseminate to the public any such
materials without prior approval by Company.
- 6 -
<PAGE>
6. Records to be Supplied by Company.
----------------------------------
The Company shall furnish to Underwriter copies of all information,
financial statements and other papers which Underwriter may reasonably request
for use in connection with the distribution of the Shares, and this shall
include, but shall not be limited to, one certified copy, upon request by
Underwriter, of all financial statements prepared for the Company by independent
public accountants.
7. Expenses.
---------
In the performance of its obligations under this Agreement,
Underwriter will pay only the costs incurred in qualifying as a broker or dealer
under state and federal laws and in establishing and maintaining its
relationships with the dealers selling the Shares. All other costs in connection
with the offering of the Shares will be paid by the Manager in accordance with
agreements between them as permitted by applicable law, including the Act and
rules and regulations promulgated thereunder. These costs include, but are not
limited to, licensing fees, filing fees, travel and such other expenses as may
be incurred by Underwriter on behalf of the Company and the Manager.
8. Indemnification of Company and Manager.
---------------------------------------
Underwriter agrees to indemnify and hold harmless the Company, the
Manager and each person who has been, is, or may hereafter be a director,
trustee, officer, employee, shareholder or control person of the Company or the
Manager, against any loss,
- 7 -
<PAGE>
damage or expense (including the reasonable costs of investigation) reasonably
incurred by any of them in connection with any claim or in connection with any
action, suit or proceeding to which any of them may be a party, which arises out
of or is alleged to arise out of or is based upon any untrue statement or
alleged untrue statement of a material fact, or the omission or alleged omission
to state a material fact necessary to make the statements not misleading, on the
part of Underwriter or any agent or employee of Underwriter or any other person
for whose acts Underwriter is responsible, unless such statement or omission was
made in reliance upon written information furnished by the Company or the
Manager. Underwriter likewise agrees to indemnify and hold harmless the Company,
the Manager and each such person in connection with any claim or in connection
with any action, suit or proceeding which arises out of or is alleged to arise
out of Underwriter's failure to exercise reasonable care and diligence with
respect to its services, if any, rendered in connection with investment,
reinvestment, automatic withdrawal and other plans for Shares. The term
"expenses" for purposes of this and the next paragraph includes amounts paid in
satisfaction of judgments or in settlements which are made with Underwriter's
consent. The Underwriter will advance attorneys' fees or other expenses incurred
by any such person in defending a proceeding upon the undertaking by or on
behalf of such person to repay the advance if it is ultimately determined that
such person is not entitled to indemnification. The foregoing rights of
indemnification shall be
- 8 -
<PAGE>
in addition to any other rights to which the Company, the Manager or each such
person may be entitled as a matter of law.
9. Indemnification of Underwriter.
-------------------------------
The Company agrees to indemnify and hold harmless Underwriter and each
person who has been, is, or may hereafter be a director, officer, employee,
shareholder or control person of Underwriter against any loss, damage or expense
(including the reasonable costs of investigation) reasonably incurred by any of
them in connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or negligence on the part of
any of such persons in the performance of Underwriter's duties or from the
reckless disregard by any of such persons of Underwriter's obligations and
duties under this Agreement. The Company will advance attorneys' fees or other
expenses incurred by any such person in defending a proceeding, upon the
undertaking by or on behalf of such person to repay the advance if it is
ultimately determined that such person is not entitled to indemnification. Any
person employed by Underwriter who may also be or become an officer or employee
of the Company shall be deemed, when acting within the scope of his employment
by the Company, to be acting in such employment solely for the Company and not
as an employee or agent of Underwriter.
10. Termination and Amendment of this Agreement.
--------------------------------------------
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment. This Agreement may be amended only
if such amendment is approved (i) by
- 9 -
<PAGE>
Underwriter, (ii) either by action of the Board of Trustees of the Company or at
a meeting of the Shareholders of the Company by the affirmative vote of a
majority of the outstanding Shares, and (iii) by a majority of the Trustees of
the Company who are not interested persons of the Company or of Underwriter by
vote cast in person at a meeting called for the purpose of voting on such
approval.
Either the Company or Underwriter may at any time terminate this
Agreement on sixty (60) days' written notice delivered or mailed by registered
mail, postage prepaid, to the other party.
11. Effective Period of this Agreement.
-----------------------------------
This Agreement shall take effect upon its execution and shall remain
in full force and effect for a period of two (2) years from the date of its
execution (unless terminated automatically as set forth in Section 10), and from
year to year thereafter, subject to annual approval (i) by Underwriter, (ii) by
the Board of Trustees of the Company or a vote of a majority of the outstanding
Shares, and (iii) by a majority of the Trustees of the Company who are not
interested persons of the Company or of Underwriter by vote cast in person at a
meeting called for the purpose of voting on such approval.
12. New Series.
-----------
The terms and provisions of this Agreement shall become automatically
applicable to any additional series of the Company established during the
initial or renewal term of this Agreement.
- 10 -
<PAGE>
13. Successor Investment Company.
-----------------------------
Unless this Agreement has been terminated in accordance with Paragraph
10, the terms and provisions of this Agreement shall become automatically
applicable to any investment company which is a successor to the Company as a
result of reorganization, recapitalization or change of domicile.
14. Severability.
-------------
In the event any provision of this Agreement is determined to be void
or unenforceable, such determination shall not affect the remainder of this
Agreement, which shall continue to be in force.
15. Questions of Interpretation.
----------------------------
(a) This Agreement shall be governed by the laws of the State of
Delaware.
(b) Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the Act shall be resolved by reference to such term or provision of the Act
and to interpretation thereof, if any, by the United States courts or in the
absence of any controlling decision of any such court, by rules, regulations or
orders of the Securities and Exchange Commission issued pursuant to said Act. In
addition, where the effect of a requirement of the Act, reflected in any
provision of this Agreement is revised by rule, regulation or order of the
Securities and Exchange Commission, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
- 11 -
<PAGE>
16. Limitation of Liability.
------------------------
It is expressly agreed that the obligations of the Trust hereunder
shall not be binding upon any of the Trustees, shareholders, nominees, officers,
agents or employees of the Trust, personally, but bind only the trust property
of the Trust. The execution and delivery of this Agreement have been authorized
by the Trustees of the Trust and signed by an officer of the Trust, acting as
such, and neither such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the trust property of the Trust.
17. Miscellaneous.
--------------
(a) Underwriter represents and warrants that it has taken reasonable
steps to make its transaction processing and recordkeeping and other systems and
equipment compatible with the change in the year 1999 to 2000 without any
related errors in reports or material disruption to services provided hereunder
and Underwriter expects full compatibility before December 31, 1999.
(b) The parties to this Agreement acknowledge and understand that any
and all technical, trade secret, or business information, including, without
limitation, financial information, business or marketing strategies or plans,
product development or customer information, which is disclosed to the other or
is otherwise obtained by the other, its affiliates, agents or representatives
during the term of this Agreement (the "Proprietary Information") is
confidential and proprietary, constitutes trade secrets of the owner, and is of
great value and
- 12 -
<PAGE>
importance to the success of the owner's business. Each party agrees to use its
best efforts (the same being not less than that employed to protect its own
proprietary information) to safeguard the Proprietary Information and to prevent
the unauthorized, negligent or inadvertent use or disclosure thereof. Neither
party shall, without the prior written approval of an officer of the other,
directly or indirectly, disclose the Proprietary Information. Each party shall
be liable under this Agreement to the other for any use or disclosure in
violation of this Agreement by its employees, attorneys, accountants, or other
advisors or agents. This section shall continue in full force and effect
notwithstanding the termination of this Agreement.
18. Notices.
--------
Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further notice
to the other party, it is agreed that the address of the Company and the Manager
for this purpose shall be 101 Park Center Plaza, Suite 1300, San Jose,
California 95113, and that the address of Underwriter for this purpose shall be
312 Walnut Street, Cincinnati, Ohio 45202.
- 13 -
<PAGE>
IN WITNESS WHEREOF, the Company, the Manager and Underwriter have each
caused this Agreement to be signed in duplicate on their behalf, all as of the
day and year first above written.
FIRSTHAND FUNDS
By: /s/ Kevin M. Landis
-------------------------------
Its: President
INTERACTIVE RESEARCH ADVISERS, INC.
By: /s/ Kendrick W. Kam
-------------------------------
Its: President
CW FUND DISTRIBUTORS, INC.
By: /s/ Robert G. Dorsey
-------------------------------
Its: President
- 14 -
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Post-Effective
Amendment to the Registration Statement on Form N-1A of Firsthand Funds and to
the use of our reports on the financial statements and financial highlights of
Technology Value Fund, Technology Leaders Fund, Technology Innovators Fund and
Medical Specialists Fund, each a series of Firsthand Funds each dated January
18, 1999. Such financial statements and financial highlights appear in the 1998
Annual Reports to Shareholders, which is incorporated by reference in the
Registration Statement.
/s/ Tait, Weller and Baker
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
February 24, 1999
<TABLE> <S> <C>
<ARTICLE> 6
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<NUMBER> 1
<NAME> FIRSTHAND FUNDS - THE TECHNOLOGY VALUE FUND
<S> <C>
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<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 169,738,697
<INVESTMENTS-AT-VALUE> 174,059,786
<RECEIVABLES> 7,342,563
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<OTHER-ITEMS-LIABILITIES> 3,258,237
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<NET-ASSETS> 178,131,097
<DIVIDEND-INCOME> 18,678
<INTEREST-INCOME> 251,377
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<EXPENSES-NET> 3,550,915
<NET-INVESTMENT-INCOME> (3,280,860)
<REALIZED-GAINS-CURRENT> (1,125,096)
<APPREC-INCREASE-CURRENT> 40,388,492
<NET-CHANGE-FROM-OPS> 35,982,536
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<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 5,313,423
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<PER-SHARE-NII> (.59)
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<EXPENSE-RATIO> 1.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> FIRSTHAND FUNDS - THE MEDICAL SPECIALISTS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 4,086,013
<INVESTMENTS-AT-VALUE> 4,469,101
<RECEIVABLES> 441,203
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,910,304
<PAYABLE-FOR-SECURITIES> 402,737
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,649
<TOTAL-LIABILITIES> 420,386
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,573,655
<SHARES-COMMON-STOCK> 465,004
<SHARES-COMMON-PRIOR> 233,313
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (466,825)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 383,088
<NET-ASSETS> 4,489,918
<DIVIDEND-INCOME> 7,871
<INTEREST-INCOME> 13,417
<OTHER-INCOME> 0
<EXPENSES-NET> 66,764
<NET-INVESTMENT-INCOME> (45,476)
<REALIZED-GAINS-CURRENT> (466,825)
<APPREC-INCREASE-CURRENT> 347,325
<NET-CHANGE-FROM-OPS> (164,976)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,557
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 551,990
<NUMBER-OF-SHARES-REDEEMED> 320,299
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,127,708
<ACCUMULATED-NII-PRIOR> 1,557
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 51,357
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 66,764
<AVERAGE-NET-ASSETS> 3,429,605
<PER-SHARE-NAV-BEGIN> 10.12
<PER-SHARE-NII> (.10)
<PER-SHARE-GAIN-APPREC> (.36)
<PER-SHARE-DIVIDEND> 0
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<PER-SHARE-NAV-END> 9.66
<EXPENSE-RATIO> 1.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> FIRSTHAND FUNDS - THE TECHNOLOGY LEADERS FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 39,163,880
<INVESTMENTS-AT-VALUE> 50,280,606
<RECEIVABLES> 472,927
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 50,753,533
<PAYABLE-FOR-SECURITIES> 6,722,838
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,195,974
<TOTAL-LIABILITIES> 7,918,812
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,012,265
<SHARES-COMMON-STOCK> 2,387,362
<SHARES-COMMON-PRIOR> 355,432
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 705,730
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,116,726
<NET-ASSETS> 42,834,721
<DIVIDEND-INCOME> 23,456
<INTEREST-INCOME> 151,801
<OTHER-INCOME> 0
<EXPENSES-NET> 372,754
<NET-INVESTMENT-INCOME> (197,497)
<REALIZED-GAINS-CURRENT> 903,227
<APPREC-INCREASE-CURRENT> 11,093,756
<NET-CHANGE-FROM-OPS> 11,799,486
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,257
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,830,812
<NUMBER-OF-SHARES-REDEEMED> 1,798,882
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 39,253,891
<ACCUMULATED-NII-PRIOR> 2,257
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 372,754
<AVERAGE-NET-ASSETS> 19,223,135
<PER-SHARE-NAV-BEGIN> 10.07
<PER-SHARE-NII> (.09)
<PER-SHARE-GAIN-APPREC> 7.96
<PER-SHARE-DIVIDEND> 0
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<PER-SHARE-NAV-END> 17.94
<EXPENSE-RATIO> 1.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> FIRSTHAND FUNDS - THE TECHNOLOGY INNOVATORS FUND
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 6,439,073
<INVESTMENTS-AT-VALUE> 7,402,119
<RECEIVABLES> 17,767
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,419,886
<PAYABLE-FOR-SECURITIES> 711,460
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 219,327
<TOTAL-LIABILITIES> 930,787
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,381,596
<SHARES-COMMON-STOCK> 405,301
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> 144,457
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 963,046
<NET-ASSETS> 6,489,099
<DIVIDEND-INCOME> 11,088
<INTEREST-INCOME> 2,164
<OTHER-INCOME> 0
<EXPENSES-NET> 19,217
<NET-INVESTMENT-INCOME> (5,965)
<REALIZED-GAINS-CURRENT> 150,422
<APPREC-INCREASE-CURRENT> 963,046
<NET-CHANGE-FROM-OPS> 1,107,503
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 649,555
<NUMBER-OF-SHARES-REDEEMED> 244,254
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6,489,099
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 19,217
<AVERAGE-NET-ASSETS> 1,620,278
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.01)
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
