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The Internet Fund, Inc.
ANNUAL REPORT
December 31, 1998
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THE INTERNET FUND, INC.
REPORT OF THE INVESTMENT ADVISER
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Dear Fellow Shareholders:
We are pleased to report that 1998 has been a period in which many of the Fund's
holdings have shown exceptional gains, with total performance for the year of
over 196%. Rising investor confidence in the long-term potential of
Internet-related businesses has been the main driver for this rapid price
appreciation. We will continue to follow our investment philosophy of investing
in the companies that will benefit the most from the emergence of the Internet
as a mass-market medium.
If you have any questions, please call the Fund at 1-888-FUNDWWW or at our web
address at [email protected].
Very truly yours,
/s/ Ryan Jacob
Ryan Jacob
Portfolio Manager
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS ONE YEAR INCEPTION*
<S> <C> <C> <C>
The Internet Fund, Inc. 196.14% 68.56%
NASDAQ Composite Index (1) 40.48% 30.52%
Inter@ctive Week Internet Index
(2) 146.37% 55.59%
*From 10/21/96 through 12/31/98
The Internet Fund, Inter@ctive Week Internet
Inc. NASDAQ Composite Index Index
10/21/96 $10,000 $10,000 $10,000
12/31/96 $9,420 $10,446 $10,044
12/31/97 $10,620 $12,772 $10,709
12/31/98 $31,451 $17,942 $26,384
</TABLE>
Remember that historic performance does not predict future performance. Shares
may be worth more or less at redemption than at original purchase.
1. The NASDAQ Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market & SmallCap stocks.
2. The INTER@CTIVE Week Internet Index is a capitalization-weighted index of
companies involved with providing digital interactive services, developing
and marketing digital interactive software, and manufacturing interactive
hardware.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE FUND MANAGER ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON THE MARKET AND OTHER
CONDITIONS.
1
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THE INTERNET FUND, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
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<TABLE>
<CAPTION>
SHARES VALUE
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<S> <C> <C>
COMMON STOCKS -- 72.15%
DATA COMMUNICATIONS/NETWORKING HARDWARE -- 13.85%
Broadcom Corp.* 6,000 $ 724,500
Exodus Communications, Inc.* 10,000 642,500
IDT Corp.* 20,000 307,500
Inktomi Corp.* 6,000 776,250
RCN Corp.* 35,000 619,062
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3,069,812
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COMPUTER/NETWORK SOFTWARE -- 8.68%
DoubleClick, Inc.* 19,000 865,688
OzeMail Ltd.* -- ADR 20,000 441,250
24 / 7 Media, Inc.* 22,000 616,000
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1,922,938
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ELECTRONIC COMMERCE -- 12.91%
Allou Health and Beauty Care, Inc.* 80,000 860,000
Amazon.com, Inc.* 1,000 321,250
Bluefly, Inc.* 30,000 303,750
CMG Information Services, Inc.* 9,000 958,500
Egghead.com, Inc.* 20,000 416,250
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2,859,750
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INTERNET/NETWORK SECURITY -- 5.36%
Data Broadcasting Corp.* 40,000 715,000
Verisign, Inc.* 8,000 473,000
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1,188,000
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INTERNET SERVICE PROVIDERS/BROWSERS -- 31.35%
America Online, Inc.* 5,000 800,000
At Home Corp.* 6,000 445,500
CNET, Inc.* 10,000 548,125
Excite, Inc.* 18,000 757,125
GeoCities* 24,000 807,000
Lycos, Inc.* 15,000 833,437
Infoseek Corp.* 10,000 493,750
Mindspring Enterprises, Inc.* 10,000 610,625
PSINet, Inc.* 25,000 521,875
Rocky Mountain Internet, Inc.* 20,000 252,500
Yahoo!, Inc.* 3,700 876,669
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6,946,606
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TOTAL COMMON STOCKS (IDENTIFIED COST $11,228,881) 15,987,106
REPURCHASE AGREEMENT -- 11.28%
State Street Bank & Trust Repurchase Agreement, 3.25%
Due 01/04/99; Collateral: U.S. Treasury Note $2,365,000,
6.25% due 02/15/03, Value: $2,610,031
(IDENTIFIED COST $2,500,000) 2,500,000
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TOTAL INVESTMENTS (IDENTIFIED COST $13,728,881) 18,487,106
OTHER ASSETS LESS LIABILITIES -- 16.57% 3,671,577
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NET ASSETS -- 100% $22,158,683
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</TABLE>
* Non-income-producing security.
ADR -- American Depository Receipt.
See notes to financial statements.
2
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THE INTERNET FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
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ASSETS:
<TABLE>
<S> <C>
Investments at value (identified cost $11,228,881) $15,987,106
Repurchase agreement (identified cost $2,500,000) 2,500,000
Receivable for fund shares sold 2,728,181
Receivable for securities sold 462,084
Cash and other assets 1,149,019
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Total assets 22,826,390
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LIABILITIES:
Payable for securities purchased 617,251
Advisory fee payable 17,536
Other accrued expenses 32,920
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Total liabilities 667,707
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NET ASSETS $22,158,683
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COMPOSITION OF NET ASSETS:
Accumulated paid-in capital $16,867,230
Accumulated net investment loss (90,069)
Accumulated net realized gain on investments 623,297
Unrealized appreciation of investments 4,758,225
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NET ASSETS $22,158,683
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NET ASSET VALUE PER SHARE (1,409,831 SHARES OUTSTANDING) $15.72
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</TABLE>
See notes to financial statements.
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THE INTERNET FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
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INVESTMENT INCOME:
<TABLE>
<S> <C>
Interest and dividends $ 4,971
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EXPENSES:
Investment advisory fees 38,561
Audit and legal fees 26,220
Custody and accounting fees 13,112
Registration fees 5,558
Reports to shareholders 4,353
Transfer agent fees 1,700
Directors' fees 792
Other expenses 4,733
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Total expenses 95,029
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Net investment loss (90,058)
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NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments: 632,132
Net change in unrealized gain on investments 4,751,175
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Net realized and unrealized gain on investments 5,383,307
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,293,249
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</TABLE>
See notes to financial statements.
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THE INTERNET FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ (90,058) $ 310
Net realized gain (loss) on investments 632,132 (1,257)
Net change in unrealized gain on investments 4,751,175 14,733
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Net increase in net assets resulting from operations 5,293,249 13,786
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income and short term capital gains on investments (8,316) --
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FROM CAPITAL SHARE TRANSACTIONS:
Shares sold 22,532,887 125,135
Reinvestment of distributions 7,974 --
Shares redeemed (5,816,862) (102,450)
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Net increase in net assets resulting from capital share transactions 16,723,999 22,685
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Total increase in net assets 22,008,932 36,471
NET ASSETS:
Beginning of year 149,751 113,280
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End of year $ 22,158,683 $ 149,751
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SHARES ISSUED AND REDEEMED:
Shares sold 1,814,360 24,844
Reinvestment of distributions 525 --
Shares redeemed (433,255) (20,670)
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Net increase 1,381,630 4,174
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</TABLE>
See notes to financial statements.
5
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THE INTERNET FUND, INC.
FINANCIAL HIGHLIGHTS
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For a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR OCTOBER 21, 1996*
ENDED FOR THE YEAR ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ------------------- -------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 5.31 $ 4.71 $ 5.00
Net investment income (loss) (0.08) 0.01 0.02
Net realized and unrealized gain (loss) on investments 10.50 0.59 (0.31)
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Total from investment operations 10.42 0.60 (0.29)
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Dividends from net investment income, short-term
capital gains and 1997 net unrealized gain (0.01) -- --
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Net asset value, end of period $ 15.72 $ 5.31 $ 4.71
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Total return 196.14% 12.74% (5.80%)B
Net assets, end of period (000's) $ 22,159 $ 150 $ 113
Ratio of expenses to average net assets 3.08% 0.08% 0.21%A
Ratio of expenses to average net assets (excluding
waivers) 3.08% 3.60% 6.73%A
Ratio of net investment income (loss) to average net
assets (2.92%) 0.19% 2.01%A
Ratio of net investment income (loss) to average net
assets (excluding waivers) (2.92%) (3.33%) (4.15%)A
Portfolio turnover rate 80% 50% 0%A
</TABLE>
A Annualized
B Not Annualized
*Commencement of Operations.
See notes to financial statements.
6
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THE INTERNET FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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1. ORGANIZATION OF THE FUND
The Internet Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company. The financial statements have been prepared in conformity with
generally accepted accounting principles.
2. SIGNIFICANT ACCOUNTING PRINCIPLES
SECURITY VALUATION
The Fund values securities for which exchange quotations are readily
available at the last recorded sales price, or if the security is not traded
on an exchange, at the closing bid price. Short term investments are valued
at cost, approximating market value.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date. Realized gains
and losses from investment transactions are determined on the basis of
identified cost. Dividend income received and distributions to shareholders
are recognized on the ex-dividend date, and interest income is recognized on
the accrual basis.
INCOME TAXES
No provision for income taxes is required because the Fund intends to
continue to qualify as a regulated investment company and to distribute all
of its taxable income to its shareholders. The Fund failed to meet the
distribution requirements for regulated investment companies for the year
ended December 31, 1997. The Fund established its status as a regulated
investment company in 1998 by distributing all earnings and profits,
including the net unrealized gain at December 31, 1997.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that may affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FINANCIAL STATEMENT PRESENTATION
Certain classifications from prior periods have been restated to conform
with current year presentation.
7
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THE INTERNET FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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3. RELATED PARTY TRANSACTIONS
The Fund has entered into an investment advisory agreement with Kinetics
Asset Management, Inc. (Kinetics), whereby Kinetics receives a management
and administration fee in the amount of 1.25% of average daily net assets.
4. FINANCIAL INSTRUMENTS
For the year ended December 31, 1998, purchases and sales proceeds of
investments, other than short-term investments, were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS OTHER INVESTMENT SECURITIES
<S> <C> <C> <C>
PURCHASES SALES PURCHASES SALES
- ------------- ------------- ------------- ------------
-- -- $ 13,015,171 $ 2,552,614
</TABLE>
At December 31, 1998, the cost of investments for federal income tax
purposes, the aggregate gross unrealized gain for all securities for which
there was an excess of value over tax cost and the aggregate gross
unrealized loss for all securities for which there was an excess of tax cost
over value were as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
TAX COST UNREALIZED GAIN UNREALIZED LOSS GAIN
- ------------- --------------- --------------- ---------------
<S> <C> <C> <C>
$13,743,727... $ 4,910,523 $ (167,144) $ 4,743,379
</TABLE>
5. CAPITAL STOCK
At December 31, 1998, the Fund had 7,303,185 authorized shares at $.01 par
value.
6. YEAR 2000 CONVERSION
The Fund has established a preliminary plan to ensure that its systems and
applications will recognize and process the year 2000 and that there will be
no material disruption to business operations. The Fund is also dependent
upon its clearing brokers and other outside providers to implement this
conversion. The total cost of compliance and its effects on the Fund's
future results of operations are being determined as the Fund finalizes its
plans.
8
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of The Internet Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the portfolios of investments, of The Internet Fund, Inc., as of December 31,
1998, the statement of operations for the year then ended, the statements of
changes in net assets for each of the two years then ended and the financial
highlights for each of the periods then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on the financial statements and
financial highlights based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 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 audit provides 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
Internet Fund, Inc. as of December 31, 1998, the results of its operations, and
the changes in its net assets, and its financial highlights for each of the
respective periods stated in the first paragraph, in conformity with generally
accepted accounting principles.
/s/ Lilling & Company LLP
Lilling & Company LLP
10 Cutter Mill Road
Great Neck, NY 11021
February 15, 1999
9
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[LOGO]
THE INTERNET FUND, INC.
1-888-fund www
[email protected]
For additional information, please call us
for a copy of our prospectus or visit our
website at www.theinternetfund.com
[LOGO]
The Internet Fund, Inc.
ANNUAL REPORT
December 31, 1998
