STATEMENT OF ADDITIONAL INFORMATION
LCM INTERNET GROWTH FUND, INC.
This Statement of Additional Information ("SAI") is
not a prospectus, but should be read in conjunction
with the Prospectus of the LCM Internet Growth Fund,
Inc. (the "Fund"), dated the date hereof. Before
purchasing shares of the Fund, you should obtain and
read the Fund's Prospectus. The Prospectus, which
may be revised from time to time, is available
without charge by writing to the Fund at 810 West
Washington Boulevard, Chicago, Illinois 60607, or by
calling (312) 705-3028.
This Statement of Additional information is dated October 26, 1999.
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TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVE AND POLICIES 3
INVESTMENT PRACTICES AND TECHNIQUES 4
MANAGEMENT 12
PRINCIPAL SHAREHOLDERS 14
INVESTMENT ADVISORY AND OTHER SERVICES 14
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION 15
TAXATION OF THE FUND AND ITS DISTRIBUTIONS 17
FINANCIAL STATEMENTS 18
You should rely only on the information contained in
this SAI and in the Prospectus. The Fund has not
authorized anyone to provide you with different
information. The Fund is not making an offer of these
securities in any state where the offer is not
permitted. You should not assume that the information
contained in this SAI or in the Prospectus is accurate
as of any date other than the date hereof.
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INVESTMENT OBJECTIVE AND POLICIES
a) Investment Objective
The Fund's investment objective is to seek capital
appreciation by investing in a portfolio consisting
primarily of equity securities issued by companies that
the Fund's investment adviser, LCM Capital Management,
Inc. ("LCMCM"), believes will benefit from growth of
the Internet. Current dividend income is not an
investment consideration. Under normal market
conditions, the Fund will invest at least 65% of its
total assets in the equity securities of companies that
engage in Internet and Internet-related activities.
For more information, please see "Investment Objective
and Policies" in the Prospectus.
b) Fundamental Investment Policies
The Fund's fundamental investment policies (or
restrictions) are set forth in the Prospectus under the
caption "Investment Restrictions." The Fund's
fundamental investment policies (which include the
Fund's investment objective) may not be changed without
the approval of a majority of the Fund's outstanding
voting securities. Please refer to the Prospectus for
more information.
c) Non-Fundamental Investment Policies
The Fund's non-fundamental investment policies (or
restrictions), which may be changed by the Fund's Board
of Directors without shareholder approval, are set
forth below. Many of these policies are discussed in
the Prospectus under the caption "Investment Practices
and Techniques."
As a matter of non-fundamental policy:
(1)The Fund may not sell securities short, unless the
Fund owns or has the right to obtain securities
equivalent in kind and amount to the securities
sold short, or unless it covers such short sale as
required by the current rules and positions of the
Securities and Exchange Commission (the "SEC") or
its staff, and provided that transactions in
options, futures contracts or other derivative
instruments are not deemed to constitute selling
securities short;
(2)The Fund may not purchase securities on margin,
except that the Fund may obtain such short-term
credits as are necessary for the clearance of
transactions, and provided that margin deposits in
connection with futures contracts or other
derivative instruments shall not constitute
purchasing securities on margin;
(3)The Fund may not invest in illiquid securities if,
as a result of such investment, more than 15% of
its net assets would be invested in illiquid
securities;
(4)The Fund may not purchase securities of other
investment companies, except in compliance with the
Investment Company Act of 1940, as amended (the
"1940 Act");
(5)The Fund may not engage in futures or options on
futures transactions which are impermissible
pursuant to Rule 4.5 under the Commodity Exchange
Act (the "CEA") and, in accordance with Rule 4.5,
will use futures or options on futures transactions
solely for bona fide hedging transactions (within
the meaning of the CEA); provided, however, that
the Fund may, in addition to bona fide hedging
transactions, use futures and options on futures
transactions if the aggregate initial margin and
premiums required to establish such positions, less
the amount by which any such options are "in the
money" (within the meaning of the CEA), do not
exceed 5% of the Fund's net assets;
(6)The Fund may not invest in, purchase or sell
options, except that the Fund may invest up to 10%
of its total assets in options, and may sell
options in an amount not to exceed 10% of its total
assets; and
(7)The Fund may not borrow money in an amount in
excess of 33 1/3% of its total assets (measured by
adding the amount borrowed to the Fund's other
assets).
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With the exception of non-fundamental policy number 7
above, the percentage restrictions set forth above
apply at the time a transaction is effected, and a
subsequent change in a percentage resulting from market
fluctuations or any other cause other than action by
the Fund will not require the Fund to dispose of
portfolio securities or take other action to satisfy
the percentage restriction.
INVESTMENT PRACTICES AND TECHNIQUES
The following information supplements the discussion of
the Fund's investment practices and portfolio
management techniques described in the Prospectus under
the caption "Investment Practices and Techniques."
a) Short-Term Fixed Income Securities
The Fund may hold a small portion of its assets
(generally not more than 10%) in U.S. government
securities, money market securities and cash to meet
ordinary cash needs. Under unusual circumstances, as a
defensive technique, the Fund may retain a larger
portion of cash and/or invest more assets in U.S.
government securities and/or money market securities
deemed by LCMCM to be consistent with a temporary
defensive posture.
(1)U.S. Government Securities. The U.S. government
securities in which the Fund may invest are
securities issued or guaranteed by the U.S.
government (i.e., the U.S. Treasury) or its
agencies or instrumentalities. U.S. government
agency/instrumentality securities include
securities issued by (i) the Federal Housing
Administration, Farmers Home Administration, Export-
Import Bank of the United States, Small Business
Administration and GinnieMae, whose securities are
supported by the full faith and credit of the
United States; (ii) the Federal Home Loan Banks,
Federal Intermediate Credit Banks and the Tennessee
Valley Authority, whose securities are supported by
the right of the agency to borrow from the U.S.
Treasury; (iii) the FannieMae, whose securities are
supported by the discretionary authority of the
U.S. government to purchase certain obligations of
the agency or instrumentality; and (iv) the Student
Loan Marketing Association, the Interamerican
Development Bank and the International Bank for
Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
While the U.S. government provides financial
support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given
that it always will do so since it is not so
obligated by law. The U.S. government, its
agencies and instrumentalities do not guarantee the
market value of their securities, and consequently,
the value of such securities may fluctuate.
(2)Money Market Securities. The money market
securities in which the Fund may invest include (i)
commercial paper rated A-1 or higher by Standard &
Poor's ("S&P") or Prime-1 or higher by Moody's
Investors Service ("Moody's"), or if such
commercial paper is not rated, issued by companies
which have an outstanding debt issue rated AA or
higher by S&P or Aa or higher by Moody's; (ii)
repurchase agreements entered into only with
respect to U.S. government securities. In such a
transaction, at the time the Fund purchases the
security, it simultaneously agrees to resell and
redeliver the security to the seller, who also
simultaneously agrees to buy back the security at a
fixed price and time. This assures a predetermined
yield for the Fund during its holding period since
the resale price is always greater than the
purchase price and reflects an agreed-upon market
rate. Such transactions afford an opportunity for
the Fund to invest temporarily available cash.
Repurchase agreements may be considered loans to
the seller, collateralized by the underlying
securities. The risk to the Fund is limited to the
ability of the seller to pay the agreed-upon sum on
the repurchase date; in the event of default, the
repurchase agreement provides that the Fund is
entitled to sell the underlying collateral. If the
value of the collateral declines after the
agreement is entered into, however, and if the
seller defaults under a repurchase agreement when
the value of the underlying collateral is less than
the repurchase price, the Fund could incur a loss
of both principal and interest. LCMCM monitors the
value of the collateral at the time the transaction
is entered into and at all times during the term of
the repurchase agreement. LCMCM does so in an
effort to determine that the value of the
collateral always equals or exceeds the agreed-upon
repurchase price to be paid to the Fund. If the
seller were to be subject to a federal bankruptcy
proceeding, the ability of the Fund to liquidate
the collateral could be delayed or impaired because
of certain provisions of the bankruptcy laws; (iii)
certificates of deposit issued against funds
deposited in a domestic branch of a U.S. bank or
savings and loan association that are insured
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by the Federal Deposit Insurance Corporation ("FDIC")
and have assets in excess of $500 million. Such
certificates are for a definite period of time,
earn a specified rate of return and are normally
negotiable. If such certificates of deposit are
non-negotiable, they will be considered illiquid
securities and be subject to the Fund's 15%
restriction on investments in illiquid securities.
Pursuant to a certificate of deposit, the issuer
agrees to pay the amount deposited plus interest to
the bearer of the certificate on the date specified
thereon. Under current FDIC regulations, the
maximum insurance payable as to any one certificate
of deposit is $100,000; therefore, certificates of
deposit purchased by the Fund will not generally be
fully insured; (iv) bankers' acceptances, which are
short-term credit instruments used to finance
commercial transactions. Generally, an acceptance
is a time draft drawn on a bank by an exporter or
an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then
"accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of
the instrument on its maturity date. The
acceptance may then be held by the accepting bank
as an asset or it may be sold in the secondary
market at the going rate of interest for a specific
maturity; and (v) bank time deposits, which are
monies kept on deposit with U.S. banks or savings
and loan associations for a stated period of time
at a fixed rate of interest. There may be
penalties for the early withdrawal of such time
deposits, in which case the yields of these
investments will be reduced.
b) Illiquid Securities
The Fund may invest up to 15% of its net assets in
illiquid securities (i.e., securities that are not
readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to,
restricted securities (securities the disposition of
which is restricted under the federal securities laws),
repurchase agreements with maturities in excess of
seven days and other securities that are not readily
marketable. The Board of Directors of the Fund, or its
delegate, has the ultimate authority to determine, to
the extent permissible under the federal securities
laws, which securities are liquid or illiquid for
purposes of this 15% limitation. Certain securities
exempt from registration or issued in transactions
exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"), such as
securities that may be resold to institutional
investors under Rule 144A under the Securities Act, may
be considered liquid under guidelines adopted by the
Board of Directors. However, investing in securities
which may be resold pursuant to Rule 144A under the
Securities Act could have the effect of increasing the
level of the Fund's illiquidity to the extent that
institutional investors become, for a time,
uninterested in purchasing such securities.
The Board of Directors has delegated to LCMCM the day-
to-day determination of the liquidity of any security,
although it has retained oversight and ultimate
responsibility for such determinations. Although no
definitive liquidity criteria are used, the Board of
Directors has directed LCMCM to look to such factors
as (i) the nature of the market for the security
(including the institutional private resale market),
(ii) the terms of certain securities or other
instruments allowing for the disposition to a third
party or the issuer thereof (e.g., certain repurchase
obligations and demand instruments), (iii) the
availability of market quotations (e.g., for securities
quoted in the PORTAL system) and (iv) other permissible
relevant factors.
Restricted securities may be sold only in privately
negotiated transactions or in a public offering with
respect to which a registration statement is in effect
under the Securities Act. Where registration is
required, the Fund may be obligated to pay all or part
of the registration expenses and a considerable period
may elapse between the time of the decision to sell and
the time the Fund may be permitted to sell a security
under an effective registration statement. If, during
such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price
than that which prevailed when it decided to sell.
Restricted securities will be priced at fair value as
determined in good faith by the Board of Directors.
If, through the appreciation of restricted securities
or the depreciation of unrestricted securities, the
Fund should be in a position where more than 15% of the
value of its net assets are invested in illiquid
securities, including restricted securities which are
not readily marketable (except for Rule 144A securities
deemed to be liquid by LCMCM), the Fund will take such
steps as is deemed advisable, if any, to protect
liquidity.
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c) Non-Diversification
While the Fund is "non-diversified," which means that
it is permitted to invest its assets in a more limited
number of companies than other mutual funds, the Fund
intends to diversify its assets to qualify for tax
treatment as a regulated investment company under the
Internal Revenue Code of 1986, as amended ("Code"). To
qualify (i) not more than 25% of the total value of the
Fund's assets may be invested in securities of any one
issuer or of any two or more issuers controlled by the
Fund, which, pursuant to the regulations under the
Code, may be deemed to be engaged in the same, similar
or related trades or businesses, and (ii) with respect
to 50% of the total value of the Fund's assets (a) not
more than 5% of its total assets may be invested in the
securities of any one issuer and (b) the Fund may not
own more than 10% of the outstanding voting securities
of any one issuer. These percentage limitations do not
apply to investments in U.S. government securities or
the securities of other regulated investment companies.
Accordingly, as a "non-diversified" fund, the Fund may
invest up to 50% of its assets in the securities of as
few as two companies, up to 25% each, so long as the
Fund does not control the two companies and the two
companies are engaged in different businesses. The
Fund may also invest up to 50% of its assets in the
securities of as few as ten companies, up to 5% each,
provided that the Fund does not own in excess of 10% of
any company's outstanding voting stock. Non-
diversification involves an increased risk of loss to
the Fund when the market value of a security declines.
d) Concentration
The Fund has adopted a fundamental investment policy
which prohibits the Fund from investing more than 25%
of its total assets in securities of issuers whose
principal business activities are in the same industry,
except that the Fund will invest, under normal market
conditions, more than 25% of its total assets in the
securities of issuers in the information technology
industry. For this purpose, "information technology
industry" is comprised of those companies providing
infrastructure, content and e-commerce products and/or
services designed for Internet use. This industry,
which is very dynamic and therefore frequently
changing, currently consists of 13 sectors and 65 sub-
sectors as identified by LCMCM. See "Investment
Objective and Policies" in the Prospectus for more
information. Because a relatively high percentage of
the Fund's assets will be invested in the information
technology industry, the Fund's portfolio securities
will be especially influenced by factors specific to
that industry and may be more susceptible to
fluctuation in value than portfolio securities of a
less concentrated investment company.
e) Derivative Transactions
In General. The Fund may invest in derivative
instruments for any lawful purpose consistent with its
investment objective such as hedging or managing risk,
but not for speculation. Derivative instruments are
commonly defined to include securities or contracts
whose value depend on (or "derive" from) the value of
one or more other assets, such as securities or
commodities. These "other assets" are commonly
referred to as "underlying assets."
Options and forward contracts are considered to be the
basic "building blocks" of derivatives. An option is a
contract in which the "holder" (the buyer) pays a
certain amount (the "premium") to the "writer" (the
seller) to obtain the right, but not the obligation, to
buy from the writer (in a "call") or sell to the writer
(in a "put") a specific asset at an agreed upon price
(the "strike price" or "exercise price") at or before a
certain time (the "expiration date"). The holder pays
the premium at inception and has no further financial
obligation. The holder of an option-based derivative
generally will benefit from favorable movements in the
price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the
value of the underlying asset. The writer of an option-
based derivative generally will receive fees or
premiums but generally is exposed to losses due to
changes in the value of the underlying asset.
A forward is a sales contract between a buyer (holding
the "long" position) and a seller (holding the "short"
position) for an asset with delivery deferred until a
future date. The buyer agrees to pay a fixed price at
the agreed future date and the seller agrees to deliver
the asset. The seller hopes that the market price on
the delivery date is
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less than the agreed upon price,
while the buyer hopes for the contrary. The change in
value of a forward-based derivative generally is
roughly proportional to the change in value of the
underlying asset.
While the Fund may invest in options, it will not
invest in forward contracts. As described below, the
Fund may, however, invest in futures contracts.
Hedging. The Fund may use derivative instruments to
protect against possible adverse changes in the market
value of securities held in, or are anticipated to be
held in, the Fund's portfolio. Derivatives may also be
used by the Fund to "lock-in" its realized but
unrecognized gains in the value of its portfolio
securities. Hedging strategies, if successful, can
reduce the risk of loss by wholly or partially
offsetting the negative effect of unfavorable price
movements in the investments being hedged. However,
hedging strategies can also reduce the opportunity for
gain by offsetting the positive effect of favorable
price movements in the hedged investments.
Managing Risk. The Fund may also use derivative
instruments to manage the risks of the Fund's
portfolio. Risk management strategies include, but are
not limited to, facilitating the sale of portfolio
securities, establishing a position in the derivatives
markets as a substitute for buying or selling certain
securities or creating or altering exposure to certain
asset classes. The use of derivative instruments may
provide a less expensive, more expedient or more
specifically focused way for the Fund to invest than
"traditional" securities (i.e., stocks or bonds) would.
Exchange or OTC Derivatives. Derivative instruments
may be exchange-traded or traded in over-the-counter
("OTC") transactions between private parties. Exchange-
traded derivatives are standardized options and futures
contracts traded in an auction on the floor of a
regulated exchange. Exchange contracts are generally
liquid. The exchange clearinghouse is the counterparty
of every contract. Thus, each holder of an exchange
contract bears the credit risk of the clearinghouse
(and has the benefit of its financial strength) rather
than that of a particular counterparty. OTC
transactions are subject to additional risks, such as
the credit risk of the counterparty to the instrument,
and are less liquid than exchange-traded derivatives
since they often can only be closed out with the other
party to the transaction. For purposes of the Fund's
15% limitation on investments in illiquid securities,
OTC transactions (as well as any assets used to cover
such transactions) will be considered illiquid.
Risks and Special Considerations. The use of
derivative instruments involves risks and special
considerations as described below. Risks pertaining to
particular derivative instruments are described in the
sections that follow.
(1)Market Risk. The primary risk of derivatives is
the same as the risk of the underlying assets;
namely, that the value of the underlying asset may
go up or down. Adverse movements in the value of
an underlying asset can expose the Fund to losses.
Derivative instruments may include elements of
leverage and, accordingly, the fluctuation of the
value of the derivative instrument in relation to
the underlying asset may be magnified. The
successful use of derivative instruments depends
upon a variety of factors, particularly LCMCM's
ability to predict movements of the securities,
currencies and commodities markets, which requires
different skills than predicting changes in the
prices of individual securities. There can be no
assurance that any particular strategy adopted will
succeed. A decision to engage in a derivative
transaction will reflect LCMCM's judgment that the
derivative transaction will provide value to the
Fund and its shareholders and is consistent with
the Fund's objectives, investment limitations and
operating policies. In making such a judgment,
LCMCM will analyze the benefits and risks of the
derivative transaction and weigh them in the
context of the Fund's entire portfolio and
investment objective.
(2)Credit Risk. The Fund will be subject to the risk
that a loss may be sustained by the Fund as a
result of the failure of a counterparty to comply
with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative
instruments is generally less than for privately-
negotiated or OTC derivative instruments, since
generally a clearing agency, which is the issuer or
counterparty to each exchange-traded instrument,
provides a guarantee of performance. For privately-
negotiated instruments, there is no similar
clearing agency guarantee. In all transactions,
the Fund will bear the risk that the counterparty
will default, and this could result in a loss of
the expected benefit of the derivative transaction
and possibly other losses to the Fund. The Fund
will enter into transactions in derivative
instruments only with counterparties that LCMCM
reasonably believes are capable of performing under
the contract.
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(3)Correlation Risk. When a derivative transaction is
used to completely hedge another position, changes
in the market value of the combined position (the
derivative instrument plus the position being
hedged) result from an imperfect correlation
between the price movements of the two instruments.
With a perfect hedge, the value of the combined
position remains unchanged for any change in the
price of the underlying asset being hedged. With
an imperfect hedge, the value of the derivative
instrument and its hedge are not perfectly
correlated. Correlation risk is the risk that
there might be imperfect correlation, or even no
correlation, between price movements of an
instrument and price movements of investments being
hedged. For example, if the value of a derivative
instrument used in a short hedge (such as writing a
call option, buying a put option or selling a
futures contract) increased by less than the
decline in value of the hedged investments, the
hedge would not be perfectly correlated. Such a
lack of correlation might occur due to factors
unrelated to the value of the investments being
hedged, such as speculative or other pressures on
the markets in which these instruments are traded.
The effectiveness of hedges using instruments on
indices will depend, in part, on the degree of
correlation between price movements in the index
and price movements in the investments being
hedged.
(4)Liquidity Risk. Derivatives are also subject to
liquidity risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out or
replaced quickly at or very close to its
fundamental value. Generally, exchange contracts
are very liquid because the exchange clearinghouse
is the counterparty of every contract. OTC
transactions are less liquid than exchange-traded
derivatives since they often can only be closed out
with the other party to the transaction. The Fund
might be required by applicable regulatory
requirements to maintain assets as "cover,"
maintain segregated accounts and/or make margin
payments when it takes positions in derivative
instruments involving obligations to third parties
(i.e., instruments other than purchased options).
If the Fund is unable to close out its positions in
such instruments, it might be required to continue
to maintain such assets or accounts or make such
payments until the position expires, matures or is
closed out. The requirements might impair the
Fund's ability to sell a portfolio security or make
an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. The
Fund's ability to sell or close out a position in
an instrument prior to expiration or maturity
depends on the existence of a liquid secondary
market or, in the absence of such a market, the
ability and willingness of the counterparty to
enter into a transaction closing out the position.
Therefore, there is no assurance that any
derivatives position can be sold or closed out at a
time and price that is favorable to the Fund.
(5)Legal Risk. Legal risk is the risk of loss caused
by the legal unenforceability of a party's
obligations under the derivative. While a party
seeking price certainty agrees to surrender the
potential upside in exchange for downside
protection, the party taking the risk is looking
for a positive payoff. Despite this voluntary
assumption of risk, a counterparty that has lost
money in a derivative transaction may try to avoid
payment by exploiting various legal uncertainties
about certain derivative products.
(6)Systemic or "Interconnection" Risk.
Interconnection risk is the risk that a disruption
in the financial markets will cause difficulties
for all market participants. In other words, a
disruption in one market will spill over into other
markets, perhaps creating a chain reaction. Much
of the OTC derivatives market takes place among the
OTC dealers themselves, thus creating a large
interconnected web of financial obligations. This
interconnectedness raises the possibility that a
default by one large dealer could create losses for
other dealers and destabilize the entire market for
OTC derivative instruments.
General Limitations. The use of derivative instruments
is subject to applicable regulations of the SEC, the
several options and futures exchanges upon which they
may be traded and the Commodity Futures Trading
Commission ("CFTC").
The Fund has filed a notice of eligibility for
exclusion from the definition of the term "commodity
pool operator" with the CFTC and the National Futures
Association, which regulate trading in the futures
markets. In accordance with Rule 4.5 of the
regulations under the CEA, the notice of eligibility
for the Fund includes representations that the Fund
will use futures contracts and related options solely
for bona fide hedging purposes within the meaning of
CFTC regulations, provided that the Fund may hold other
positions in futures contracts and related options that do
<PAGE>
not qualify as a bona fide hedging position if the
aggregate initial margin deposits and premiums required
to establish these positions, less the amount by which
any such futures contracts and related options
positions are "in the money," do not exceed 5% of the
Fund's net assets.
The SEC has identified certain trading practices
involving derivative instruments that involve the
potential for leveraging a fund's assets in a manner
that raises issues under the 1940 Act. In order to
limit the potential for the leveraging of a fund's
assets, as defined under the 1940 Act, the SEC has
stated that a fund may use coverage or the segregation
of a fund's assets. The Fund will set aside cash or
other permissible liquid assets in a segregated
custodial account if required to do so by SEC and CFTC
regulations and/or SEC and CFTC interpretations
thereof. Assets used as cover or held in a segregated
account cannot be sold while the derivative position is
open, unless they are replaced with similar assets. As
a result, the commitment of a large portion of the
Fund's assets to segregated accounts could impede
portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
In some cases, the Fund may be required to allocate or
limit a percentage of its assets to a particular asset
class. In such cases, the Fund may use a derivative
instrument to increase or decrease exposure to an asset
class. When the Fund uses derivatives in this way, it
is required by applicable SEC guidelines to set aside
liquid assets in a segregated account to secure its
obligations under the derivative instruments. Under
these circumstances, LCMCM may, where reasonable,
measure compliance with the applicable percentage by
reference to the nature of the economic exposure
created through the use of the derivative instrument
and not by reference to the nature of the exposure
arising from the assets set aside in the segregated
account (unless another interpretation is specified by
applicable regulatory requirements, in which case such
other interpretation will be complied with). For
example, if U.S. government securities are set aside to
secure the Fund's obligations under an equity position
involving a derivative instrument, the combined
position (i.e., the derivative instrument and the U.S.
government securities) will be treated as an equity
position (if allowed under applicable regulatory
requirements), not as a U.S. government securities
position.
Options. The Fund may use options for any lawful
purpose consistent with its investment objective such
as hedging or managing risk, but not for speculation.
The Fund may purchase (buy) or write (sell) put and
call options on securities and securities indices
("underlying assets") and enter into closing
transactions with respect to such options to terminate
an existing position. Options used by the Fund may
include European, American and Bermuda style options.
If an option is exercisable only at maturity, it is a
"European" option; if it is also exercisable prior to
maturity, it is an "American" option. If it is
exercisable only at certain times, it is a "Bermuda"
option.
The Fund may purchase (buy) and write (sell) put and
call options and enter into closing transactions with
respect to such options to terminate an existing
position. The purchase of call options serves as a
long hedge, and the purchase of put options serves as a
short hedge. Writing put or call options can enable
the Fund to enhance income by reason of the premiums
paid by the purchaser of such options. Writing call
options serves as a limited short hedge because
declines in the value of the hedged investment would be
offset to the extent of the premium received for
writing the option. However, if the security
appreciates to a price higher than the exercise price
of the call option, it can be expected that the option
will be exercised and the Fund will be obligated to
sell the security at less than its market value or will
be obligated to purchase the security at a price
greater than that at which the security must be sold
under the option. Writing put options serves as a
limited long hedge because increases in the value of
the hedged investment would be offset to the extent of
the premium received for writing the option. However,
if the security depreciates to a price lower than the
exercise price of the put option, it can be expected
that the put option will be exercised and the Fund will
be obligated to purchase the security at more than its
market value.
The value of an option position will reflect, among
other things, the historical price volatility of the
underlying investment, the current market value of the
underlying investment, the time remaining until
expiration, the relationship of the exercise price to
the market price of the underlying investment and
general market conditions.
<PAGE>
The Fund may effectively terminate its right or
obligation under an option by entering into a closing
transaction. For example, the Fund may terminate its
obligation under a call or put option that it had
written by purchasing an identical call or put option;
this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put
or call option it had purchased by writing an identical
put or call option; this is known as a closing sale
transaction. Closing transactions permit the Fund to
realize the profit or limit the loss on an option
position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and
OTC options. Exchange-traded options are issued by a
clearing organization affiliated with the exchange on
which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction.
In contrast, OTC options are contracts between the Fund
and the other party to the transaction ("counterparty")
(usually a securities dealer or a bank) with no
clearing organization guarantee. Thus, when the Fund
purchases or writes an OTC option, it relies on the
counterparty to make or take delivery of the underlying
investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any
premium paid by the Fund as well as the loss of any
expected benefit of the transaction.
The Fund's ability to establish and close out positions
in exchange-listed options depends on the existence of
a liquid market. The Fund intends to purchase or write
only those exchange-traded options for which there
appears to be a liquid secondary market. However,
there can be no assurance that such a market will exist
at any particular time. Closing transactions can be
made for OTC options only by negotiating directly with
the counterparty, or by a transaction in the secondary
market if any such market exists. Although the Fund
will enter into OTC options only with counterparties
that are expected to be capable of entering into
closing transactions with the Funds, there is no
assurance that the Fund will in fact be able to close
out an OTC option at a favorable price prior to
expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an
OTC option position at any time prior to its
expiration. If the Fund were unable to effect a
closing transaction for an option it had purchased, it
would have to exercise the option to realize any
profit.
The Fund may engage in options transactions on
securities indices in much the same manner as the
options on securities discussed above, except the index
options may serve as a hedge against overall
fluctuations in the securities market in general.
The writing and purchasing of options is a highly
specialized activity that involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions.
Imperfect correlation between the options and
securities markets may detract from the effectiveness
of attempted hedging. The Fund will not invest more
than 10% of its total assets in options, nor will it
sell options in an amount exceeding 10% of its total
assets.
Futures Contracts. The Fund may use futures contracts
for any lawful purpose consistent with its investment
objective such as hedging and managing risk, but not
for speculation. The Fund may enter into interest rate
and index futures. The Fund may also purchase put and
call options, and write covered put and call options,
on futures in which it is allowed to invest. The
purchase of futures or call options thereon can serve
as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures
contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can
serve as a limited long hedge, using a strategy similar
to that used for writing covered options in securities.
The Fund's hedging may include purchases of futures as
an offset against the effect of expected increases in
securities prices and sales of futures as an offset
against the effect of expected declines in securities
prices.
To the extent required by regulatory authorities, the
Fund may enter into futures contracts that are traded
on national futures exchanges and are standardized as
to maturity date and underlying financial instrument.
Futures exchanges and trading are regulated under the
CEA by the CFTC. Although techniques other than sales
and purchases of futures contracts could be used to
reduce a Fund's exposure to market or interest rate
fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost
through using futures contracts.
An interest rate futures contract provides for the
future sale by one party and purchase by another party
of a specified amount of a specific financial
instrument (e.g., debt security) for a specified price
at a designated date,
<PAGE>
time and place. An index futures
contract is an agreement pursuant to which the parties
agree to take or make delivery of an amount of cash
equal to the difference between the value of the index
at the close of the last trading day of the contract
and the price at which the index futures contract was
originally written. Transaction costs are incurred
when a futures contract is bought or sold and margin
deposits must be maintained. A futures contract may be
satisfied by delivery or purchase, as the case may be,
of the instrument or by payment of the change in the
cash value of the index. More commonly, futures
contracts are closed out prior to delivery by entering
into an offsetting transaction in a matching futures
contract. Although the value of an index might be a
function of the value of certain specified securities,
no physical delivery of those securities is made. If
the offsetting purchase price is less than the original
sale price, the Fund realizes a gain; if it is more,
the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original
purchase price, the Fund realizes a gain; if it is
less, the Fund realizes a loss. The transaction costs
must also be included in these calculations. There can
be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If
the Fund is not able to enter into an offsetting
transaction, the Fund will continue to be required to
maintain the margin deposits on the futures contract.
No price is paid by the Fund upon entering into a
futures contract. Instead, at the inception of a
futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of
the futures broker through whom the transaction was
effected, "initial margin," consisting of cash or other
liquid assets, in an amount generally equal to 10% or
less of the contract value. Margin must also be
deposited when writing a call or put option on a
futures contract, in accordance with applicable
exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does
not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is
returned to the Fund at the termination of the
transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as
periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin
payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and
from the futures broker daily as the value of the
futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing,
but rather represents a daily settlement of the Fund's
obligations to or from a futures broker. When the Fund
purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast,
when the Fund purchases or sells a futures contract or
writes a call or put option thereon, it is subject to
daily variation margin calls that could be substantial
in the event of adverse price movements. If the Fund
has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a
time when such sales are disadvantageous. Purchasers
and sellers of futures positions and options on futures
can enter into offsetting closing transactions by
selling or purchasing, respectively, an instrument
identical to the instrument held or written. Positions
in futures and options on futures may be closed only on
an exchange or board of trade that provides a secondary
market. The Fund intends to enter into futures
transactions only on exchanges or boards of trade where
there appears to be a liquid secondary market.
However, there can be no assurance that such a market
will exist for a particular contract at a particular
time.
Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of
a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price
beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily
limit for several consecutive days with little or no
trading, thereby preventing liquidation of unfavorable
positions.
If the Fund were unable to liquidate a futures or
option on a futures contract position due to the
absence of a liquid secondary market or the imposition
of price limits, it could incur substantial losses.
The Fund would continue to be subject to market risk
with respect to the position. In addition, except in
the case of purchased options, the Fund would continue
to be required to make daily variation margin payments
and might be required to maintain the position being
hedged by the future or option or to maintain certain
liquid securities in a segregated account.
Certain characteristics of the futures market might
increase the risk that movements in the prices of
futures contracts or options on futures contracts might
not correlate perfectly with movements in the prices of the
<PAGE>
investments being hedged. For example, all
participants in the futures and options on futures
contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or
options on futures contracts positions whose prices are
moving unfavorably to avoid being subject to further
calls. These liquidations could increase the price
volatility of the instruments and distort the normal
price relationship between the futures or options and
the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are
less onerous than margin requirements in the securities
markets, there might be increased participation by
speculators in the future markets. This participation
also might cause temporary price distortions. In
addition, activities of large traders in both the
futures and securities markets involving arbitrage,
"program trading," and other investment strategies
might result in temporary price distortions. The Fund
will limit its futures transactions to those permitted
under Rule 4.5 of the CEA.
f) Foreign Securities
The Fund may invest up to 5% of its net assets directly
in foreign securities. Investments in securities of
foreign issuers involve risks which are in addition to
the usual risks inherent in domestic investments. In
many countries, there is less publicly available
information about issuers than is available in the
reports and ratings published about companies in the
U.S. Additionally, foreign companies are not subject
to uniform accounting, auditing and financial reporting
standards. Other risks inherent in foreign investment
include expropriation; confiscatory taxation;
withholding taxes on dividends and interest; less
extensive regulation of foreign brokers, securities
markets and issuers; costs incurred in conversions
between currencies; the illiquidity and volatility of
foreign securities markets; the possibility of delays
in settlement in foreign securities markets;
limitations on the use or transfer of assets (including
suspension of the ability to transfer currency from a
given country); the difficulty of enforcing obligations
in other countries; diplomatic developments; and
political or social instability. Foreign economies may
differ favorably or unfavorably from the U.S. economy
in various respects, and many foreign securities are
less liquid and their prices are more volatile than
comparable U.S. securities. From time to time, foreign
securities may be difficult to liquidate rapidly
without adverse price effects. Certain costs
attributable to foreign investing, such as custody
charges and brokerage costs, are higher than those
attributable to domestic investing.
MANAGEMENT
The directors and officers of the Fund, together with
information as to their principal business occupations
during the last five years, and other information, are
shown below. Each director who is deemed an
"interested person" of the Fund, as defined in the 1940
Act, is indicated by an asterisk. The directors and
officers listed below have served as such since
inception of the Fund in August 1998, except as
otherwise noted.
*Michael R. Grady, Jr., President, Treasurer and
Director of the Fund (DOB 8/19/62; Age 36).
Mr. Grady co-founded the Fund's investment adviser,
LCMCM, with Mr. Barry Glasgow in June 1998 and has
served as its President and a Director since then.
Since January 1997, Mr. Grady has also served as
President of LaSalle St. Capital Markets, Inc., an
investment banking, research and consulting firm which
is an affiliate of LCMCM, and since December 1996, Mr.
Grady has served as a registered representative of
LaSalle St. Securities, LLC, a registered broker-
dealer, an affiliate of LCMCM and the Fund's principal
underwriter (the "Underwriter"). Prior to joining the
LaSalle group of companies, both of which are located
in Chicago, Illinois, Mr. Grady spent 18 months with
Madison Securities, Inc., a registered broker-dealer in
Chicago, Illinois (from June 1995 until December 1996),
and 14 months with Lexington Securities, Inc., a
registered broker-dealer in Chicago, Illinois (from
April 1994 until June 1995). At both companies, Mr.
Grady served as a registered representative and an
Executive Vice President. From August 1990 until April
1994, Mr. Grady served as a registered representative
of A.G. Edwards & Sons, Inc., a registered broker-
dealer in Bartlett, Illinois. Mr. Grady received his
B.S. in Finance from Northern Illinois University in
1985.
*Barry J. Glasgow, Vice President, Secretary and
Director of the Fund (DOB 4/14/43; Age 56).
Mr. Glasgow co-founded the Fund's investment adviser,
LCMCM, with Mr. Grady in June 1998 and has served as
its Chief Investment Officer, Secretary, Portfolio
Manager and a Director since then. From May 1991 until June
<PAGE>
1998, Mr. Glasgow served as the Managing Partner
and Portfolio Manager of Gonski & Glasgow Investments,
a registered investment adviser in Elgin, Illinois.
From January 1991 until May 1996, Mr. Glasgow served as
a registered representative of Rocky Mountain
Securities, Inc., a registered broker-dealer, in its
Elgin, Illinois branch office. From May 1996 until May
1998, Mr. Glasgow served as a registered representative
of Berry-Shino Securities, Inc., a registered broker-
dealer, in its Elgin, Illinois branch office. Since
May 1998, Mr. Glasgow has served as a registered
representative of the Underwriter, and from November
1998 until the date hereof, Mr. Glasgow served as a
Research Analyst of LaSalle St. Capital Markets, Inc.
David A. Schwering, Ph.D., Director of the Fund (DOB 1/8/50; Age 49).
Dr. Schwering has served as the President and a
Director of American Communication & Computation, Inc.,
a corporation engaged in the communications
infrastructure business, since January 1980, and as a
Director of International Digital Maintenance, Ltd., a
digital equipment repair firm, since May 1972. Both
companies are located in Silver Springs, Maryland. Dr.
Schwering holds several patents in the fields of
electronic and security devices. As a pioneer in
modern computing, Dr. Schwering developed several early
computer technologies. In the 1970s, he developed the
downlink and computation algorithms for NASA's ABS
satellites, the domestic money transfer system for
Bankers Trust in New York, the off-track betting system
for the State of New York and an encrypted
telecommunications system for the U.S. government. Dr.
Schwering received his B.S. in Physics from the
Massachusetts Institute of Technology (M.I.T.), his
M.S.C.S. from the University of Maryland and a
Doctorate in Economics from Harvard University. Dr.
Schwering is listed in "Who's Who" in the computer
industry.
Michael Radnor, Ph.D., Director of the Fund (DOB 2/1/33; Age 66).
Dr. Radnor has served as a Professor at the J.L.
Kellogg Graduate School of Management at Northwestern
University in Evanston, Illinois since 1964. In 1983,
Dr. Radnor launched the International Business
Development program through which his staff at
Northwestern assisted numerous U.S. and foreign
companies to strengthen their international operations,
technology and trade strategies and programs.
Privatized as IBD, Inc. in late 1994, the program works
with firms in several countries worldwide. Dr. Radnor
is the President of IBD, Inc. In 1989, Dr. Radnor,
with support from the State of Illinois, established
the Small Business Development Center/Incubator
("SBDC"). SBDC provides counseling, training, referral
services and direct assistance to small businesses in
the Midwest.
George D. Kraft, Ph.D., Director of the Fund (DOB 9/10/37; Age 61).
Dr. Kraft has served as a Professor at the I.I.T.
Stuart School of Business in Chicago, Illinois since
1994. Previously, he was an Associate Professor of
Electrical and Computer Engineering in the Armour
College of Engineering at I.I.T. In 1993, Dr. Kraft
helped form the Telecommuting Advisory Council of
Illinois, and in 1991, he was a member of a statewide
telecommunications committee that developed a strategic
plan for wiring Illinois with a broadband multimedia
network. He has consulted extensively for the U.S.
government through work for the Defense Information
Systems Agency, the Department of Housing and Urban
Development and the General Services Administration.
Each of these agencies has used him as a national
expert on telecommunication capabilities and products.
Dr. Kraft has also been involved with the National
Institute of Standards and Technology, as manager of
the Integrated Services Digital Network ("ISDN")
Standardization Effort and the Alternate Chairman of
the Executive Steering Committee of the North American
ISDN User's Forum. Dr. Kraft has served as a Director
of the Fund since March 1999.
Lawrence E. Harb, Director of the Fund (DOB 7/28/53; Age 45).
Mr. Harb has served as the Managing Director of Sales
and Marketing for J.S. Wurzler Underwriting Managers,
LLC ("Wurzler"), an underwriter of internet and e-
commerce insurance for certain syndicates of Lloyds of
London which is located in Okemos, Michigan, since
January 1999. Prior to joining Wurzler, he was
affiliated with Aon Corp. for approximately three
years. Aon Corp., which is located in Chicago,
Illinois, is a holding company that owns mutual fund,
investment advisory and brokerage businesses. While at
Aon Corp., Mr. Harb served as Chairman of Financial
Solutions Insurance Services, an insurance brokerage
firm; President of Aon Securities Corp., a registered
broker-dealer; and Senior Vice President/Director of
Marketing of Aon Advisors, a registered
<PAGE>
investment adviser. Before his involvement with Aon Corp.,
Mr. Harb was President and founder of LaSalle Consultants,
Ltd., a financial consulting firm located in Melrose
Park, Illinois, and President of LCL Investments, Inc.,
a registered broker-dealer located in Melrose Park,
Illinois. Mr. Harb has over 23 years experience in
the financial services industry, co-authored a book on
banking and has taught at the I.I.T. Stuart School of
Business in Chicago, Illinois. Mr. Harb received his
B.S. in Management from Northern Illinois University in
1975 and his Masters of Management degree from
Northwestern University's Kellogg School of Management
in 1993. Mr. Harb has served as a Director of the Fund
since March 1999.
The address of Messrs. Grady and Glasgow is 810 West
Washington Boulevard, Chicago, Illinois 60607; the
address of Dr. Schwering is 223 University Boulevard
East, Silver Spring, Maryland 20901; the address of Dr.
Radnor is Northwestern University, 2001 Sheridan Road,
Evanston, Illinois 60208; the address of Dr. Kraft is
I.I.T. Stuart School of Business, Room 424, 565 West
Adams Street, Chicago, Illinois 60631; and the address
of Mr. Harb is 3520 Okemos Road, Suite 120, Okemos,
Michigan 48864-5943.
Directors and officers of the Fund who are also
officers, directors or employees of LCMCM will not
receive any remuneration from the Fund for serving as
directors or officers. Accordingly, neither Mr. Grady
nor Mr. Glasgow will receive any remuneration from the
Fund for their services as directors and officers.
However, the remaining directors will receive the
following fees for their services as directors of the
Fund:(1)
Name Cash Other Total
Compensation(2) Compensation
David A. Schwering $8,000 $0 $8,000
Michael Radnor $8,000 $0 $8,000
George D. Kraft $8,000 $0 $8,000
Lawrence E. Harb $8,000 $0 $8,000
Total $32,000 $0 $32,000
__________
(1)The amounts indicated are estimates of amounts to
be paid by the Fund during its first fiscal year.
(2)Each director who is not deemed an "interested
person" of the Fund, as defined in the 1940 Act,
will receive $2,000 for each Board of Directors
meeting attended by such person, plus reimbursement
of reasonable expenses incurred in connection
therewith. The Board anticipates holding four
meetings during its first fiscal year. Thus, each
disinterested director is entitled to up to $8,000
during such time period from the Fund, plus
reasonable expenses.
PRINCIPAL SHAREHOLDERS
Prior to the Fund's initial public offering, the
following persons owned of record or are known by the
Fund to have owned beneficially 5% or more of the
outstanding shares of common stock of the Fund:
Name and Address No. Shares Percentage
Laurie Grady* 4,233 40%
810 West Washington Blvd.
Chicago, Illinois 60607
McDermott-LaSalle, Inc.** 4,233 40%
810 West Washington Blvd.
Chicago, Illinois 60607
Byron and Joy Crowe*** 2,117 20%
810 West Washington Blvd.
Chicago, Illinois 60607
<PAGE>
___________
*Laurie Grady and Michael Grady, an officer and director of the Fund
and LCMCM, are married.
**McDermott-LaSalle, Inc. is controlled by Jack McDermott, the Chairman
of the Board and a controlling shareholder of LCMCM.
***Byron Crowe is a director of LCMCM.
Based on the foregoing, no one owned a controlling
interest in the Fund. Shareholders with a controlling
interest could effect the outcome of proxy voting or
the direction of management of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
LCM Capital Management, Inc. ("LCMCM") is the
investment adviser to the Fund. Jack McDermott, the
Chairman of the Board of LCMCM, owns a controlling
interest in LCMCM. Messrs. Grady and Glasgow serve as
officers and directors of LCMCM and the Fund. See
"Management" for more information.
The investment advisory agreement between the Fund and
LCMCM dated as of October 26, 1999 (the "Advisory
Agreement") has an initial term of two years and
thereafter is required to be approved annually by the
Board of Directors of the Fund or by vote of a majority
of the Fund's outstanding voting securities (as defined
in the 1940 Act). Each annual renewal must also be
approved by the vote of a majority of the Fund's
directors who are not parties to the Advisory Agreement
or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such
approval. The Advisory Agreement was approved by the
full Board of Directors of the Fund on August 4, 1999
and by the initial shareholders of the Fund on October
6, 1999. The Advisory Agreement is terminable without
penalty on 60 days' written notice by the Board of
Directors, by vote of a majority of the Fund's
outstanding voting securities or by LCMCM, and will
terminate automatically in the event of its assignment.
Under the terms of the Advisory Agreement, LCMCM will
manage the Fund's investments and business affairs,
subject to the supervision of the Board of Directors.
At its expense, LCMCM will provide office space and all
necessary office facilities, equipment and personnel
for managing the investments of the Fund. As
compensation for its services, the Fund will pay LCMCM
a fee, computed daily and payable monthly, equal to, on
an annual basis, 1.0% of the Fund's average daily net
assets. LCMCM may from time to time voluntarily waive
all or a portion of its management fee and/or all or a
portion of operating expenses in order to ensure that
total annual operating expenses do not exceed 2.50% of
average daily net assets. The organizational and
offering expenses of the Fund will be paid by LCMCM
from its own assets.
Custodian, Transfer Agent, Dividend Paying Agent,
Registrar, Fund Accountant and Administrator
As custodian of the Fund's assets, Firstar Bank
Milwaukee, N.A. ("Firstar Bank"), 615 East Michigan
Street, Milwaukee, Wisconsin 53202, has custody of all
securities and cash of the Fund, delivers and receives
payment for portfolio securities sold, receives and
pays for portfolio securities purchased, collects
income from investments, if any, and performs other
duties, all as directed by the officers of the Fund.
Firstar Bank also acts as transfer agent, dividend
paying agent and registrar for the Fund, and Firstar
Mutual Fund Services, L.L.C., which is an affiliate of
Firstar Bank and which is located at the same address,
acts as fund accountant and administrator for the Fund.
Independent Accountants
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue,
Suite 1500, Milwaukee, Wisconsin 53202, independent
accountants for the Fund, audit and report on the
Fund's financial statements.
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Under the Advisory Agreement, LCMCM is responsible for
decisions to buy and sell securities for the Fund and
for the placement of the Fund's securities business,
the negotiation of the commissions to be paid on such
transactions and the allocation of portfolio brokerage
and principal business. Purchases may be made from
brokers, dealers and, on occasion, issuers. The
purchase price of securities purchased from a broker or
dealer may include commissions and dealer spreads.
The Fund may also pay mark-ups on principal
transactions.
In executing transactions on behalf of the Fund, LCMCM
has no obligation to deal with any particular broker or
dealer. Rather, LCMCM seeks to obtain the best
execution at the best security price available with
respect to each transaction. The best price to the
Fund means the best net price without regard to the mix
between purchase or sale price and commission, if any.
While LCMCM seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest
available commission. As noted in the Prospectus under
the captions "Management of the Fund - Investment
Advisory Agreement" and "Underwriting," pursuant to
guidelines adopted by the Fund's Board of Directors and
in accordance with the rules of the SEC, the
Underwriter, which is an affiliate of LCMCM, may serve
as broker to the Fund; however, in order for the
Underwriter to effect portfolio transactions for the
Fund on an exchange, the commissions, fees or other
remuneration received by the Underwriter must be
reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in
connection with comparable transactions involving
similar securities being purchased or sold on any
exchange during a comparable period of time. This
standard allows the Underwriter to receive no more than
the remuneration which would be expected to be received
by an unaffiliated broker in a commensurate arm's-
length transaction.
Section 28(e) of the Securities Exchange Act of 1934,
as amended ("Section 28(e)"), permits an investment
adviser, under certain circumstances, to cause an
account to pay a broker or dealer who supplies
brokerage and research services a commission for
effecting a transaction in excess of the amount of
commission another broker or dealer would have charged
for effecting the transaction. Brokerage and research
services include (i) furnishing advice as to the value
of securities, the advisability of investing,
purchasing or selling securities and the availability
of securities or purchasers or sellers of securities;
(ii) furnishing analyses and reports concerning
issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of
accounts; and (iii) effecting securities transactions
and performing functions incidental thereto (such as
clearance, settlement and custody).
In selecting brokers or dealers, LCMCM considers
investment and market information and other research,
such as economic, securities and performance
measurement research provided by such brokers or
dealers and the quality and reliability of brokerage
services, including execution capability, performance
and financial responsibility. Accordingly, the
commissions charged by any such broker or dealer may be
greater than the amount another firm might charge if
LCMCM determines in good faith that the amount of such
commissions is reasonable in relation to the value of
the research information and brokerage services
provided by such broker or dealer to the Fund. LCMCM
believes that the research information received in this
manner provides the Fund with benefits by supplementing
the research otherwise available to the Fund. Such
higher commissions will not, however, be paid by the
Fund unless (i) LCMCM determines in good faith that the
amount is reasonable in relation to the services in
terms of the particular transaction or in terms of
LCMCM's overall responsibilities with respect to the
accounts, including the Fund, as to which it exercises
investment discretion; (ii) such payment is made in
compliance with the provisions of Section 28(e) and
other applicable state and federal laws; and (iii) in
the opinion of LCMCM, the total commissions paid by the
Fund will be reasonable in relation to the benefits to
the Fund over the long term. In addition, such higher
commissions will not be paid by the Fund with respect
to portfolio transactions in which the Underwriter is
serving as broker to the Fund. The investment advisory
fees paid by the Fund under the Advisory Agreement are
not reduced as a result of LCMCM's receipt of research
services.
Although LCMCM is a newly organized investment adviser
and does not currently have any advisory accounts in
addition to the Fund, LCMCM may take on other advisory
accounts in the future. In the event that LCMCM serves
as investment adviser to clients, in addition to the
Fund, in the future, LCMCM would also place portfolio
transactions for such other advisory accounts. Under
these circumstances, research services furnished by
firms through which the Fund effects its securities
transactions could be used by LCMCM in servicing all of
its accounts;
<PAGE>
that is, not all of such services may be
used by LCMCM in connection with the Fund. LCMCM
believes it would not be possible to measure separately
the benefits from research services to each of the
accounts (including the Fund) managed by it. Because
the volume and nature of the trading activities of the
accounts would not likely be uniform, the amount of
commissions in excess of those charged by another
broker or dealer paid by each account for brokerage and
research services would vary. However, LCMCM believes
such costs to the Fund would not be disproportionate to
the benefits received by the Fund on a continuing
basis. LCMCM would seek to allocate portfolio
transactions equitably whenever concurrent decisions
were made to purchase or sell securities by the Fund
and another advisory account. In some cases, this
procedure could have an adverse effect on the price or
the amount of securities available to the Fund. There
can be no assurance that a particular purchase or sale
opportunity would be allocated to the Fund. In making
such allocations between the Fund and other advisory
accounts, certain factors considered by LCMCM would be
the respective investment objectives, the relative size
of portfolio holdings of the same or comparable
securities, the availability of cash for investment and
the size of investment commitments generally held.
A change in the investments held by the Fund is known
as "portfolio turnover." For instance, a portfolio
turnover rate of 100% would result if all the
securities in a portfolio (excluding securities whose
maturities at acquisition were one year or less) at the
beginning of an annual period had been replaced by the
end of the period. Portfolio turnover generally
involves some expense to the Fund, including brokerage
commissions or dealer mark-ups and other transaction
costs on the sale of securities and reinvestment in
other securities. Such sales may result in realization
of taxable capital gains. The portfolio turnover rate
may vary from year to year, as well as within a year.
Under normal market conditions, the portfolio turnover
rate for the Fund is expected to be approximately 80%
to 130% and generally will not exceed 175%.
TAXATION OF THE FUND AND ITS DISTRIBUTIONS
As indicated under "Federal Taxation of the Fund and
its Distributions" in the Prospectus, the Fund intends
to qualify annually and be treated as a "regulated
investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and, if
so qualified, will not be liable for federal income
taxes to the extent earnings are distributed on a
timely basis. This qualification does not require
government supervision of the Fund's management
practices or policies. However, in order to so
qualify, the Fund must, among other things: (i) derive
at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to
securities loans, gains from the sale or other
disposition of stock or other income derived with
respect to its business of investing in such stock
(including, but not limited to, gains from options or
futures contracts), and (ii) diversify its holdings
such that, at the end of each quarter of each taxable
year, (a) at least 50% of the market value of the
Fund's assets is represented by cash, cash items, U.S.
government securities, securities of other regulated
investment companies and other securities which, with
respect to any one issuer, do not represent more than
5% of the value of the Fund's assets nor more than 10%
of the outstanding voting securities of such issuer,
and (b) not more than 25% of the market value of the
Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or the
securities of other regulated investment companies).
If the Fund qualifies as a regulated investment
company, the Fund will not be subject to federal income
tax on the portion of its investment company taxable
income (i.e., its investment company taxable income as
defined in the Code without regard to the deduction for
dividends paid) and its net capital gain (i.e., the
excess of its net realized long-term capital gain over
its net realized short-term capital loss) which it
distributes to the Fund's shareholders in each taxable
year, provided that it distributes to its shareholders
at least 90% of its net investment income for such
taxable year. If the Fund should fail to qualify as a
regulated investment company in any year, the Fund
would be subject to tax in such year on all of its
taxable income, whether or not the Fund made any
distributions. In addition, amounts not distributed by
a regulated investment company on a timely basis in
accordance with a calendar year distribution
requirement are subject to a 4% excise tax. To avoid
this tax, the Fund must distribute during each calendar
year an amount equal to, at a minimum, the sum of (i)
98% of its net investment income for the calendar year,
(ii) 98% of its capital gain income for the one year
period ending on October 31 of such year (unless an
election is made by a fund with a November or December
year-end to use the fund's fiscal year) and (iii) all
ordinary income and capital gain net income for
previous years that were not previously distributed.
<PAGE>
Dividends paid by the Fund from its net investment
income are taxable as ordinary income to shareholders
of the Fund who are subject to tax. Distributions made
from net capital gains and properly designated by the
Fund as such are taxable to shareholders as long-term
capital gains, regardless of the length of time the
shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or
less, however, is treated as long-term capital loss to
the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's
earnings and profits are treated first as a non-taxable
reduction in the adjusted tax basis of a shareholder's
Fund shares (up to the amount of the shareholder's tax
basis in his or her shares) and, thereafter, constitute
capital gain to such shareholder (provided that Fund
shares are held as a capital asset).
Capital gain dividends may be taxed at a lower rate
than dividends from ordinary income for certain non-
corporate taxpayers. For securities held longer than
one year, the maximum long-term capital gains rate is
20%.
Dividends and distributions by the Fund are generally
taxable to shareholders at the time the dividend or
distribution is made (even if paid or reinvested in
additional Fund shares). However, any dividend
declared by the Fund in October, November or December
of any calendar year, which is payable to Fund
shareholders of record on a specified date in such a
month and which is not paid on or before December 31 of
such year will be treated as being paid by the Fund and
received by Fund shareholders as of December 31 of such
year, provided that the dividend is paid during January
of the following year. After the end of each taxable
year, the Fund will notify shareholders of the federal
income tax status of any dividends and distributions,
or deemed distributions, made by the Fund during such
year.
Gain or loss, if any, recognized on the sale or other
disposition of Fund shares, including repurchases by
the Fund, will be taxed as a capital gain or loss if
the shares are capital assets in the shareholder's
hands and will be taxed as long-term or short-term gain
or loss, as the case may be. A loss realized on a sale
or exchange of Fund shares will be disallowed if other
Fund shares are acquired within a 61-day period
beginning 30 days before and ending 30 days after the
date that the shares are disposed of. The basis of the
shares acquired will be adjusted to reflect the
disallowed loss.
This section is not intended to be a full discussion of
federal income tax laws and the effect of such laws on
Fund shareholders. There may be other federal, state
or local tax considerations applicable to a particular
shareholder. Shareholders are urged to consult their
own tax advisers.
FINANCIAL STATEMENTS
The following audited financial statements of the Fund
are contained herein:
(a) Report of Independent Accountants.
(b) Statement of Assets and Liabilities.
(c) Notes to Statement of Assets and Liabilities.
<PAGE>
LCM INTERNET GROWTH FUND, INC.
Report of Independent Accountants
To the Shareholders and Board of Directors of
LCM Internet Growth Fund, Inc.
In our opinion, the accompanying statement of assets
and liabilities presents fairly, in all material
respects, the financial position of the LCM Internet
Growth Fund, Inc. (the "Fund") at October 6, 1999, in
conformity with generally accepted accounting
principles. This financial statement is the
responsibility of the Fund's management; our
responsibility is to express an opinion on this
financial statement based on our audit. We conducted
our audit of this financial statement in accordance
with generally accepted auditing standards which
require that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used
and significant estimates made by management, and
evaluating the overall financial statement
presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
October 8, 1999
<PAGE>
LCM INTERNET GROWTH FUND, INC.
Statement of Assets and Liabilities
October 6, 1999
ASSETS:
Cash $100,009
Prepaid insurance expense 3,175
--------
Total Assets 103,184
LIABILITIES:
Payable to Adviser 3,175
--------
Total Liabilities 3,175
NET ASSETS $100,009
========
Capital Shares outstanding, $.01 par value;
500,000,000 shares authorized 10,583
========
Net asset value per share $9.45
========
The accompanying notes to the financial statement are an integral
part of this statement.
<PAGE>
LCM INTERNET GROWTH FUND, INC.
Notes to the Financial Statement
October 6, 1999
1. Organization
LCM Internet Growth Fund, Inc. (the "Fund") was
incorporated under the laws of the State of Maryland
on August 24, 1998. The Fund is a non-diversified,
closed-end management investment company registered
under the Investment Company Act of 1940, as
amended. The Fund has had no operations to date
other than those relating to organization matters
and the sale of 10,583 shares of its common stock to
its initial investors.
2. Significant Accounting Policies
a. Organization and Prepaid Insurance Expense
Expenses incurred by the Fund in connection
with the organization and initial public
offering were assumed by LCM Capital
Management, Inc. ("LCMCM"), the Fund's Adviser.
Prepaid insurance expense was an expense
advanced by the Adviser and is deferred and
amortized over twelve months.
b. Federal Income Taxes
The Fund intends to comply with the
requirements of the Internal Revenue Code
necessary to qualify as a regulated investment
company and to make the requisite distributions
of income and capital gains to its shareholders
sufficient to relieve it from all or
substantially all Federal income taxes.
c. Use of 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 and
disclosure of contingent assets and liabilities
at the date of the financial statements.
Actual results could differ from those
estimates.
3. Investment Adviser
The Fund has an Investment Advisory Agreement (the
"Agreement") with LCMCM (the "Adviser"), with whom
certain officers and directors of the Fund are
affiliated, pursuant to which the Adviser manages
the Fund's investments and business affairs, subject
to the supervision of the Fund's Board of Directors.
Under the Agreement, the Fund compensates the
Adviser for its investment management services at
the annual rate of 1.00% of the Fund's average daily
net assets.
