LCM INTERNET GROWTH FUND, INC.
A MARYLAND CORPORATION
SEMI-ANNUAL REPORT
SEPTEMBER 30, 2000
223 W. Lake Street
Chicago, Illinois 60606
312-705-3028
As of September 30, 2000 the issuer had outstanding
2,582,883 shares of Common Stock ($0.01 par value)
LCM INTERNET GROWTH FUND, INC.
TABLE OF CONTENTS
Page
----
I. Letter to Shareholders 3
II. Abbreviated Table of Investment Results 4
III. Fund Description 5
IV. Investment Objective and Strategy 5
V. Risk Factors and Website 6
VI. Schedule of Investments 7-9
VII. Statement of Assets and Liabilities 10
VIII. Statement of Operations 11
IX. Statement of Changes in Net Assets 12
X. Financial Highlights 13
XI. Notes to Financial Statements 14-16
XII. Top Forty Equity Positions (with prior quarter rank). 17
XIII. Annual Meeting of Stockholders 18
XVI. Stock Repurchases 18
XVII. Frequently Asked Questions 19
XVIII. Board and Officers 20
LCM INTERNET GROWTH FUND, INC.
LETTER TO SHAREHOLDERS
In the mid-80's businesses used significant portions of their capital budgets to
acquire computer systems, and in so doing the computer stocks became the
darlings of Wall Street. Operating computers at that time required technical
programming skills, and because many companies didn't see an immediate return on
investment from productivity improvement quite a few reduced their capital
spending in this area. Over the next few years, companies like Microsoft
produced software that made computers more user friendly and accessible to a
larger number of workers. When businesses saw productivity improvements, the
spending on computers, peripherals and software exploded. Perceptions remained
cautious and the stock prices of the leaders (Microsoft, Intel, etc.) barely
kept pace with the Dow Jones Industrials through the end of 1992, but since
then have produced returns ten times those of the index.
The Internet appears to be receiving a similar negative perception. According
to CyberAtlas, the number of Internet users has grown from less than 20 million
in 1995 to over 200 million in 2000. The problem is that the infrastructure has
not kept pace. For many users, the Internet is still too slow and difficult to
use, and consequently usage rates have decelerated. We foresee accelerated
spending rates on infrastructure to keep up with the demand for ease of use and
increased functionality.
Ultimately, the driving force behind the continued expansion of the Internet
will be businesses seizing upon the improved efficiencies provided by the
Internet. We believe that companies that learn to integrate their business
functions with the Internet will have extreme competitive advantages over those
that don't. Corporations will find that the Internet supplies answers for their
ever growing enterprises: better communication through less layers of
management, increased productivity, shorter product-to-market cycles, the
ability to shrink order-cycle times and decrease inventories as well as minimize
and eliminate obsolete inventories.
Projections of a trillion dollar E-Commerce economy have not gone away, and
companies in the E-Commerce area will continue to grow their business faster,
smarter, and more profitably. To that end, the Internet will continue to evolve
and the infrastructure required for it to meet its full potential will be built
out. Some of the current focal areas are data storage, networks and network
management, optic and broadband implementation.
In 2001 we believe you will see more discussion of "Business-to-Government" or
"B2G." Regardless of the outcome of the election, monies will be accelerated in
this area and the purchasing cycle for the Pentagon will begin to move to online
replenishment. This will not be an overnight cure, but it is the beginning and
it has the potential for huge tax dollar savings in the future. We will try to
add to the Fund's portfolio those stocks that we believe will benefit from the
looming B2G marketplace.
The Internet is a work in progress and the economic and social impact to our
business and personal world is still in the formative stages. Your Fund
continues to look forward to the long-term growth of the Internet.
ABBREVIATED TABLE OF INVESTMENT RESULTS
FOR PERIOD ENDED
SEPTEMBER 30, 2000
LCM INTERNET GROWTH FUND - NAV*<F1>
TOTAL
RETURN
NAV 1 3 6 CALENDAR 12 FROM
RETURNS MONTH MONTH MONTH YTD MONTH INCEPTION*<F1>
------- ----- ----- ----- --- ----- --------------
-9.99% -2.56% -19.46 -11.91% n/a 27.57%
LCM INTERNET GROWTH FUND - MARKET VALUE*<F1>
TOTAL
RETURN
MARKET 1 3 6 CALENDAR 12 FROM
RETURNS MONTH MONTH MONTH YTD MONTH INCEPTION*<F1>
------- ----- ----- ----- --- ----- --------------
-10.90% -3.47% -26.85 -30.01% n/a -9.02%
*<F1> Returns for periods of less than one year are not annualized
PER SHARE DATA
September 30, 2000 March 31, 2000 Inception Date
------------------ -------------- --------------
Market Price $8.69 $12.44 $10.00**<F2>
Net Asset Value $11.44 $14.81 $9.35***<F3>
**<F2> The Inception Date is October 27, 1999, the day the Fund first traded
on AMEX
***<F3> The Inception Date is October 29, 1999, the day the Fund's initial
public offering closed
Investors should be aware that the information contained in this page is
historical data and that past performance is not indicative of future investment
results. Shares, when sold, may be worth more or less than their original cost.
FUND DESCRIPTION
The Fund was organized on August 24, 1998 as a corporation under the laws of the
State of Maryland. The Fund is a non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940. LCM
Capital Management, Inc. ("LCMCM"), a registered investment advisor, is the
Fund's Investment Advisor. As of September 30, 2000, there were 2,582,883
shares of the Fund's common stock issued and outstanding.
INVESTMENT OBJECTIVE AND STRATEGY
The Fund's investment objective is capital appreciation through investment in a
portfolio consisting primarily of equity securities issued by companies that
LCMCM believes will benefit from the growth of the Internet. Equity securities
are defined to include common stocks, securities convertible into common stocks,
such as convertible preferred stocks, bonds, notes and debentures, and American
Depository Receipts ("ADRs"). Current income is not an investment consideration.
The Fund's investment objective is a fundamental policy that may not be changed
without the approval of a majority of the Fund's outstanding voting securities.
Under normal market conditions, at least 65% of the Fund's total assets are
invested in the equity securities of companies that engage in Internet and
Internet-related activities. Under favorable market conditions, the Fund
typically is substantially fully-invested in such 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 daily cash needs.
Under unusual circumstances, as a defensive technique, the Fund may retain a
larger portion of the 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. For example, in April and May of 2000 the Fund
increased its cash position beyond 35% of assets due to adverse market
conditions. To the extent the Fund engages in temporary investment strategies,
the Fund may not achieve its investment objective.
In order to assess Internet-related opportunities for the Fund, LCMCM has
divided those companies that participate in the Internet into three major areas
consisting of sectors and further broken down to sub-sectors. The three major
areas are: infrastructure, content and e-commerce. Infrastructure refers to the
basic connections, networks and computer and server hardware necessary to convey
information from point A to point B. Content includes those sites, services,
software and applications necessary to facilitate user access to information
and/or services on the web. E-commerce is the structure necessary to conduct
business-to-business, consumer-to-business and government-to-business
transactions.
Because the Internet is so dynamic, LCMCM continues to closely monitor the
Internet industry for emerging and obsolete sectors and sub-sectors. For each
identified sub-sector, LCMCM evaluates the companies, both public and private,
that are vying for leadership positions. Generally, such leaders are added to
the Fund's holdings. However, like the sectors and sub-sectors themselves,
these leaders will not remain static. The evaluation of changes among the
leaders will be a continual process.
LCMCM expects that approximately 85% of the Fund's Internet-related equity
investments will be divided among the leaders of the identified sub-sectors. As
the leaders of the identified sub-sectors change, the Fund's investments are
rebalanced so as to replicate as nearly as possible the current status of the
sub-sector leaders. Such rebalancing increases the Fund's transactional
expenses and portfolio turnover. The weighting of the investment in each sub-
sector is partly determined by a proprietary quantitative program overlapping
the portfolio. The Fund expects to invest up to the remaining 15% of its equity
investments in special situations which will generally be in companies that do
not have the historical basis necessary for the Fund's model or involve emerging
technology.
RISK FACTORS
An investment in shares of the Fund involves a number of risks. As a result,
there can be no assurance that the Fund will achieve its investment objective.
Due to the risks inherent in the securities in which the Fund invests, the Fund
should not be considered a complete investment program. You should consider the
following risk factors in evaluating an investment in shares of the Fund.
Volatility of Investments The market prices of the securities in which the Fund
-------------------------
invests are likely to be highly volatile and are subject to wide fluctuations,
which may result in similar fluctuations in the net asset value of the Fund's
shares.
Concentration on the Information Technology Industry The net asset value of the
----------------------------------------------------
Fund's shares is especially influenced by factors specific to the information
technology industry and may fluctuate more than the value of shares in a
portfolio investing in a broader range of industries.
Investments in Smaller Companies and/or Illiquid Securities Because the
-----------------------------------------------------------
Internet is a relatively new development, many of the companies in which the
Fund invests are small with little prior operating history, and certain of these
companies have securities for which no readily available markets exists, which
are restricted as to resale or are otherwise highly illiquid.
Discount from Net Asset Value Shares of closed-end management investment
-----------------------------
companies frequently trade at a discount to their net asset value.
Initial Public Offerings From time to time, the Fund invests in companies at
------------------------
the initial public offering stage. The Fund has no assurance that it will
continue to have access to such investments, or that any such investments will
be profitable for the Fund.
For a more complete discussion of the Fund's risk factors, please see the Fund's
initial public offering prospectus.
WWW.LCMFUNDS.COM
Shareholders can get updates on the Fund's net asset value and stock price at
the Fund's website, www.lcmfunds.com. Investors will also find links to the
----------------
Fund's quarterly and annual reports, as well as press releases issued by the
Fund.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
SHARES MARKET VALUE
------ ------------
COMMON STOCKS - 96.4%**<F5>
BUSINESS SERVICES - 6.2%**<F5>
87,386 Be Free, Inc. *<F4> $ 371,390
100,000 e4L, Inc. *<F4> 23,437
5,000 Luminant Worldwide Corporation *<F4> 14,844
17,000 MarchFirst, Inc. *<F4> 266,688
10,000 Sapient Corporation *<F4> 406,875
6,200 Scient Corporation *<F4> 129,812
5,000 TMP Worldwide Inc. *<F4> 402,500
15,000 Zengine, Inc. *<F4> 211,875
-----------
1,827,421
-----------
COMPUTERS AND ELECTRONICS - 10.3%**<F5>
3,000 CTS Corporation 151,875
793 Dell Computer Corporation *<F4> 24,434
6,000 EMC Corporation *<F4> 594,750
26,000 M-Systems Flash Disk Pioneers Ltd. *<F4> f<F6> 992,875
14,000 Robinson Nugent, Inc.*<F4> 238,000
6,000 SanDisk Corporation *<F4> 400,500
19,000 Silicon Storage Technology, Inc. *<F4> 516,563
1,000 Sun Microsystems, Inc. *<F4> 116,750
-----------
3,035,747
-----------
E-COMMERCE - 11.6%**<F5>
3,000 Ariba, Inc. *<F4> 429,797
15,000 Commerce One, Inc. *<F4> 1,177,500
5,000 eBay, Inc. *<F4> 343,437
10,000 Network Commerce Inc. *<F4> 55,937
9,000 PurchasePro.com, Inc. *<F4> 790,875
18,000 VerticalNet, Inc. *<F4> 632,250
-----------
3,429,796
-----------
FIBER OPTICS - 5.7%**<F5>
1,000 Corning Incorporated 297,000
500 Corvis Corporation *<F4> 30,523
6,000 Finisar Corporation *<F4> 290,250
3,120 JDS Uniphase Corporation *<F4> 295,425
7,000 Sycamore Networks, Inc. *<F4> 756,000
500 TyCom, Ltd. *<F4> f<F6> 19,188
-----------
1,688,386
-----------
FINANCIAL SERVICES - 0.2%**<F5>
1,062 American Express Company 64,517
-----------
INTERNET CONTENT - 5.0%**<F5>
5,556 America Online, Inc. *<F4> 298,635
10,000 Infonautics, Inc. *<F4> 21,250
6,000 InfoSpace, Inc. *<F4> 181,500
3,000 Liberate Technologies, Inc. *<F4> 86,812
15,000 Multex.com Inc. *<F4> 256,875
6,930 Yahoo! Inc. *<F4> 630,630
-----------
1,475,702
-----------
NETWORKING PRODUCTS - 13.2%**<F5>
2,760 Brocade Communications Systems, Inc. *<F4> 651,360
2,000 Emulex Corporation *<F4> 245,000
8,000 Foundry Networks, Inc. *<F4> 535,500
30,000 IBS Interactive, Inc. *<F4> 73,125
9,000 Information Resource Engineering, Inc. *<F4> 272,250
9,000 JNI Corp. *<F4> 801,000
3,972 Juniper Networks, Inc. *<F4> 869,620
10,000 Optibase Ltd. *<F4> f<F6> 175,625
8,000 Stratos Lightwave, Inc. *<F4> 258,000
-----------
3,881,480
-----------
NETWORK SECURITY - 2.8%**<F5>
2,000 Check Point Software Technologies Ltd. *<F4> f<F6> 315,000
10,000 Network Associates, Inc. *<F4> 226,250
121,500 V-ONE Corporation *<F4> 288,562
-----------
829,812
-----------
SEMICONDUCTORS - 14.1%**<F5>
2,108 Broadcom Corporation Class A*<F4> 513,825
6,000 Conexant Systems, Inc. *<F4> 251,250
4,000 Integrated Device Technology, Inc. *<F4> s<F7> 362,000
18 Intel Corporation 748
32,500 Intersil Holding Corporation *<F4> 1,620,938
51,000 Kopin Corporation *<F4> 918,000
10,000 Oak Technology, Inc. *<F4> 273,750
508 PMC-Sierra, Inc. *<F4> 109,347
2,694 Texas Instruments Incorporated 127,123
-----------
4,176,981
-----------
SOFTWARE - 15.9%**<F5>
2,000 ANTs SOFTWARE.COM *<F4> 23,500
400 AvantGo, Inc. *<F4> 8,000
2,000 BEA Systems, Inc. *<F4> 155,750
11,900 Datastream Systems, Inc. *<F4> 153,213
5,500 i2 Technologies, Inc. *<F4> 1,028,844
3,500 Informatica Corporation *<F4> 326,375
5,000 IONA Technologies PLC ADR *<F4> f<F6> 347,500
546 Microsoft Corporation *<F4> 32,931
4,022 Oracle Corporation *<F4> 316,732
5,000 SpeechWorks International *<F4> 310,000
7,500 VERITAS Software Corporation *<F4> 1,065,000
13000 Vitria Technology, Inc. *<F4> 606,125
6,938 Wind River Systems, Inc. *<F4> 332,590
-----------
4,706,560
-----------
TELECOMMUNICATION EQUIPMENT - 4.5%**<F5>
4,684 ADC Telecommunications, Inc. *<F4> 125,956
8,000 Advanced Fibre Communications, Inc. *<F4> 303,000
10,000 AudioCodes Ltd. *<F4> f<F6> 851,250
704 Nortel Networks Corporation f<F6> 41,932
-----------
1,322,138
-----------
TELECOMMUNICATION SERVICES - 3.5%**<F5>
7,000 PanAmSat Corporation *<F4> 223,563
14,000 Wireless Facilities, Inc. *<F4> 807,625
-----------
1,031,188
-----------
WIRELESS EQUIPMENT - 3.4%**<F5>
14,000 Adaptive Broadband Corporation *<F4> 273,000
28,500 Airspan Networks Inc. *<F4> f<F6> 327,750
1,000 Nokia Oyj ADR f<F6> 39,813
8,400 Proxim, Inc. *<F4> 373,800
-----------
1,014,363
-----------
TOTAL COMMON STOCKS (Cost $25,774,258) 28,484,091
-----------
WARRANTS - 0.0%**<F5>
7,500 IBS Interactive, Inc. v<F8> (Acquired 3/15/00)
Expiration March 14, 2003
Exercise Price $13.75 8,850
-----------
TOTAL WARRANTS (Cost $18,000) 8,850
-----------
PRINCIPAL
AMOUNT/SHARES
-------------
SHORT-TERM INVESTMENTS - 5.3%**<F5>
VARIABLE RATE DEMAND NOTES - 5.2% d<F9>
629,208 American Family Financial Services Inc. 6.24% 629,208
138,365 Wisconsin Corporate Central Credit Union, 6.29% 138,365
785,127 Wisconsin Electric Power Company, 6.24% 785,127
-----------
TOTAL VARIABLE RATE DEMAND NOTES 1,552,700
-----------
INVESTMENT COMPANY - 0.1%**<F5>
15,000 Star Treasury Fund, 5.44% 15,000
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,567,700) 1,567,700
-----------
TOTAL INVESTMENTS (Cost $27,359,958) $30,060,641
-----------
-----------
CONTRACTS
(100 SHARES
PER CONTRACT)
-------------
CALL OPTIONS WRITTEN - (0.0%)**<F5>
10 Integrated Device Technology, Inc.
Expiration: October 2000
Exercise Price: $95.00 $ 6,625
-----------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $9,825) $ 6,625
-----------
-----------
*<F4> Non-income producing security
**<F5> Computed as a percentage of net assets
f<F6> Foreign security
s<F7> Security pledged as collateral for written options
ADR American Depository Receipt
v<F8> Fair valued security
d<F9> Variable rate demand notes are considered short-term obligations and
are payable on demand. Interest rates change periodically on
specified dates. The rates listed are as of September 30, 2000.
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
(UNAUDITED)
ASSETS:
Investments, at market value (cost $27,359,958) $30,060,641
Cash 69,565
Dividends and interest receivable 8,580
Other assets 23,376
-----------
Total assets 30,162,162
-----------
LIABILITIES:
Payable for investments purchased 499,090
Options written, at value (premiums received $9,825) 6,625
Payable to Adviser 23,882
Accrued expenses and other liabilities 83,247
-----------
Total liabilities 612,844
-----------
NET ASSETS $29,549,318
-----------
-----------
NET ASSETS CONSIST OF:
Common stock, at par ($0.01), 500 million shares authorized $ 26,406
Additional paid-in capital 24,677,104
Cost of 57,700 shares held in treasury (532,994)
Accumulated undistributed net realized gains 2,674,919
Net unrealized appreciation on:
Investments 2,700,683
Written options 3,200
-----------
Net assets $29,549,318
-----------
-----------
Net assets, per share of Common Stock
(based on 2,582,883 shares outstanding) $ 11.44
-----------
-----------
Market value, per share of Common Stock $ 8.6875
-----------
-----------
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
INVESTMENT INCOME:
Interest income $ 217,307
Dividend income 3,153
-----------
Total investment income 220,460
-----------
EXPENSES:
Investment advisory fee 156,766
Administration fee 18,117
Shareholder servicing and accounting costs 27,999
Custody fees 11,895
Registration 3,843
Professional fees 18,483
Reports to shareholders 23,725
Directors' fees and expenses 18,300
Other 10,980
-----------
Total expenses 290,108
-----------
Net investment loss (69,648)
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Realized gain (loss) on:
Long transactions (3,158,914)
Short sale transactions (3,109)
Options expired or closed 275,337
Change in unrealized appreciation (depreciation) on:
Investments (4,655,572)
Written options (90,279)
-----------
Net realized and unrealized gain (loss) on investments (7,632,537)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(7,702,185)
-----------
-----------
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
Six months For the Period
Ended October 29, 1999 (1)<F10>
September 30, 2000 to March 31, 2000
------------------ -------------------------
(unaudited)
<S> <C> <C>
OPERATIONS:
Net investment loss $ (69,648) $ (139,316)
Net realized gain (loss) on:
Long transactions (3,158,914) 7,022,071
Short transactions (3,109) 11,684
Options contracts expired or closed 275,337 57,105
Change in unrealized appreciation (depreciation) on:
Investments (4,655,572) 7,356,255
Written options (90,279) 93,479
----------- -----------
Net decrease in net assets resulting from operations (7,702,185) 14,401,278
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold (2,640,583 shares) - 24,703,510
Cost of treasury shares repurchased (57,700 shares) (532,993) -
----------- -----------
Net decrease in net assets resulting from capital share transactions (532,993) 24,703,510
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (1,320,292) -
----------- -----------
Total distributions (1,320,292) -
----------- -----------
TOTAL DECREASE IN NET ASSETS (9,555,470) 39,104,788
----------- -----------
NET ASSETS
Beginning of period 39,104,788 -
----------- -----------
End of year $29,549,318 $39,104,788
----------- -----------
----------- -----------
</TABLE>
(1)<F10> Commencement of Operations
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
For the Period
Six Months Ended October 29, 1999 *<F11>
September 30, 2000 to March 31, 2000
------------------ -----------------------
<S> <C> <C>
Net asset value, beginning of period $14.81 $9.35
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.03) (0.05)
Net realized and unrealized loss on investments (2.84) 5.51
------ ------
Net decrease in net asset value from operations (2.87) 5.46
------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (0.50) -
------ ------
Total Distributions (0.50) -
------ ------
Net asset value, end of period $11.44 $14.81
------ ------
------ ------
TOTAL RETURN
Market value (26.85)%**<F12> 24.38%
Net asset value (19.46)%**<F12> 58.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's ommitted) $29,549 $39,105
Ratio of expenses to average net assets 1.85%***<F13> 1.78%
Rato of net investment loss to average net assets (0.44)%***<F13> (0.94)%
Portfolio turnover rate 214.44% 168.62%
</TABLE>
*<F11> Commencement of operations.
**<F12> Not annualized.
***<F13> Annualized.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
LCM Internet Growth Fund, Inc. (the "Fund") was incorporated under the laws of
the state of Maryland on August 24, 1998 and is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. The Fund commenced operations on October 29, 1999. The investment
objective of the Fund is to seek capital appreciation by investing in a
portfolio consisting primarily of equity securities issued by companies that the
Fund's investment adviser 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.
The following is a summary of significant accounting policies followed by the
Fund.
a) Investment Valuation - Common stocks and securities sold short that are
listed on a security exchange or quoted on NASDAQ are valued at the last quoted
sales price on the day the valuation is made. Price information on listed
stocks is taken from the exchange where the security is primarily traded. If
such securities were not traded on the valuation date, they are valued at the
average of the current bid and asked price. Unlisted equity securities for
which market quotations are readily available are valued at the latest quoted
bid price. Debt securities are valued at the latest bid price. Investments in
open-end mutual funds are valued at the net asset value on the day the valuation
is made. Short-term instruments (those with remaining maturities of 60 days or
less) are valued at amortized cost, which approximates market value. Other
assets and securities for which no quotations are readily available are valued
at fair value as determined in good faith by management in accordance with
procedures approved by the Board of Directors. At September 30, 2000, such
securities represent 0.03% of the Fund's net assets.
b) Written Option Accounting - The Fund writes (sells) call options for trading
purposes and writes put options for hedging purposes. When the Fund writes
(sells) an option, an amount equal to the premium received by the Fund is
included in the Statement of Assets and Liabilities as an asset and an
equivalent liability. The amount of the liability is subsequently marked-to-
market to reflect the current value of the option written. By writing an
option, the Fund may become obligated during the term of the option to deliver
or purchase the securities underlying the option at the exercise price if the
option is exercised. Option contracts are valued at the average of the current
bid and asked price reported on the day of valuation. When an option expires on
its stipulated expiration date or the Fund enters into a closing purchase
transaction, the Fund realizes a gain or loss if the cost of the closing
purchase transaction differs from the premium received when the option was sold
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When an option is
exercised, the premium originally received decreases the cost basis of the
underlying security (or increases the proceeds on securities sold short) and the
Fund realizes a gain or loss from the sale of the security (or closing of the
short sale). All written options must be fully collateralized. The Fund
maintains segregated collateral, as appropriate, consisting of cash, U.S.
Government securities or other liquid assets in an amount at least equal to the
market value of the purchase obligation of put options or the market value of
the instrument underlying the contract for call options. See Note 3 for options
written by the Fund for the period ended September 30, 2000.
c) Purchased Option Accounting - Premiums paid for option contracts purchased
are included in the Statement of Assets and Liabilities as an asset. Option
contracts are valued at the average of the current bid and asked price reported
on the day of valuation. When option contracts expire or are closed, realized
gains or losses are recognized without regard to any unrealized gains or losses
on the underlying securities. Put and call option contracts are held by the
Fund for trading and hedging purposes.
d) Short Sales - The Fund may engage in short sale transactions. For financial
statement purposes, an amount equal to the short sale proceeds is included in
the Statement of Assets and Liabilities as an asset and an equivalent liability.
The amount of the liability is subsequently marked-to-market to reflect the
current value of the short position. Subsequent fluctuations in the market
prices of securities sold, but not yet purchased, may require the Fund to
purchase the securities at prices which may differ from the market value
reflected in the Statement of Assets and Liabilities. The Fund is liable for
any dividends payable on securities while those securities are in a short
position. As collateral for its short positions, the Fund is required under the
1940 Act to maintain segregated assets consisting of cash, cash equivalents or
liquid securities. These segregated assets are required to be adjusted daily to
reflect changes in the value of the securities sold short. At September 30,
2000, the Fund did not hold any short positions.
e) Foreign Securities - Investing in securities of foreign companies and
foreign governments involves special risks and considerations not typically
associated with investing in U.S. companies and the U.S. government. These
risks include revaluation of currencies and future adverse political and
economic developments. Moreover, securities of many foreign companies and
foreign governments and their markets may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies and the U.S.
government.
f) Federal Income Taxes - It is the Fund's policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute, at least annually, substantially all of its net investment income
and net realized capital gains to shareholders. Therefore, no provision for
federal income or excise taxes is required.
g) Investment Income and Investment Transactions - Investment transactions are
recorded on trade date. The Fund determines the gain or loss realized from
investment transactions by comparing the original cost of the security lot sold
with the net sales proceeds. Dividend income (or expense on securities sold
short) is recognized on the ex-dividend date or as soon as information is
available to the Fund, and interest income is recognized on an accrual basis.
h) Distributions to Shareholders - Dividends and distributions to shareholders
are recorded on the ex-dividend date. Income and capital gains distributions
are determined in accordance with federal tax regulations and may differ from
those determined in accordance with generally accepted accounting principles.
To the extent these differences are permanent, such amounts are reclassified
within the capital accounts based on their federal tax basis treatment;
temporary differences do not require such reclassification.
i) 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 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.
2. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments,
options and short positions) aggregated $61,408,829 and $50,145,271,
respectively, for the period ended September 30, 2000.
At September 30, 2000, gross unrealized appreciation and depreciation of
investments were as follows:
Appreciation $ 6,271,942
Depreciation (3,536,450)
-----------
Net appreciation on investments $ 2,735,492
3. OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the period
ended September 30, 2000, were as follows:
PREMIUM AMOUNT NUMBER OF CONTRACTS
Options outstanding at
March 31, 2000 $227,604 90
Options written 222,020 360
Options closed (260,324) (370)
Options expired (179,475) (70)
-------- ----
Options outstanding at
September 30, 2000 $9,825 10
-------- ----
-------- ----
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund has entered into an investment advisory agreement with LCM Capital
Management, Inc. ("LCMCM"). Pursuant to this agreement, LCMCM is entitled to
receive a fee, calculated daily and payable monthly, at the annual rate of 1% as
applied to the Fund's daily net assets.
Firstar Mutual Fund Services, LLC serves as administrator and accounting
services agent for the Fund. Firstar Bank, N.A. serves as transfer agent,
dividend paying agent, registrar, custodian for the Fund.
5. STOCK REPURCHASE PROGRAM
The Fund may repurchase its shares at such time as the Fund's shares are trading
at a greater than 10% discount to the Fund's net asset value. During the period
ended September 30, 2000, the Fund purchased 57,700 shares of capital stock on
the open market at a cost of $532,993. The weighted average discount of these
purchases, comparing the purchase price to the net asset value at the time of
purchase, was 22.6%. No limit has been placed on the number of shares to be
purchased by the Fund other than those imposed by federal securities laws. All
purchases will be made in accordance with federal securities laws. The shares
purchased are held in treasury.
6. CAPITAL STOCK
There were no transactions in shares of common stock for the year ended March
31, 2000. Transactions in shares of common stock for the period ended September
30, 2000 were as follows:
Shares outstanding, beginning of period 2,640,583
Shares repurchased (57,700)
---------
Shares, outstanding, end of period 2,582,883
---------
---------
TOP FORTY EQUITY POSITIONS
<TABLE>
RANK RANK PERCENTAGE OF
9/30/2000 3/31/2000 SECURITY VALUE NET ASSETS
<S> <C> <C> <C> <C>
1 22 Intersil Holding Corporation $1,620,938 5.48%
2 - Commerce One, Inc. 1,177,500 3.98%
3 3 VERITAS Software Corporation 1,065,000 3.60%
4 32 i2 Technologies, Inc 1,028,844 3.48%
5 16 M -Systems Flash Disk Pioneers Ltd. 992,845 3.36%
6 - Kopin Corporation 918,000 3.11%
7 1 Juniper Networks, Inc. 869,620 2.94%
8 - Audiocodes LTD 851,250 2.88%
9 - Wireless Facilities, Inc. 807,625 2.73%
10 - JNI Corp. 801,000 2.71%
11 - Purchasepro.com 790,875 2.68%
12 42 Sycamore Networks 756,000 2.56%
13 7 Brocade Communications Systems, Inc. 651,360 2.20%
14 - Verticalnet, Inc. 632,250 2.14%
15 24 Yahoo! Inc. 630,630 2.13%
16 - Vitria Technology, Inc. 606,125 2.05%
17 - EMC Corporation 594,750 2.01%
18 - Foundry Networks 535,500 1.81%
19 - Silicon Storage Technology Inc. 516,563 1.75%
20 5 Broadcom Corporation Class A 513,825 1.74%
21 13 Ariba, Inc. 429,797 1.45%
22 - Sapient Corporation 406,875 1.38%
23 30 TMP Worldwide, Inc. 402,500 1.36%
24 - Sandisk Corp. 400,500 1.35%
25 21 Proxim, Inc. 373,800 1.26%
26 81 Be Free, Inc. 371,391 1.26%
27 - Integrated Device Technology, Inc. 362,000 1.22%
28 - Iona Technologies PLC 347,500 1.18%
29 56 EBay, Inc. 343,438 1.16%
30 75 Wind River Systems, Inc. 332,590 1.13%
31 - Airspan Networks 327,750 1.11%
32 - Informatica Corp. 326,375 1.10%
33 4 Oracle Systems 316,733 1.07%
34 19 Check Point Software Technologies Ltd 315,000 1.07%
35 - Speechworks International 310,000 1.05%
36 9 Advanced Fibre Communications, Inc. 303,000 1.03%
37 100 America Online, Inc. 298,635 1.01%
38 - Corning Corp. 297,000 1.00%
39 15 JDS Uniphase Corp. 295,425 1.00%
40 94 Finisar Corp. 290,250 0.98%
</TABLE>
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders of the Fund was held on June 29, 2000. At
the meeting all the directors of the Fund were re-elected by the following vote
of the holders of the Common Stock:
Votes For Votes Withheld
--------- --------------
Michael Grady 2,669,064 8,414
Barry Glasgow 2,665,973 11,505
David Schwering 2,669,064 8,414
Michael Radnor 2,668,776 8,702
George Kraft 2,669,064 8,414
Lawrence Harb 2,668,064 9,414
In addition, the selection of PricewaterhouseCoopers, LLP as independent
auditors of the Fund for the following fiscal year was ratified by the
shareholders by the following vote:
Votes For Votes Against Votes Withheld
--------- ------------- --------------
PricewaterhouseCoopers 2,666,932 6,427 4,119
STOCK REPURCHASES
At the initial meeting of the Board of Directors, the Board authorized the
Fund's managers to repurchase shares of the Fund at such times as the Fund's
shares are trading at a substantial discount to NAV (greater than 10%).
Notification was made in the Fund's Prospectus and the authority to repurchase
shares was restated in the Fund's Annual Report dated as of March 31, 2000.
In the quarter ended September 30, 2000 the Fund repurchased 57,700 shares on
the open market. This repurchase amounted to approximately 2.2% of the Fund's
outstanding shares. As of September 30, 2,582,883 shares of the Fund remained
outstanding.
This report, including the financial statements herein, is transmitted to the
shareholders of LCM Internet Growth Fund, Inc. for their information. It is not
a prospectus, circular or representation intended for use in the purchase or
sale of shares of the Company or of any securities mentioned in the report. The
rates of return will vary and the market value of an investment will fluctuate.
Shares, if sold, may be worth more or less than their original cost. Past
performance is not indicative of future investment results.
FREQUENTLY ASKED QUESTIONS
HOW DOES ONE INVEST IN LCM INTERNET GROWTH FUND?
Unlike common mutual funds, the Fund is a closed-end investment company, which
means that its shares of common stock are bought and sold in the same manner as
other publicly listed companies. Shares of the Fund trade on the American Stock
Exchange under the symbol "FND". Shares of FND may be bought or sold through
any registered investment securities dealer, including online trading firms.
WHAT IS THE DIFFERENCE BETWEEN CLOSED-END AND OPEN-END FUNDS?
Both types of investment companies are authorized by the Investment Company Act
of 1940 and both are commonly called mutual funds. However, there are important
differences between the two. Open-end funds continually issue and redeem their
own securities at net asset value, whereas closed-end funds offer their
securities through an initial public offering and the shares are thereafter
traded on an exchange at a price determined by market conditions, and which may
not necessarily correlate with the fund's net asset value. Open-end funds are
subject to unpredictable capital inflows and outflows, but also have the
opportunity to grow at a rapid rate by adding additional investors and/or
investment capital. Closed-end funds managers have greater certainty as to the
assets under management, but growth of a closed-end fund comes almost entirely
from the appreciation of its assets. For more information on closed end funds,
including articles by industry analysts, see www.cefa.com/research.
---------------------
THE FUND INVESTS IN INTERNET COMPANIES. WHAT IS AN INTERNET COMPANY?
These days, it seems like every company thinks it is an "Internet company."
However, an established company announcing a "new Internet strategy" does not
necessarily make that company a true Internet player. The Internet is a
pervasive industry that encompasses a great number of companies beyond the
obvious dotcoms like AOL, Amazon and Yahoo! The Fund's manager generally looks
for companies whose main business falls within one or more of the following
categories in the Internet industry: Infrastructure, Content and E-Commerce.
HOW CAN ONE FIND INFORMATION ABOUT THE FUND'S STOCK PRICE, NET ASSET VALUE AND
TRADING ACTIVITY?
The Fund's end-of-day stock price and net asset value (NAV) are generally posted
on the Fund's website, www.lcmfunds.com on a daily basis. Trading information
----------------
for FND can be obtained from any source that lists information for stocks listed
on AMEX, such as major newspapers and online quotation websites.
ARE STOCK CERTIFICATES AVAILABLE?
Yes. While the majority of shareholders hold their shares in book entry form,
all record shareholders are entitled to receive a certificate evidencing their
shares if so desired. To request a stock certificate, or to replace a lost,
damaged or stolen certificate, please contact your broker or Firstar Bank,
P.O. Box 1118, Cincinnati, Ohio 45201, Attention: Transfer Agent for LCM
Internet Growth Fund.
DOES THE FUND PAY REGULAR DIVIDENDS?
The Fund does not pay regular dividends, but from time to time it may make
special distributions to shareholders. Should the Board declare a regular
dividend or an additional special distribution in the future, the Fund will make
a prior notification to shareholders through a press release to that effect.
Visit www.lcmfunds.com regularly to keep up to date with announcements by the
----------------
Fund.
BOARD OF DIRECTORS
MICHAEL R. GRADY, Jr. BARRY J. GLASGOW
President Chief Investment Officer
LCM Capital Management, Inc. LCM Capital Management, Inc.
Chicago, Illinois Chicago, Illinois
DAVID VON VISTAUXX, Ph.D.*<F14> MICHAEL RADNOR, Ph.D.
President and Director Professor
American Communication & Computation, Inc. Kellogg Graduate School
Silver Spring, Maryland of Management
Northwestern University
Evanston, Illinois
GEORGE D. KRAFT, Ph.D. LAWRENCE E. HARB
Professor President
I.I.T. Stuart Graduate School IT Risk Managers, Inc.
of Business Okemos, Michigan
Chicago, Illinois
EXECUTIVE OFFICERS
MICHAEL R. GRADY, Jr. BARRY J. GLASGOW
President and Treasurer Vice President and Secretary
INVESTMENT ADVISOR
LCM CAPITAL MANAGEMENT, INC.
223 W. Lake Street
Chicago, Illinois 60606
312-705-3028
CUSTODIAN, TRANSFER AGENT AND REGISTRAR
FIRSTAR BANK, N.A.
615 East Michigan Street
Milwaukee, Wisconsin 53202
*<F14> nee David Schwering
