Pursuant to Rule 497(c)
Registration No. 333-82865
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JACOB INTERNET FUND INC.
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Prospectus & Application
November 26 , 1999
The Jacob Internet Fund is a mutual fund whose primary investment
objective is long-term growth of capital with current income as a secondary
objective.
This Prospectus contains important information about the Fund.
For your own benefit and protection, please read it before you
invest, and keep it for future reference.
Investment Adviser
Jacob Asset Management
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of the
prospectus. Any representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
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Risk/Return Summary.....................................1 Redemption of Fund Shares.........11
Fee Table...............................................3 Pricing of Fund Shares............14
Investment Objectives, Principal Investment Strategies
and Related Risks.......................................3 Dividends and Distributions.......15
Additional Investment Information and Risk Factors......6 Tax Consequences..................15
Management, Organization and Capital Structure..........7 Distribution Arrangements.........16
Purchase of Fund Shares.................................9
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RISK/RETURN SUMMARY
Investment Objectives
The Fund's primary investment objective is to seek long-term growth of capital.
Current income is a secondary objective. There is no assurance that the Fund
will achieve its investment objectives.
Principal Investment Strategies
The Fund seeks to achieve its investment objectives by investing primarily in
common stocks and securities convertible into common stocks of companies engaged
in the Internet and Internet-related activities or services. These companies are
selected by the investment adviser because they derive a substantial portion of
their revenue from Internet or Internet-related businesses or are aggressively
developing and expanding their Internet and Internet-related business
operations. The investment adviser believes that the Internet offers unique
investment opportunities because of its ever-growing popularity among business
and personal users alike. The Internet is a collection of connected computers
that allows commercial and professional organizations, educational institutions,
government agencies, and consumers to communicate electronically, access and
share information, and conduct business around the world.
The Fund intends to concentrate (i.e. 25% or more of the Fund's total assets) in
securities of companies in the Internet and Internet-related industries. The
Fund invests in common stock and other securities of companies whose research
and development efforts with respect to Internet usage may result in higher
stock values. The investment adviser's overall stock selection is based on an
assessment of a company's fundamental prospects. The Fund does not trade in
securities for short-term profits, but when circumstances warrant, securities
may be sold without regard to the length of time they have been held.
Principal Risks
o The loss of money is a risk of investing in the Fund.
o The value of the Fund's shares and the securities held by the Fund can each
decline in value.
o The Fund may involve significantly greater risks and therefore may
experience greater volatility than a mutual fund that invests in a variety
of industries or does not primarily invest in Internet-related companies.
o Investments in companies in the rapidly changing field of computer/Internet
technology face special risks such as competitive pressures and
technological obsolescence and may be subject to greater governmental
regulation than many other industries.
o The market value of convertible securities tends to decline as interest
rates increase and, conversely, to increase as interest rates decline. In
addition, convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality.
o The stocks selected by the investment adviser may decline in value or not
increase in value when the stock market in general is rising.
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o The investment adviser may not be able to sell stocks at an optimal time or
price.
o Investments in smaller capitalized companies may involve greater risks, such
as limited product lines, markets and financial or managerial resources.
o The investment adviser, a newly created entity, has no previous experience
managing a mutual fund. However, please refer to the "Adviser" section of
this Prospectus for the business background and investment experience of
Ryan I. Jacob, the Fund's Chief Portfolio Manager.
Who May Want to Invest in This Fund
This Fund is designed for long-term investors who understand and are willing to
accept the risk of loss involved in investing in a fund seeking long-term growth
of capital. Investors should consider their investment goals, their time horizon
for achieving them, and their tolerance for risks before investing in the Fund.
If you seek an aggressive approach to capital growth and can accept the above
average level of price fluctuations that this Fund is expected to experience,
this Fund could be an appropriate part of your overall investment strategy. The
Fund should not represent your complete investment program or be used for
short-term trading purposes.
Risk/Return Bar Chart and Table
A bar chart and table will be available to track the Fund's performance once the
Fund has been in operation for a full calendar year.
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FEE TABLE
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 1.25%
Distribution and/or Service 12b-1 Fees 0.35%
Other Expenses * 0.52%
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Total Annual Fund Operating Expenses 2.12%
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Expenses Reimbursed and/or Waived by the Fund's Adviser (0.12)**
Net Annual Fund Operating Expenses 2.00%
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* "Other Expenses" are based on estimated amounts for the current fiscal year.
** The Adviser has contractually agreed to limit the Total Annual Operating
Expenses to no more than 2.00% at least through August 31, 2000. The Adviser is
reimbursing and/or waiving fees to the Fund so that you would pay no more than
2.00% on an annualized basis at least through August 31, 2000. To the extent
that the Adviser reimburses or waives fees, it may seek payment or reimbursement
for three years after the year in which fees were waived or reimbursed. The Fund
will not make such payments to the Adviser if the Total Annual Fund Operating
Expenses exceed the expense limits in effect at the time these waivers and/or
reimbursements are proposed.
Example: This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund over the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Year 1+ Year 3++
$203 $664
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+ The Expense Example shown for One Year includes the effects of the
Adviser's reimbursement of Fund operating expenses to no more than 2.00%
on an annualized basis.
++ The Three Year Expense Example does not show the effects of the
waiver or reimbursement because the Adviser is obligated to waive
and/or reimburse expenses only through the period ended August 31,
2000.
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENTSTRATEGIES AND RELATED RISKS
Investment Objectives. The Fund's primary investment objective is long-term
growth of capital. Current income is a secondary objective. There is no
assurance that the Fund will achieve its investment objectives.
Principal Investment Strategies. The Fund seeks to achieve its investment
objectives by investing primarily in common stocks and securities convertible
into common stocks of companies engaged in the Internet and Internet-related
activities or services. These companies are selected by the investment adviser
because they
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derive a substantial portion of their revenue from Internet or Internet-related
businesses or are aggressively developing and expanding their Internet and
Internet-related business operations. The Fund intends to concentrate (i.e. 25%
or more of the Fund's total assets) in securities of companies in the Internet
and Internet-related industries. Under normal circumstances, at least 80% of its
total assets will be invested in such companies.
The investment adviser believes that companies that provide products or services
designed for the Internet offer favorable investment opportunities. Accordingly,
the Fund seeks to invest in common stock and convertible securities of companies
whose research and development efforts may result in higher stock values.
The Internet is a world-wide network of computers designed to permit users to
share information and transfer data quickly and easily. The world wide web
("www") is a means of graphically interfacing with the Internet. It is a
hyper-text based publishing medium containing text, graphics, interactive
feedback mechanisms and links within www documents and to other www documents.
The investment adviser believes that because of rapid advances in the breadth
and scope of products and services offered over the Internet, an investment in
companies with business operations in this area will offer substantial
opportunities for long-term capital appreciation. Of course, prices of common
stocks of even the best managed, most profitable corporations are subject to
market risk, which means their stock prices can decline. In addition, swings in
investor psychology or significant trading by large institutional investors can
result in price fluctuations.
The Internet has exhibited and continues to demonstrate rapid growth, both
through increasing demand for existing products and services and the broadening
of the Internet market. This provides a favorable environment for investment in
small to medium capitalized companies. However, the Fund's investment policy is
not limited to any minimum capitalization requirement and the Fund may hold
securities without regard to the capitalization of the issuer. The investment
adviser's overall stock selection for the Fund is not based on the
capitalization or size of the company but rather on an assessment of the
company's fundamental prospects.
Portfolio securities generally will be selected from companies in the following
groups:
o Media and Content Providers: Companies that provide information and
entertainment services over the Internet, supported by subscriptions,
advertising and/or transactional revenues.
o E-commerce: Companies that sell goods and services using the Internet,
and companies that distribute products directly over the Internet.
o Infrastructure: Companies that develop and manufacture solutions to enable
businesses to implement Internet strategies.
o Communications: Companies engaged in the transmission of voice, video and
data, with emphasis on providers of high speed Internet access.
Buy/Sell Decisions. The investment adviser considers the following factors when
buying and selling securities for the Fund: (i) the value of individual
securities relative to other investment alternatives, (ii) trends in the
determinants of corporate profits, (iii) corporate cash flow, (iv) balance sheet
changes, (v) management capability and practices and (vi) the economic and
political outlook. The Fund does not trade in securities for short-term profits,
but when circumstances warrant, securities may be sold without regard to the
length of time they have been held.
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Risk Factors. The Computer/Internet Technology Area: Companies in the rapidly
changing field of computer/Internet technology face special risks. For example,
their products or services may not prove commercially successful or may become
obsolete quickly. The value of the Fund's shares may be susceptible to factors
affecting the computer/Internet technology area and to greater risk and market
fluctuation than an investment in a fund that invests in a broader range of
portfolio securities not concentrated in any particular industry. As such, the
Fund is not an appropriate investment for individuals who are not long-term
investors and who, as their primary objective, require safety of principal or
stable income from their investments. The computer/Internet technology area may
be subject to greater governmental regulation than many other areas and changes
in governmental policies and the need for regulatory approvals may have a
material adverse effect on these areas. Additionally, companies in these areas
may be subject to risks of developing technologies, competitive pressures and
other factors and are dependent upon consumer and business acceptance as new
technologies evolve.
Smaller Capitalized or Unseasoned Companies: The investment adviser believes
that smaller capitalized or unseasoned companies generally have greater earnings
and sales growth potential than larger capitalized companies. However, the level
of risk will be increased to the extent that the Fund has significant exposure
to smaller capitalized or unseasoned companies (those with less than a
three-year operating history). Investments in smaller capitalized or unseasoned
companies may involve greater risks, such as limited product lines, markets and
financial or managerial resources. In addition, less frequently-traded
securities may be subject to more abrupt price movements than securities of
larger capitalized companies.
Convertible Securities: The Fund may invest in convertible securities, which may
include corporate notes or preferred stock, but are ordinarily a long-term debt
obligation of the issuer convertible at a stated exchange rate into common stock
of the issuer. As with all debt securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar quality.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price, the price of the convertible security
tends to reflect the value of the underlying common stock. As the market price
of the underlying common stock declines, the convertible security tends to trade
increasingly on a yield basis, and thus may not depreciate to the same extent as
the underlying common stock. Convertible securities rank senior to common stocks
on an issuer's capital structure and are consequently of higher quality and
generally entail less risk than the issuer's common stock.
Temporary Investments. In response to adverse market, economic, political or
other conditions, the Fund may invest up to 100% of its assets in U.S. and
foreign short-term money market instruments. The Fund may invest up to 35% of
its assets in these securities to maintain liquidity. Some of the short-term
money instruments in which the Fund may invest include:
o commercial paper;
o certificates of deposit, demand and time deposits and banker's acceptances;
o U.S. government securities; and
o repurchase agreements.
To the extent the Fund engages in this temporary, defensive strategy, the Fund
may not achieve its investment objectives. The Statement of Additional
Information contains more information about the Fund and the types of securities
in which it may invest.
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Portfolio Turnover. Purchases and sales are made whenever the investment adviser
believes it is necessary in order to meet the Fund's investment objectives,
other investment policies, and the need to meet redemptions. Fund turnover may
involve the payment by the Fund of brokerage and other transaction costs, on the
sale of securities, as well as on the investment of the proceeds in other
securities. The greater the portfolio turnover the greater the transaction costs
to the Fund, which could have an adverse effect on the Fund's total rate of
return. In addition, funds with high portfolio turnover rates may be more likely
than low-turnover funds to generate capital gains that must be distributed to
shareholders as taxable income. The Fund will minimize portfolio turnover
because it will not seek to realize profits by anticipating short-term market
movements and intends to buy securities for long-term capital appreciation under
ordinary circumstances.
ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS
Repurchase Agreements. The Fund's portfolio position in cash or cash equivalents
may include entering into repurchase agreements. A repurchase agreement is an
instrument under which an investor purchases a U.S. Government security from a
vendor, with an agreement by the vendor to repurchase the security at the same
price, plus interest at a specified rate. Repurchase agreements may be entered
into with member banks of the Federal Reserve System or "primary dealers" (as
designated by the Federal Reserve Bank of New York) in U.S. Government
securities. Repurchase agreements usually have a short duration, often less than
one week. The Fund requires continual maintenance by the Fund's custodian of the
market value of underlying collateral in amounts equal to, or in excess of, the
value of the repurchase agreement including the agreed upon interest. If the
institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. However, if bankruptcy proceedings are
commenced with respect to the seller, realization on the collateral by the Fund
may be delayed or limited and the Fund may incur additional costs. In such case
the Fund will be subject to risks associated with changes in the market value of
the collateral securities. The Fund intends to limit repurchase agreements to
transactions with institutions believed by the investment adviser to present
minimal credit risk. Repurchase agreements are considered to be loans under the
Investment Company Act of 1940.
Foreign Securities. Investments may be made in both domestic and foreign
companies. While the Fund has no present intention to invest any significant
portion of its assets in foreign securities, it reserves the right to invest not
more than 15% of the value of its total assets (at the time of purchase and
after giving effect thereto) in the securities of foreign issuers and obligors.
Investments in foreign companies involve certain risks which are not typically
associated with investing in domestic companies. An investment may be affected
by changes in currency rates and in exchange control regulations. There may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Foreign stock markets have substantially less
volume than the major U.S. markets and securities of some foreign companies may
be less liquid and more volatile than securities of comparable domestic
companies. There is generally less government regulation of stock exchanges,
brokers and listed companies in foreign countries than in the United States. In
addition, with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments which could affect investments in those countries.
Individual foreign economies may differ favorably or unfavorably from the United
States' economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
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Borrowing. The Fund may from time to time borrow money from banks for temporary,
extraordinary or emergency purposes. Such borrowing will not exceed an amount
equal to one-third of the value of the Fund's total assets less its liabilities
and will be made at prevailing interest rates. The Fund may not, however,
purchase additional securities while borrowings exceed 5% of its total assets.
Interest paid on borrowings will reduce net income.
Illiquid Securities. The Fund may invest up to 15% of its net assets in illiquid
securities, including restricted securities (i.e., securities subject to certain
restrictions on their transfer) and other securities that are not readily
marketable, such as repurchase agreements maturing in more than one week,
provided, however, that any illiquid securities purchased by the Fund will have
been registered under the Securities Act of 1933 or be securities of a class, or
convertible into a class, which is already publicly traded and the issuer of
which is filing reports required by Section 13 or 15 of the Securities Exchange
Act of 1934.
Year 2000 Compliance. As the Year 2000 approaches, an issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Failure to adequately address this issue could have
potentially serious repercussions. The investment adviser is in the process of
working with the Fund's service providers to prepare for the Year 2000. Based on
information currently available, the investment adviser does not expect that the
Fund will incur significant operating expenses or be required to incur material
costs to be Year 2000 compliant. Although the investment adviser does not
anticipate that the Year 2000 issue will have a material impact on the Fund's
ability to provide service at current levels, there can be no assurance that
steps taken in preparation for the Year 2000 will be sufficient to avoid any
adverse impact on the Fund. The Year 2000 problem may also adversely affect
issuers of the Securities contained in the Fund to varying degrees based upon
various factors, and these may have a corresponding adverse effect on the Fund's
performance. The investment adviser is unable to predict what effect, if any,
the Year 2000 problem will have on such issuers.
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
Adviser. Jacob Asset Management LLC (the "Adviser"), a registered investment
adviser, is a Delaware limited liability company with its principal office
located at 1675 Broadway, New York, New York 10019. Pursuant to the Investment
Advisory Agreement for the Fund, the Adviser manages the Fund's portfolio of
securities and makes the decisions with respect to the purchase and sale of
investments, subject to the general control of the Board of Directors of the
Fund. The Adviser will also be responsible for overseeing the performance of the
Fund's administrator.
Ryan I. Jacob, founder and Chief Executive Officer of the Adviser, as well as
President and Chief Portfolio Manager of the Fund, is primarily responsible for
the day-to-day management of the Fund's portfolio. Mr. Jacob served as Chief
Portfolio Manager of The Internet Fund, Inc. from December 20, 1997 through June
24, 1999. Mr. Jacob also served as a financial analyst for Lepercq, de Neuflize
& Co. Inc. from September 1998 to June 1999 and as an analyst for Horizon Asset
Management from October 1994 through August 1998. Mr. Jacob was also an
assistant portfolio manager in the private clients group at Bankers Trust from
October 1992 through October 1994 and Director of Research for IPO Value
Monitor, an investment related research service from 1996 to August 1998. Mr.
Jacob, a graduate of Drexel University, has over 8 years of investment
management experience.
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Francis J. Alexander is a portfolio manager of the Fund. Mr. Alexander assists
Mr. Jacob in the day-to-day management of the Fund's assets and securities. Mr.
Alexander was Chief Portfolio Manager of The Internet Fund, Inc. from October
21, 1996 (inception) through December 19, 1997 and was a portfolio manager of
that fund while Mr. Jacob served as Chief Portfolio Manager. Mr. Alexander has
been a portfolio manager with Lepercq, de Neuflize & Co. Inc. since May 1998 and
has also served as President of Alexander Capital Management, Inc. since 1985.
Mr. Alexander received his Bachelor of Arts from Notre Dame University and his
Master of Business Administration from St. John's University.
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The following is the historical performance of The Internet Fund, Inc. The
Internet Fund, Inc. and the Fund are managed in substantially similar styles,
although The Internet Fund, Inc. is a separate fund and its historical
performance is not indicative of the future performance of this Fund. Share
prices and investment returns will fluctuate reflecting market conditions, as
well as changes in company-specific fundamentals of portfolio securities.
Sections (a) and (b) below reflect average annual returns of The Internet Fund,
Inc. for the one-year period ended December 31, 1998, and for the period
December 20, 1997 through June 24, 1999, which are the relevant periods during
which Mr. Jacob was primarily responsible for the management of The Internet
Fund, Inc. and during which Mr. Alexander assisted Mr. Jacob as a portfolio
manager. In addition, section (c) below reflects the average annual return of
the Internet Fund, Inc. from inception of that fund through December 19, 1997,
the period during which Mr. Alexander was primarily responsible for the
management of that fund. All performance numbers as compared with the
performance of the Standard & Poor's 500 Composite Stock Total Return Index
were:
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<CAPTION>
The Internet Fund, Inc. S&P 500 Index (c)
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(advised by Kinetics Asset
Management, Inc.)
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(a) One Year 196.14% 28.58%
(b) December 20 , 1997 through 232.36% 20.03%
June 24, 1999
(c) October 21, 1996 (inception) 1.89% 30.54%
through December 19, 1997
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The cumulative total return for The Internet Fund, Inc. from December 20, 1997
through June 24, 1999 (approximately eighteen months) was 516.98%. It is
generally considered that internet and internet related stocks performed well
compared to the S&P 500 Index during this time period. The cumulative total
return for The Internet Fund, Inc. from October 21, 1996 (inception) through
December 19, 1997 was 2.20%. At June 30, 1999, that fund had over $715 million
in net assets.
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Adviser's Fees. Pursuant to the terms of the Investment Advisory Agreement, the
Fund will pay an annual advisory fee paid monthly equal to 1.25% of the Fund's
average daily net assets. This fee is higher than the fee paid by most other
mutual funds; however, the Board of Directors believes it to be reasonable in
light of the advisory services the Fund receives. Any portion of the advisory
fees received by the Adviser may be used by the Adviser to provide investor and
administrative services and for distribution of Fund shares. The Adviser may
voluntarily waive a portion of its fee or assume certain expenses of the Fund.
This would have the effect of lowering the overall expense ratio of the Fund and
of increasing yield to investors in the Fund.
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PURCHASE OF FUND SHARES
Initial Purchase Period. All subscriptions -------------------------------
for shares of the Fund received during the Minimum Investment
period from the date of this Prospectus $2,500
until December 13, 1999 will be held in ($1,000 for IRA, UGMA,
escrow. At the close of business on 401(k), and other retirement
December 13, 1999, all proceeds from accounts.)
investor subscriptions will be forwarded Additional Investment
to Firstar Mutual Fund Services, LLC (the $100
"Transfer Agent"). The Transfer Agent will -------------------------------
then issue shares of the Fund equal in
value to the amount subscribed for by each
subscriber. The escrow account will be
maintained with Firstar Bank, N.A., the
Fund's custodian. All subscriptions during
the escrow period will be issued shares at
an initial subscription price of $10.00 per
share.
Subsequent to the initial purchase period, you may purchase shares at the next
determined net asset value after the Transfer Agent receives and accepts your
order. The Fund sells (and redeems) its shares on a continuous basis at net
asset value ("NAV") and does not apply any sales charges. To purchase shares,
you need to invest at least $2,500 initially. Investments made under the Uniform
Gift to Minor's Act, an IRA account, 401(k) plan, or other retirement accounts
need to invest only $1,000 to start. Once you have an account with the Fund, you
may make additional investments in amounts as low as $100.
The Fund reserves the right to vary the initial and subsequent minimum
investment requirements at any time.
How To Open An Account:
By Mail
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Complete and sign the New Account Application and make a check or money order
payable to Jacob Internet Fund.
$2,500 minimum. $1,000 minimum for IRA, UGMA, 401K and other
retirement accounts.
Any lesser amount must be approved by the Fund.
MAIL TO: OVERNIGHT OR EXPRESS MAIL TO:
JACOB INTERNET FUND JACOB INTERNET FUND
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 East Michigan Street, 3rd Floor
Milwaukee, WI 53201-0701 Milwaukee, WI 53202
Setting up an IRA account? Please call the Fund at 1-888-JACOBFX
(1-888-522-6239) for details. All checks and money orders must be in U.S.
Dollars only. No cash will be accepted.
NOTE: The Transfer Agent charges a $25 fee for any returned checks due
to insufficient funds. You will be responsible for any losses suffered
by the Fund as a result.
By Wire
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Please call the Fund at 1-888-JACOBFX to notify the Fund that the wire is coming
and to verify the proper wire instructions so that the wire is properly applied
when received. The Fund is not responsible for delays resulting from the banking
or Federal Reserve wire system.
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Immediately send a completed New Account Application form to the Fund at the
above address to have all accurate information recorded to your account. Your
purchase request should be wired through the Federal Reserve Bank as follows:
Firstar Bank Milwaukee, N.A. Credit to: Firstar Mutual Fund Services, LLC
777 East Wisconsin Avenue Account Number: 112-952-137
Milwaukee, Wisconsin 53202 Further credit to: Jacob Internet Fund
ABA Number: 075000022 Your account name and account number
(For new accounts, include taxpayer identification number)
How To Purchase Additional Shares:
By Mail
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You may add to your account at any time by mailing the remittance form which is
attached to your individual account statement along with any subsequent
investments. All requests must include your account registration number in order
to assure that your funds are credited properly.
By Wire
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Please follow the wiring instructions detailed above.
By Telephone
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If you have completed the appropriate section of the New Account Application or
if you make subsequent arrangements in writing, you may purchase additional
shares by telephoning the Fund toll-free at 1-888-JACOBFX. This option allows
investors to move money from their predesignated bank account to their Fund
account upon request. Only bank accounts held at domestic institutions that are
Automated Clearing House (ACH) members may be used for telephone transactions.
To have your Fund shares purchased at the NAV determined at the close of regular
trading on a given date, the Transfer Agent must receive both your purchase
order and payment by Electronic Funds Transfer through the ACH System before the
close of regular trading on that date. You may not use telephone transactions
for your initial purchase of Fund shares.
The Fund may alter, modify or terminate the telephone purchase option at any
time. The minimum amount that can be transferred by telephone is $100. For more
information about telephonic transactions, please call the Fund at
1-888-JACOBFX.
By Internet
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This option allows you to purchase additional shares directly through the Fund's
website at www.JacobInternet.com. To choose this option, complete the
appropriate section of the New Account Application or make subsequent
arrangements in writing. Only bank accounts held at a domestic institution which
is an ACH member may be used for internet transactions.
To have your Fund shares purchased at the NAV determined at the close of regular
trading on a given date, the Transfer Agent must receive both your purchase
order and payment via ACH transfer before the close of regular trading on that
date. You may not use internet transactions for your initial purchase of Fund
shares.
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The Fund may alter, modify or terminate the internet purchase option at any
time. The minimum amount that can be transferred by internet is $100. For more
information about internet transactions, please call the Fund at 1-888-JACOBFX.
By Automatic Investment Plan
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You may purchase additional shares of the Fund through an Automatic Investment
Plan which allows monies to be deducted directly from your checking, savings or
bank money market accounts to invest in the Fund. You may make automatic
investments on a weekly, monthly, bi-monthly (every other month) or quarterly
basis.
Minimum initial investment $1000
Subsequent monthly investments $ 100
You are eligible for this plan if your bank account is maintained at a domestic
financial institution which is an ACH member.
The Fund may alter, modify or terminate this Plan at any time. For information
about participating in the Automatic Investment Plan, please call the Fund at
1-888-JACOBFX.
Investing Through Brokers or Agents. You may invest in the Fund through brokers
or agents who have entered into selling agreements with the Fund's distributor.
Investors may be charged a fee by the broker or agent they transact through. The
broker or agent may set their own initial and subsequent investment minimums.
Receipt of Orders. Shares may only be purchased on days the New York Stock
Exchange is open for business. If you are paying with federal funds (wire), your
order will be considered received when Firstar Bank Milwaukee, N.A. receives the
federal funds. When making a purchase request in writing, make sure your request
is in good order. "Good order" means your letter of instruction includes:
o the name of the fund
o the dollar amount of shares to be purchased
o purchase application or investment slip
o check payable to Jacob Internet Fund
Timing of Requests. All requests received and accepted by the Transfer Agent
before 4:00 p.m. (Eastern time) will be executed on that same day. Requests
received after 4:00 p.m. will be processed on the next business day.
REDEMPTION OF FUND SHARES
When Redemption Proceeds Are Sent to You. You may redeem your shares at any time
without a charge. Once the Transfer Agent receives and accepts your redemption
request, your request will be processed at the next determined NAV. If you
purchase shares by check or ACH transfer and request a redemption soon after the
purchase, the Fund will honor the redemption request, but will not mail the
proceeds until your purchase check has cleared (usually within 12 days, but in
no case more than 15 days). If you make a purchase by check or ACH transfer that
does not clear, the purchase will be canceled and you will be responsible for
any losses or fees incurred in that transaction.
A redemption request received and accepted before 4:00 p.m. (Eastern time) will
normally be wired to the bank you indicate on the following business day or
mailed on the following business day to the address of record; in
11
<PAGE>
the case of
redemptions via ACH transfer, proceeds will normally be sent to the bank you
indicate on the second business day after the redemption request has been
received and accepted. In no event will proceeds be wired, mailed or transferred
through the ACH system more than 7 days after the Transfer Agent receives and
accepts a redemption request. If the proceeds of the redemption are requested to
be sent to an address other than the address of record or if the address of
record has been changed within 15 days of the redemption request, the request
must be in writing with your signature(s) guaranteed. The Fund is not
responsible for interest on redemption amounts due to lost or misdirected mail.
The Fund and the Transfer Agent each reserve the right to refuse a wire,
telephone or internet redemption if it is believed advisable to do so.
Procedures for redeeming Fund shares by wire, telephone or internet may be
modified or terminated at any time by the Fund.
How To Redeem Shares:
By Mail
- -------
Send written redemption requests to:
Jacob Internet Fund
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
If a redemption request is inadvertently sent to the Fund at its corporate
address, it will be forwarded to the Transfer Agent and the effective date of
redemption will be delayed until the request is received by the Transfer Agent.
The Fund cannot honor any redemption requests with special conditions or which
specify an effective date other than as provided.
When making a redemption request, make sure your request is in good order. "Good
order" means your letter of instruction includes:
o the name of the fund
o the number of shares or the dollar amount of shares to be redeemed
o the account registration number
o signatures of all registered shareholders exactly as the shares are
registered
<TABLE>
<CAPTION>
Account Registration: Signature Requirements:
<S> <C>
Individual, Joint Tenants, Sole Proprietorship, Custodial Redemption requests must be signed by all
(UGMA), General Partners person(s) required to sign for
the account, exactly as it is registered.
Corporations, Associations Redemption request and a corporate
resolution, signed by person(s)
Trusts required to sign for the account,
accompanied by signature
guarantee(s).
Redemption request signed by the
trustee(s), with a signature
guarantee. (If the Trustee's name
is not registered on the account, a
copy of the trust document
certified within the past 60 days
is also required.)
</TABLE>
12
<PAGE>
By Telephone
- ------------
If you are set up to perform telephone transactions (either through your New
Account Application or by subsequent arrangements in writing), you may redeem
shares in any amount up to $50,000 by instructing the Fund by telephone at:
1-888-JACOBFX. You must redeem at least $100 for each telephone redemption.
Redemption requests for amounts exceeding $50,000 must be made in writing. A
signature guarantee is required of all shareholders in order to change telephone
redemption privileges.
By Internet
- -----------
If you are set up to perform internet transactions (either through your New
Account Application or by subsequent arrangements in writing), you may redeem
shares in any amount up to $50,000 through the Fund's website at
www.JacobInternet.com. You must redeem at least $100 for each internet
redemption. Redemption requests for amounts exceeding $50,000 must be made in
writing. A signature guarantee is required of all shareholders in order to
change internet redemption privileges.
By Systematic Withdrawal Plan
- -----------------------------
If you own shares with a value of $10,000 or more, you may participate in the
Systematic Withdrawal Plan. The Fund's systematic withdrawal option allows you
to move money automatically from your Fund account to your bank account
according to the withdrawal schedule you select. To select the systematic
withdrawal option, you must check the appropriate box on the New Account
Application. The minimum systematic withdrawal amount is $100.
If you expect to purchase additional Fund shares, it may not be to your
advantage to participate in the Systematic Withdrawal Plan because
contemporaneous purchases and redemptions may result in adverse tax
consequences.
For further details about this service, see the New Account Application or call
the Fund at 1-888-JACOBFX.
Electronic Transfers. The proceeds of a redemption can be sent directly to your
bank account via wire or ACH transfer. You can elect these options by completing
the appropriate section of the New Account Application or making subsequent
arrangements in writing. In order to arrange for redemption by wire or ACH
transfer after an account has been opened, or to change the bank or account
designated to receive redemption proceeds, a written request must be sent to the
Fund at the address listed above. If the proceeds are sent by wire, Firstar will
assess a $12.00 wire fee. If money is moved via ACH transfer, you will not be
charged by the Fund for these services. There is a $100 minimum per transfer.
Telephone/Internet Requests. Neither the Fund nor any of its service contractors
will be liable for any loss or expense in acting upon any telephone or internet
instructions for redemptions that are reasonably believed to be genuine. The
Fund will use reasonable procedures to attempt to confirm that all telephone and
internet instructions are genuine such as requesting that a shareholder provide:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Telephone Internet
----------------------------------------------------------------------------------------------------
<S> <C>
o the name in which the account is o the name in which the account is
registered, and
o the Fund account number or his/her social o the Fund account number, and
security number. o his/her Personal Identification Number
(PIN) which can be established on the web site.
--------------------------------------------------------- ------------------------------------------
</TABLE>
13
<PAGE>
If the Fund fails to follow these reasonable procedures, it may be liable for
any loss due to unauthorized or fraudulent transactions. Telephone and internet
redemptions may be difficult during periods of drastic economic or market
changes. If you are unable to contact the Fund by telephone or internet, you may
also redeem shares by mail following the instructions above.
IRA Redemptions. If you have an IRA, you must indicate on your redemption
request whether or not to withhold federal income tax. Redemption requests not
indicating an election to have federal tax withheld will be subject to
withholding . If you are uncertain of the redemption requirements, please
contact Firstar in advance: 1-888-JACOBFX.
Signature Guarantees. Signature guarantees are needed for:
o Redemption requests over $50,000
o Redemption requests to be sent to a different address other than the
address of record
o Changing telephone redemption privileges
Signature guarantees can be obtained from banks and securities dealers, but
not from a notary public. The Transfer Agent may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees and guardians. Call the Fund at 1-888-JACOBFX for more information and
a form on which to make the signature guarantee.
Redemptions In-Kind. If your redemption request exceeds the lesser of $250,000
or 1% of the NAV (an amount that would affect Fund operations), the Fund
reserves the right to make a "redemption in-kind". A redemption in-kind is a
payment in portfolio securities rather than cash. The portfolio securities would
be valued using the same method as the Fund uses to calculate its NAV. You may
experience additional expenses such as brokerage commissions in order to sell
the securities received from the Fund. In-kind payments do not have to
constitute a cross section of the Fund's portfolio. The Fund will not recognize
gain or loss for federal tax purposes on the securities used to complete an
in-kind redemption, but you will recognize gain or loss equal to the difference
between the fair market value of the securities received and your basis in the
Fund shares redeemed.
Accounts with Low Balances. Due to the high cost of maintaining accounts with
low balances, the Fund may mail you a notice if your account falls below $2,500,
other than as a result of a decline in the value per share of the Fund,
requesting that you bring the account back up to $2,500 or close it out. If you
do not respond to the request within 30 days, the Fund may close your account
and send you the proceeds.
PRICING OF FUND SHARES
How NAV is Determined. The net asset value per share ("NAV") is equal to the
value of he Fund's securities, cash and other assets less all expenses and
liabilities divided by the number of shares outstanding. The net asset value is
determined once daily on Monday through Friday as of the close of business of
the New York Stock Exchange on each day that the Exchange is open. The Fund does
not determine net asset value on the following holidays:
New Year's Day Good Friday Labor Day
Martin Luther King, Jr. Day Memorial Day Thanksgiving Day
Presidents' Day Independence Day Christmas Day
14
<PAGE>
The Fund's portfolio securities are valued each day at the last quoted sales
price on each security's principal exchange. If market quotations are not
readily available, securities will be valued at their fair market value as
determined in good faith, or in accordance with procedures approved by the Board
of Directors. The Fund may use independent pricing services to assist in
calculating the NAV. In addition, if the Fund owns any foreign securities which
are traded on foreign exchanges that are open on weekends or other days when the
Fund does not price its shares, the NAV may change on days when shareholders
will not be able to purchase or redeem Fund shares.
RETIREMENT PLANS
Shares of the Fund are available for use in tax-deferred retirement plans such
as:
o IRAs,
o employer-sponsored defined contribution plans (including 401(k) plans),
and
o tax-sheltered custodial accounts described in Section 403(b)(7) of
the Internal Revenue Code.
DIVIDENDS AND DISTRIBUTIONS
At least 90% of the Fund's net investment income will be declared as dividends
and paid annually. If an investor's shares are redeemed prior to the date on
which dividends are normally declared and paid, accrued but unpaid dividends
will be paid with the redemption proceeds. Substantially all the realized net
capital gains of the Fund, if any, are declared and paid on an annual basis.
Dividends are payable to investors of record at the time of declaration. For a
discussion of the taxation of dividends or distributions, see "Tax
Consequences."
The net investment income of the Fund for each business day is determined
immediately prior to the determination of NAV. Net investment income for other
days is determined at the time NAV is determined on the prior business day.
Shares of the Fund earn dividends on the business day their purchase is
effective but not on the business day their redemption is effective.
Choosing a Distribution Option. Distribution of dividends from the Fund may be
made in accordance with several options. A shareholder may select one of four
distribution options:
1. Automatic Reinvestment Option. Both dividends and capital gains distributions
will be automatically reinvested in additional shares of the Fund unless the
investor has elected one of the other three options.
2. Cash Dividend Option. Dividends will be paid in cash, and capital gains will
be reinvested in additional shares.
3. Cash Capital Gain Option. Capital gains will be paid in cash and dividends
will be reinvested in additional shares.
4. All Cash Option. Both dividends and capital gains distributions will be paid
in cash.
TAX CONSEQUENCES
The Fund intends to elect, effective for its tax year ending August 31, 2000, to
qualify under the Internal Revenue Code of 1986, as a regulated investment
company. Qualification as a regulated investment company relieves the Fund of
Federal income tax on net ordinary income and net long-term capital gains paid
out to its stockholders. The Fund has adopted a policy of declaring dividends
annually. The Fund's policy is to distribute as dividends each year 100% (and in
no event less than 90%) of its investment company taxable income. Distributions
of net ordinary income and net short-term capital gains are taxable to
stockholders as ordinary
15
<PAGE>
income. Although corporate stockholders would generally
be entitled to the dividends-received deduction to the extent that the Fund's
income is derived from qualifying dividends from domestic corporations, the Fund
does not believe that any of its distributions will qualify for this deduction
because the Fund believes that its distributions will consist primarily of
capital gains.
The excess of net long-term capital gains over net short-term capital losses
realized and distributed by the Fund and designated by the Fund as capital gains
dividends in a written notice to investors mailed not later than 60 days after
the Fund taxable year closes, is taxable to stockholders as long-term capital
gains, irrespective of the length of time a stockholder may have held its shares
in the Fund. A preferential tax rate for long-term capital gains is currently
applicable for non-corporate shareholders. Long-term capital gains distributions
are not eligible for the dividends-received deduction referred to above. If a
stockholder that sells shares held for six months or less received a
distribution taxable as long-term capital gain, any loss realized on the sale of
the shares will be a long-term capital loss to the extent of the distribution.
Distributions are taxable to investors whether received in cash or reinvested in
additional shares of the Fund. Any dividend or distribution received by a
stockholder shortly after the purchase of shares will reduce the net asset value
of the shares by the amount of the dividend or distribution. Furthermore, such
dividend or distribution is subject to tax even though it is, in effect, a
return of capital.
The redemption of shares may result in the stockholder's receipt of more or less
than the stockholder paid for its shares and, thus, may result in a taxable gain
or loss to the stockholder. If the redeemed shares have been held for more than
one year, the stockholder will generally realize a long-term capital gain or
loss.
The Fund is required, subject to certain exemptions, to withhold at a rate of
31% from dividends paid or credited to stockholders, and from the proceeds from
the redemption of Fund shares, if a correct taxpayer identification number,
certified when required, is not on file with the Fund. Corporate stockholders
are not subject to this requirement.
DISTRIBUTION ARRANGEMENTS
Distributor. Lepercq, de Neuflize Securities Inc. (the "Distributor") has
entered into a distribution agreement with the Fund to serve as the Fund's
distributor. The Distributor will be entitled to receive a distribution fee
equal to 0.10% of the Fund shares' average daily net assets (the "Distribution
Fee") under the terms of the Fund's Rule 12b-1 Plan and will pay the promotional
and advertising expenses related to the distribution of the Fund's shares and
for the printing of all Fund prospectuses used in connection with the
distribution and sale of Fund shares. In addition, pursuant to such distribution
agreement, the Distributor may use a portion of the distribution fee to
compensate financial intermediaries for providing distribution assistance with
respect to the sale of Fund shares. See "Investment Advisory and Other Services"
in the Statement of Additional Information.
12b-1 Plan. The Fund has adopted a distribution and service plan, pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Plan"). Rule 12b-1
provides that an investment company which bears any direct or indirect expense
of distributing its shares must do so only in accordance with the Plan permitted
by Rule 12b-1. The Plan provides that the Fund will compensate the Adviser for
certain expenses and costs incurred in connection with providing shareholder
servicing and maintaining shareholder accounts and to compensate parties with
which it has written agreements and whose clients own shares of the Fund for
providing servicing to their clients ("shareholder servicing" ), which is
subject to a service fee equal to 0.25% per annum of the Fund's average daily
net assets. Because these fees are paid out of the Fund's assets on an ongoing
basis, over time these fees will increase the cost of your investment and may
cost you more than
16
<PAGE>
paying other types of sales charges. As noted above, the Plan also provides that
the Distributor is paid the Distribution Fee, on an annual basis, to enable it
to provide promotional support to the Fund and to make payments to
broker-dealers and other financial institutions with which it has written
agreements and whose clients are Fund shareholders (each a "broker-dealer") for
providing distribution assistance. The Distribution Fee is an "asset based sales
charge" and, therefore, long-term shareholders may pay more in total sales
charges than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. Fees paid
under the Plan may not be waived for individual shareholders.
Each shareholder servicing agent that the Adviser retains will, as agent for its
customers, among other things: (i) answer customer inquiries regarding account
status and history, the manner in which purchases and redemptions of shares of
the Fund may be effected and certain other matters pertaining to the Fund; (ii)
assist shareholders in designating and changing dividend options, account
designations and addresses; (iii) provide necessary personnel and facilities to
establish and maintain shareholder accounts and records; (iv) assist in
processing purchase and redemption transactions; (v) arrange for the wiring of
funds; (vi) transmit and receive funds in connection with customer orders to
purchase or redeem shares; (vii) verify and guarantee shareholder signatures in
connection with redemption orders and transfers and changes in shareholder
designated accounts; (viii) furnish (either separately or on an integrated basis
with other reports sent to a shareholder by the Fund) quarterly and year-end
statements and confirmations in a timely fashion after activity is generated in
the account; (ix) transmit, on behalf of the Fund, proxy statements, annual
reports, updating prospectuses and other communications from the Fund to
shareholders; (x) receive, tabulate and transmit to the Fund proxies executed
by shareholders with respect to meetings of shareholders of the Fund; and (xi)
provide such other related services as the Fund or a shareholder may request.
The Plan provides that the Adviser and the Distributor may make payments from
time to time from their own resources which may include the advisory fee and
past profits for the following purposes: (i) to defray the costs of and to
compensate others, including financial intermediaries with whom the Distributor
or Adviser has entered into written agreements, for performing shareholder
servicing and related administrative functions; (ii) to compensate certain
financial intermediaries for providing assistance in distributing the Fund's
shares; (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors; and (iv) to defray the cost of the
preparation and printing of brochures and other promotional materials, mailings
to prospective shareholders, advertising, and other promotional activities,
including the salaries and/or commissions of sales personnel in connection with
the distribution of the Fund's shares. The Distributor or the Adviser, as the
case may be, in their sole discretion, will determine the amount of such
payments made pursuant to the Plan with the shareholder servicing agents and
broker-dealers they have contracted with, provided that such payments made
pursuant to the Plan will not increase the amount which the Fund is required to
pay to the Distributor or the Adviser for any fiscal year under the shareholder
servicing agreements or otherwise. Any servicing fees paid to the Adviser also
may be used for purposes of (i) above and any asset based sales charges paid to
the Distributor also may be used for purposes of (ii), (iii), or (iv) above.
Shareholder servicing agents and broker-dealers may charge investors a fee in
connection with their use of specialized purchase and redemption procedures
offered to investors by the shareholder servicing agents and broker-dealers. In
addition, shareholder servicing agents and broker-dealers offering purchase and
redemption procedures similar to those offered to shareholders who invest in the
Fund directly may impose charges, limitations, minimums and restrictions in
addition to or different from those applicable to shareholders who invest in the
Fund directly. Accordingly, the net yield to investors who invest through
shareholder servicing agents and broker-dealers may be less than by investing in
the Fund directly. An investor should read the Prospectus in conjunction with
the materials provided by the shareholder servicing agent and broker-dealer
describing the procedures under which Fund shares may be purchased and redeemed
through the shareholder servicing agent and broker-dealer.
17
<PAGE>
JACOB INTERNET FUND INC.
Investment Adviser
Jacob Asset Management LLC
Administrator and Transfer Agent
and Dividend Agent
Firstar Mutual Fund Services LLC
Underwriter and Distributor
Lepercq, de Neuflize Securities Inc.
Custodian
Firstar Bank Milwaukee, N.A.
Independent Auditors
PricewaterhouseCoopers LLP
A Statement of Additional Information (SAI), dated November 26, 1999 and the
Fund's Annual and Semi-Annual Reports (when available), include additional
information about the Fund and its investments and are incorporated by reference
into this Prospectus. The Fund's Annual Report will contain a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its prior fiscal year. You may obtain the SAI, the
Annual and Semi-Annual Reports and material incorporated by reference without
charge by calling the Fund at 1-888-JACOBFX. To request other information or to
make inquiries, please call your financial intermediary or the Fund.
A Current SAI has been filed with the Securities and Exchange Commission. You
may visit the Securities and Exchange Commission's Internet website
(www.sec.gov) to view the SAI, material incorporated by reference and other
information. These materials can also be reviewed and copied at the Commission's
Public Reference Room in Washington, DC. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. In addition, copies of these materials may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, DC 20549-6009.
Jacob Asset Management LLC
1675 Broadway, 16th Floor,
New York, NY 10019
1-888-Jacobfx (522-6239)
www.JacobInternet.com
Prospectus & Application
November 26, 1999
811-09447
<PAGE>
JACOB INTERNET FUND INC.
------------------------
STATEMENT OF ADDITIONAL INFORMATION
November 26, 1999
RELATING TO THE JACOB INTERNET FUND, INC.
PROSPECTUS DATED NOVEMBER 26, 1999
-----------------------------------------
This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Fund's Prospectus, dated November 26, 1999 (the "Prospectus").
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus, a copy of which may be
obtained without charge by writing or calling the Fund toll-free at
1-888-JACOBFX. The material relating to the purchase, redemption and pricing of
shares has been incorporated by reference into the SAI from the Fund's
Prospectus.
This Statement of Additional Information is incorporated by reference
into the Prospectus in its entirety.
TABLE OF CONTENTS
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fund History...........................................1 Capital Stock and Other Securities...........16
Description of the Fund and its Investments and Risks..1 Purchase, Redemption and Pricing of Shares...16
Management of the Fund.................................8 Taxation of the Fund.........................16
Control Persons and Principal Holders
of Securities........................................10 Underwriters.................................19
Investment Advisory and Other
Services..............................................10 Calculation of Performance Data..............19
Brokerage Allocation and Other Practices..............14 Financial Statements.........................21
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
I. FUND HISTORY
Jacob Internet Fund Inc. (the "Fund") was incorporated in Maryland on
July 13, 1999.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
A. INVESTMENT STRATEGIES AND RISKS
The Fund's primary investment objective is long-term growth of
capital, a goal it seeks by investing primarily in common stocks and securities
convertible into common stocks of companies engaged in the Internet and
Internet-related activities or services. These companies are selected by the
Fund's investment adviser because they derive a substantial portion of their
revenue from Internet or Internet-related businesses or are aggressively
developing and expanding their Internet and Internet-related business
operations. Current income is a secondary objective.
Except during temporary defensive periods, not less than 80% of the
Fund's total assets will be invested in the securities of companies engaged in
Internet and Internet-related activities. As a diversified, open-end management
investment company, at least 75% of the Fund's total assets are required to be
invested in securities limited in respect of any one issuer to not more than 5%
of the Fund's total assets and to not more than 10% of the issuer's voting
securities.
B. DESCRIPTION OF THE FUND'S INVESTMENT SECURITIES AND DERIVATIVES
The following expands upon the descriptions in the Prospectus of the
types of securities in which the Fund may invest. In addition, this section
discusses certain potential Fund investments which were not previously described
in the Prospectus.
1. The Computer/Internet Technology Area. The Adviser believes that
because of rapid advances in computer/Internet technology, an investment in
companies with business operations in these areas will offer substantial
opportunities for long-term capital appreciation. Of course, prices of common
stocks of even the best managed, most profitable corporations are subject to
market risk, which means their stock prices can decline. In addition, swings in
investor psychology or significant trading by large institutional investors can
result in price fluctuations. The Fund may also invest in the stocks of
companies that should benefit from the commercialization of technological
advances, although they may not be directly involved in research and
development.
The computer/Internet technology area has exhibited and continues to
exhibit rapid growth, both through increasing demand for existing products and
services and the broadening of the technology market. In general, the stocks of
large capitalized companies that are well established in the computer/Internet
technology market can be expected to grow with the market and will frequently be
found in the Fund's portfolio. The expansion of computer/Internet technology and
its related industries, however, also provides a favorable environment for
investment in small to medium capitalized companies. The Fund's investment
policy is not limited to any minimum capitalization requirement and the Fund may
hold securities without regard to the capitalization of the issuer. The
Adviser's overall stock selection for the Fund is not based on the
capitalization or size of the company but rather on an assessment of the
company's fundamental prospects.
Companies in the rapidly changing field of computer/Internet
technology face special risks. For example, their products or services may not
prove commercially successful or may become obsolete quickly. The value of the
Fund's shares may be susceptible to factors affecting the computer/Internet
technology area and to greater risk and market fluctuation than an investment in
a fund that invests in a broader range of portfolio securities not concentrated
in any particular industry. As such, the Fund is not an appropriate investment
for individuals who
-1-
<PAGE>
are not long-term investors and who, as their primary objective, require safety
of principal or stable income from their investments. The computer/Internet
technology area may be subject to greater governmental regulation than many
other areas and changes in governmental policies and the need for regulatory
approvals may have a material adverse effect on these areas. Additionally,
companies in these areas may be subject to risks of developing technologies,
competitive pressures and other factors and are dependent upon consumer and
business acceptance as new technologies evolve.
2. Foreign Securities. The Fund may invest up to 15% of its assets in
foreign securities. It is, however, the present intention of the Fund to limit
the investment in foreign securities to no more than 5% of its assets. By
investing a portion of its assets in foreign securities, the Fund will attempt
to take advantage of differences among economic trends and the performance of
securities markets in various countries. To date, the market values of
securities of issuers located in different countries have moved relatively
independently of each other. During certain periods, the return on equity
investments in some countries has exceeded the return on similar investments in
the United States. The Adviser believes that, in comparison with investment
companies investing solely in domestic securities, it may be possible to obtain
significant appreciation from a portfolio of foreign investments and securities
from various markets that offer different investment opportunities and are
affected by different economic trends. International diversification reduces the
effect that events in any one country will have on the Fund's entire investment
portfolio. On the other hand, a decline in the value of the Fund's investments
in one country may offset potential gains from investments in another country.
Investment in obligations of foreign issuers and in direct
obligations of foreign nations involves somewhat different investment risks from
those affecting obligations of United States domestic issuers. There may be
limited publicly available information with respect to foreign issuers and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to domestic
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States. Foreign securities settlements may in some instances be subject to
delays and related administrative uncertainties that could result in temporary
periods when assets of the Fund are uninvested and no return is earned thereon
and may involve a risk of loss to the Fund. Foreign securities markets have
substantially less volume than domestic securities exchanges and securities of
some foreign companies are less liquid and more volatile than securities of
comparable domestic companies. Brokerage commissions and other transaction costs
on foreign securities exchanges are generally higher than in the United States.
Dividends and interest paid by foreign issuers may be subject to withholding and
other foreign taxes, which may decrease the net return on foreign investments as
compared to dividends and interest paid to the Fund by domestic companies.
Additional risks include future political and economic developments, the
possibility that a foreign jurisdiction might impose or increase withholding
taxes on income payable with respect to foreign securities, the possible
seizure, nationalization or expropriation of the foreign issuer or foreign
deposits (in which the Fund could lose its entire investment in a certain
market) and the possible adoption of foreign governmental restrictions such as
exchange controls. To the extent the Fund invests in foreign securities,
shareholders may be subject to additional risks than if the Fund's portfolio
contained only domestic securities.
Foreign Currency. Investments in foreign securities will usually be
denominated in foreign currency, and the Fund may contemporarily hold funds in
foreign currencies. The value of the Fund's investments denominated in foreign
currencies may be affected, favorably or unfavorably, by the relative strength
of the U.S. dollar, changes in foreign currency and U.S. dollar exchange rates
and exchange control regulations. The Fund may incur costs in connection with
conversions between various currencies. The Fund's net asset value per share
will be affected by changes in currency exchange rates. Changes in foreign
currency exchange rates may also affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by the Fund. The
rate of exchange between the U.S. dollar and other currencies is determined by
the forces of supply and demand in the foreign exchange markets (which in turn
are affected by interest rates, trade flow and numerous other factors,
including, in some countries, local governmental intervention).
-2-
<PAGE>
3. U.S. Government Obligations. U.S. Government obligations are
obligations that are backed by the full faith and credit of the United States,
by the credit of the issuing or guaranteeing agency or by the agency's right to
borrow from the U.S. Treasury. They include (i) U.S. Treasury obligations, which
differ only in their interest rates, maturities and times of issuance as
follows: U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes
(maturity of one year or ten years), U.S. Treasury bonds (generally maturities
of more than ten years), and (ii) obligations issued or guaranteed by U.S.
Government agencies and instrumentalities that are supported by the full faith
and credit of the United States (such as securities issued by the Government
National Mortgage Association, the Federal Housing Administration, the
Department of Housing and Urban Development, the Export-Import Bank, the General
Services Administration and the Maritime Administration, and certain securities
issued by the Farmers' Home Administration and the Small Business
Administration, most of which are explained below under the section entitled
"Mortgage-Backed Securities"). The maturities of U.S. Government obligations
usually range from three months to thirty years.
4. Repurchase Agreements. When the Fund purchases securities, it may
enter into a repurchase agreement with the seller wherein the seller agrees, at
the time of sale, to repurchase the security at a mutually agreed upon time and
price. The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System and with broker-dealers who are recognized as primary
dealers in United States Government securities by the Federal Reserve Bank of
New York. Although the securities subject to the repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would never be more
than 397 days after the Fund's acquisition of the securities and normally would
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the security, and will not be
related to the coupon rate of the purchased security. At the time the Fund
enters into a repurchase agreement the value of the underlying security,
including accrued interest, will be equal to or exceed the value of the
repurchase agreement, and, in the case of a repurchase agreement exceeding one
day, the seller will agree that the value of the underlying security, including
accrued interest, will at all times be equal to or exceed the value of the
repurchase agreement. The Fund may engage in a repurchase agreement with respect
to any security in which it is authorized to invest, even though the underlying
security may mature in more than one year. The collateral securing the seller's
obligation must be of a credit quality at least equal to the Fund's investment
criteria for securities in which it invests and will be held by the Custodian or
in the Federal Reserve Book Entry System.
For purposes of the Investment Company Act of 1940, as amended (the
"1940 Act"), a repurchase agreement is deemed to be a loan from the Fund to the
seller subject to the repurchase agreement and is therefore subject to the
Fund's investment restriction applicable to loans. It is not clear whether a
court would consider the securities purchased by the Fund subject to a
repurchase agreement as being owned by the Fund or as being collateral for a
loan by the Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the securities before
repurchase of the security under a repurchase agreement, the Fund may encounter
a delay and incur costs before being able to sell the security. Delays may
involve loss of interest or decline in price of the security. If the court
characterized the transaction as a loan and the Fund has not perfected a
security interest in the security, the Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at the risk of losing some
or all of the principal and income involved in the transaction. As with any
unsecured debt obligation purchased for the Fund, the Adviser seeks to minimize
the risk of loss through repurchase agreements by analyzing the creditworthiness
of the obligor, in this case the seller. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may fail to
repurchase the security, in which case the Fund may incur a loss if the proceeds
of the sale to a third party are less than the repurchase price. However, if the
market value of the securities subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund involved will direct
the seller of the security to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. It is possible that a Fund will be unsuccessful in seeking
to impose on the seller a contractual obligation to deliver additional
securities.
-3-
<PAGE>
5. Hedging Transactions. The Fund may, but does not currently intend
to, enter into hedging transactions. Hedging is a means of transferring risk
which an investor does not desire to assume during an uncertain market
environment. The Fund is permitted to enter into the transactions solely (a) to
hedge against changes in the market value of portfolio securities or (b) to
close out or offset existing positions. The transactions must be appropriate to
reduction of risk; they cannot be for speculation. In particular, the Fund may
write covered call options on securities or stock indices. By writing call
options, the Fund limits its profit to the amount of the premium received. By
writing a covered call option, the Fund assumes the risk that it may be required
to deliver the security having a market value higher than its market value at
the time the option was written. The Fund will not write options if immediately
after such sale the aggregate value of the obligations under the outstanding
options would exceed 25% of the Fund's net assets.
To the extent the Fund uses hedging instruments which do not involve
specific portfolio securities, offsetting price changes between the hedging
instruments and the securities being hedged will not always be possible, and
market value fluctuations of the Fund may not be completely eliminated. When
using hedging instruments that do not specifically correlate with securities in
the Fund, the Adviser will attempt to create a very closely correlated hedge.
Short Sales. The Fund may make short sales of securities
"against-the-box." A short sale "against-the-box" is a sale of a security that
the Fund either owns an equal amount of or has the immediate and unconditional
right to acquire at no additional cost. The Fund will make short sales
"against-the-box" as a form of hedging to offset potential declines in long
positions in the same or similar securities.
6. Options Transactions. The Fund may, but does not currently intend
to, enter into options transactions. The Fund may purchase call and put options
on securities and on stock indices in an attempt to hedge its portfolio and to
increase its total return. Call options may be purchased when it is believed
that the market price of the underlying security or index will increase above
the exercise price. Put options may be purchased when the market price of the
underlying security or index is expected to decrease below the exercise price.
The Fund may also purchase all options to provide a hedge against an increase in
the price of a security sold short by it. When the Fund purchases a call option,
it will pay a premium to the party writing the option and a commission to the
broker selling the option. If the option is exercised by the Fund, the amount of
the premium and the commission paid may be greater than the amount of the
brokerage commission that would be charged if the security were purchased
directly.
In addition, the Fund may write covered call options on securities or
stock indices. By writing options, the Fund limits its profits to the amount of
the premium received. By writing a call option, the Fund assumes the risk that
it may be required to deliver the security at a market value higher than its
market value at the time the option was written plus the difference between the
original purchase price of the stock and the strike price. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security at a price in excess of its current market value.
7. Lending of Securities. The Fund may lend its portfolio securities
to qualified institutions as determined by the Adviser. By lending its portfolio
securities, the Fund attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund in such transaction. The Fund will not lend portfolio securities if, as a
result, the aggregate of such loans exceeds 33% of the value of its total assets
(including such loans). All relevant facts and circumstances, including the
creditworthiness of the qualified institution, will be monitored by the Adviser,
and will be considered in making decisions with respect to lending of
securities, subject to review by the Fund's Board of Directors. The Fund may pay
reasonable negotiated fees in connection with loaned securities, so long as such
fees are set forth in a written contract and their reasonableness is determined
by the Fund's Board of Directors.
-4-
<PAGE>
8. Variable-Amount Master Demand Notes. The Fund may purchase
variable amount master demand notes ("VANs"). VANs are debt obligations that
provide for a periodic adjustment in the interest rate paid on the instrument
and permit the holder to demand payment of the unpaid principal balance plus
accrued interest at specified intervals upon a specified number of days' notice
either from the issuer or by drawing on a bank letter of credit, a guarantee,
insurance or other credit facility issued with respect to such instrument.
The VANs in which the Fund may invest are payable on not more than
seven calendar days' notice either on demand or at specified intervals not
exceeding one year depending upon the terms of the instrument. The terms of the
instruments provide that interest rates are adjustable at intervals ranging from
daily to up to one year and their adjustments are based upon the prime rate of a
bank or other appropriate interest rate adjustment index as provided in the
respective instruments. The Fund will decide which variable rate demand
instruments it will purchase in accordance with procedures prescribed by its
Board of Directors to minimize credit risks.
The VANs that the Fund may invest in include participation
certificates purchased by the Fund from banks, insurance companies or other
financial institutions in fixed or variable rate, or taxable debt obligations
(VANs) owned by such institutions or affiliated organizations. A participation
certificate gives the Fund an undivided interest in the obligation in the
proportion that the Fund's participation interest bears to the total principal
amount of the obligation and provides the demand repurchase feature described
below. Where the institution issuing the participation does not meet the Fund's
high quality standards, the participation is backed by an irrevocable letter of
credit or guaranty of a bank (which may be a bank issuing a confirming letter of
credit, or a bank serving as agent of the issuing bank with respect to the
possible repurchase of the certificate of participation or a bank serving as
agent of the issuer with respect to the possible repurchase of the issue) or
insurance policy of an insurance company that the Board of Directors of the Fund
has determined meets the prescribed quality standards for the Fund. The Fund has
the right to sell the participation certificate back to the institution and,
where applicable, draw on the letter of credit, guarantee or insurance after no
more than 30 days' notice either on demand or at specified intervals not
exceeding 397 days (depending on the terms of the participation), for all or any
part of the full principal amount of the Fund's participation interest in the
security, plus accrued interest. The Fund intends to exercise the demand only
(1) upon a default under the terms of the bond documents, (2) as needed to
provide liquidity to the Fund in order to make redemptions of the Fund's shares,
or (3) to maintain a high quality investment portfolio. The institutions issuing
the participation certificates will retain a service and letter of credit fee
(where applicable) and a fee for providing the demand repurchase feature, in an
amount equal to the excess of the interest paid on the instruments over the
negotiated yield at which the participations were purchased by the Fund. The
total fees generally range from 5% to 15% of the applicable prime rate* or other
interest rate index. With respect to insurance, the Fund will attempt to have
the issuer of the participation certificate bear the cost of the insurance,
although the Fund retains the option to purchase insurance if necessary, in
which case the cost of insurance will be an expense of the Fund. The Adviser has
been instructed by the Fund's Board of Directors to continually monitor the
pricing, quality and liquidity of the variable rate demand instruments held by
the Fund, including the participation certificates, on the basis of published
financial information and reports of the rating agencies and other bank
analytical services to which the Fund may subscribe. Although these instruments
may be sold by the Fund, the Fund intends to hold them until maturity, except
under the circumstances stated above.
While the value of the underlying variable rate demand instruments
may change with changes in interest rates generally, the variable rate nature of
the underlying variable rate demand instruments should minimize changes in value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed
- ---------------
* The "prime rate" is generally the rate charged by a bank to its most
creditworthy customers for short term loans. The prime rate of a
particular bank may differ from other banks and will be the rate
announced by each bank on a particular day. Changes in the prime rate
may occur with great frequency and generally become effective on the
date announced.
-5-
<PAGE>
income securities. The Fund may contain VANs on which stated minimum or maximum
rates, or maximum rates set by state law, limit the degree to which interest on
such VANs may fluctuate. To the extent that the Fund holds VANs with these
limits, increases or decreases in value may be somewhat greater than would be
the case without such limits. In the event that interest rates increased so that
the variable rate exceeded the fixed-rate on the obligations, the obligations
could no longer be valued at par and this may cause the Fund to take corrective
action, including the elimination of the instruments. Because the adjustment of
interest rates on the VANs is made in relation to movements of the applicable
banks' "prime rate," or other interest rate adjustment index, the VANs are not
comparable to long-term fixed-rate securities. Accordingly, interest rates on
the VANs may be higher or lower than current market rates for fixed-rate
obligations or obligations of comparable quality with similar maturities.
For purposes of determining whether a VAN held by a Fund matures
within 397 days from the date of its acquisition, the maturity of the instrument
will be deemed to be the longer of (1) the period required before the Fund is
entitled to receive payment of the principal amount of the instrument or (2) the
period remaining until the instrument's next interest rate adjustment. If a
variable rate demand instrument ceases to meet the investment criteria of the
Fund, it will be sold in the market or through exercise of the repurchase
demand.
9. Investment Companies. The Fund may purchase securities of other
investment companies only to the extent that (i) not more than 5% of the value
of the Fund's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group,
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund, except as such securities may be acquired as
part of a merger, consolidation or acquisition of assets and further, except as
may be permitted by Section 12(d) of the 1940 Act or by the Securities and
Exchange Commission.
C. FUND POLICIES - INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment
restrictions which may not be changed unless approved by a majority of the
Fund's outstanding shares. As used in this Prospectus, the term "majority of the
outstanding shares" of the Fund means, respectively, the vote of the lesser of
(i) 67% or more of the shares of the Fund present at the meeting, if more than
50% of the outstanding shares of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding shares of the Fund.
The Fund may not:
(1) Borrow money. This restriction shall not apply to borrowing
from banks for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests that
might otherwise require the untimely disposition of
securities, in an amount up to one-third of the value of
the Fund's total assets (including the amount borrowed)
valued at market less liabilities (not including the amount
borrowed) at the time the borrowing was made.
(2) With respect to 75% of its total assets, the Fund will not
invest more than 5% of its assets in the securities of any
one issuer (except securities issued or guaranteed by the
U.S. Government, its agencies, and instrumentalities).
(3) With respect to 75% of its total assets, the Fund will not
invest in the securities of any issuer if as a result the
Fund holds more than 10% of the outstanding securities or
more than 10% of the outstanding voting securities of such
issuer.
(4) Mortgage, pledge or hypothecate any assets except that the
Fund may pledge not more than one-third of its total assets
to secure borrowings made in accordance with paragraph (2)
above.
-6-
<PAGE>
(5) Sell securities short, except short sales
"against-the-box," or purchase securities on margin made in
connection with hedging transactions.
(6) Underwrite the securities of other issuers, except insofar
as the Fund may be deemed an underwriter under the
Securities Act of 1933 in disposing of a portfolio
security.
(7) Invest more than an aggregate of 15% of its net assets in
illiquid securities, including restricted securities and
other securities that are not readily marketable, such as
repurchase agreements maturing in more than seven days and
variable rate demand instruments exercisable in more than
seven days.
(8) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and
gas interests, but this shall not prevent the Fund from
investing in obligations secured by real estate or
interests in real estate.
(9) Make loans to others, except through the purchase of
portfolio investments, including repurchase agreements,
exceeding in the aggregate one-third of the market value of
the Fund's total assets less liabilities other than
obligations created by these transactions.
(10) Invest 25% or more of its assets in the securities of
"issuers" in any single industry, except that the Fund will
concentrate (invest 25% or more of its assets) in the
Internet industry and provided that there shall be no
limitation on the Fund to purchase obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities.
(11) Invest in securities of other investment companies, except
(i) the Fund may purchase unit investment trust securities
where such unit investment trusts meet the investment
objective of the Fund and then only up to 5% of the Fund's
net assets, except as they may be acquired as part of a
merger, consolidation or acquisition of assets and (ii) as
permitted by Section 12(d) of the 1940 Act or by the
Securities and Exchange Commission.
(12) Issue senior securities except insofar as the Fund may be
deemed to have issued a senior security in connection with any
permitted borrowing.
The Fund will not be in violation of any maximum percentage
limitation when the change in the percentage of the Fund's holdings is due to a
change in value of the Fund's securities. This qualification does not apply to
the restriction on the Fund's ability to purchase additional securities when
borrowings earn 5% of the value of the Fund's total assets. Investment
restrictions that involve a maximum percentage of securities or assets will be
violated, however, if an excess over the percentage occurs immediately after,
and is caused by, an acquisition of securities or assets of, or borrowings by,
the Fund.
D. TEMPORARY DEFENSIVE POSITIONS
When the Adviser believes that market conditions warrant a temporary
defensive position, the Fund may invest up to 100% of its assets in short-term
instruments such as commercial paper, bank certificates of deposit, bankers'
acceptances, variable rate demand instruments or repurchase agreements for such
securities and securities of the U.S. Government and its agencies and
instrumentalities, as well as cash and cash equivalents denominated in foreign
currencies. Investments in domestic bank certificates of deposit and bankers'
acceptances will be limited to banks that have total assets in excess of $500
million and are subject to regulatory supervision by the U.S. Government or
state governments. The Fund's investments in foreign short-term instruments will
be limited to those that, in the opinion of the Adviser, equate generally to the
standards established for U.S. short-term instruments.
-7-
<PAGE>
III. MANAGEMENT OF THE FUND
The Fund's Board of Directors is responsible for the overall
management and supervision of the Fund. The Board employs Jacob Asset Management
LLC (the "Adviser") as the investment adviser to the Fund. The Adviser
supervises all aspects of the Fund's operations and provides investment advice
and portfolio management services to the Fund. Subject to the Board's
supervision, the Adviser makes all of the day-to-day investment decisions,
arranges for the execution of portfolio transactions and generally manages the
portfolio investments.
The directors and officers of the Fund and their principal
occupations during the past five years are set forth below. Their titles may
have varied during this period. Asterisks indicate that those directors are
"interested persons" of the Fund, as defined in the 1940 Act. Unless otherwise
indicated, the address of each director and officer is 1675 Broadway, New York,
New York 10019.
OFFICERS AND DIRECTORS OF THE FUND
<TABLE>
<S> <C>
RYAN I. JACOB* President, Chief Executive Officer and Director of the Fund as well
as founder, Chairman and Chief Executive Officer of the Adviser. Mr.
Jacob served as Chief Portfolio Manager of The Internet Fund, Inc.
from December 20, 1997 through June 24, 1999. Mr. Jacob also served
as an analyst for Horizon Asset Management from 1994 through August
1998 and was an assistant portfolio manager in the private client
group at Bankers Trust from 1992 through 1994. From 1996 through
August 1998, Mr. Jacob was Director of Research for IPO Value
Monitor, an investment research service. Mr. Jacob, a graduate of
Drexel University, has over 8 years of investment management
experience.
FRANCIS J. ALEXANDER* Vice President, Secretary, Treasurer and Director of the Fund. Mr.
Alexander has been a portfolio manager with Lepercq, de Neuflize &
Co. Inc. since May 1998. Mr. Alexander has also been President of
Alexander Capital Management, Inc. since March 1985.
WILLIAM B. FELL, 29 Director of the Fund. Mr. Fell has served as Manager-Accounting
Services with Maritrans Inc. since September 1996. From March 1995
to September 1996, he was a Senior Accountant with Maritrans Inc.
Mr. Fell was formerly a Senior Accountant with Ernst & Young LLP from
September 1994 to March 1995. His address is 1818 Market Street,
Suite 3540, Philadelphia, Pennsylvania 19103-3636.
CHRISTOPHER V. HAJINIAN, 30 Director of the Fund. Mr. Hajinian is currently a self-employed
attorney. He was an attorney with Naulty, Scaricamazza & McDevitt
Ltd. from September 1996 to
</TABLE>
- ---------------
* "Interested person" of the Fund, as defined in the Investment Company Act.
-8-
<PAGE>
<TABLE>
<S> <C>
July 1999. His address is 11 Charles Drive, Richboro, Pennsylvania 18954.
LEONARD S. JACOB, 50, M.D., Ph.D. Director of the Fund. Dr. Jacob has served as Chairman and Chief
Executive Officer of InKine Pharmaceutical Company, Inc. since
November 1997. Prior to joining InKine, Dr. Jacob served as the
President and Chief Executive Officer of Sangen Pharmaceutical
Company and as a consultant to various biotechnology companies from
June 1996. From 1989 to 1996, Dr. Jacob, as a co-founder of Magainin
Pharmaceutical Inc., served as Chief Operating Officer. His address
is 1720 Walton Rd., Suite 200, Blue Bell, Pennsylvania 19422.
JEFFREY I. SCHWARZSCHILD, 28 Director of the Fund. Mr. Schwarzschild has been an associate
attorney at Goldstein, Gillman, Melbostad, Gibson & Harris, LLP since
February 1999. He is also a professor of Constitutional Law and
Trial Advocacy at Golden Gate University. Mr. Schwarzschild had his
own law practice from December 1997 to February 1999. His address is
100 Van Ness Avenue, 21st Floor, San Francisco, California 94102.
</TABLE>
-9-
<PAGE>
ESTIMATED COMPENSATION TABLE
(For Fiscal Year Ended August 31)
<TABLE>
<CAPTION>
Pension or
Retirement Estimated
Benefits Annual
Aggregate Accrued Benefit Total
Name of Person and Compensation as Part of Upon Compensation
Position with Fund From Fund Fund Expenses Retirement From the Fund
------------------ --------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
William B. Fell $4,000 $0 $0 $4,000
Director
Christopher V. Hajinian $4,000 $0 $0 $4,000
Director
Dr. Leonard Jacob $4,000 $0 $0 $4,000
Director
Jeffrey I. Schwarzchild $4,000 $0 $0 $4,000
Director
</TABLE>
Each Director who is not an interested person of the Fund receives $1,000 for
each meeting attended and is reimbursed for all out-of-pocket expenses incurred
in connection with attendance at such meetings.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On September 20, 1999, Ryan Jacob purchased $100,000 of the Fund's
common stock at an initial subscription price of $10.00 per share. Mr. Jacob may
be deemed to be a "control person" of the Fund as defined in the Act due to his
majority ownership interest in the Adviser.
V. INVESTMENT ADVISORY AND OTHER SERVICES
A. INVESTMENT ADVISER
1. General Information. Jacob Asset Management LLC (the "Adviser"), a
registered investment adviser, is a Delaware limited liability company with its
principal office located at 1675 Broadway, New York, New York 10019. The Adviser
has been employed by the Board of Directors to serve as the investment adviser
of the Fund pursuant to an Investment Advisory Agreement entered into by the
Fund. The Adviser supervises all aspects of the Fund's operations and provides
investment advice and portfolio management services to the Fund. Pursuant to the
Advisory Agreement and subject to the supervision of the Fund's Board of
Directors, the Adviser makes the Fund's day-to-day investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Fund's investments.
Ryan I. Jacob, founder, Chairman and Chief Executive Officer of the
Adviser and President, Chief Executive Officer and Director of the Fund, is a
controlling person of the Adviser based on his majority ownership interest and
is both a control and affiliated person of the Fund. Francis J. Alexander is an
affiliated person of both the Adviser and the Fund. Mr. Alexander has a minority
ownership interest in the Adviser and is Vice President, Secretary, Treasurer
and Director of the Fund. Lepercq, de Neuflize & Co. Incorporated is an
affiliate of the Adviser based on its minority ownership interest. It acts as
investment adviser to a mutual fund and also manages portfolios for individuals
and institutional clients.
-10-
<PAGE>
Lepercq, de Neuflize Securities Inc., the Fund's distributor, is a wholly-owned
subsidiary of Lepercq, de Neuflize & Co. Incorporated.
The Adviser provides persons satisfactory to the Board of Directors
of the Fund to serve as officers of the Fund. Such officers, as well as certain
other employees and directors of the Fund, may be directors, officers or
employees of the Adviser or its affiliates.
The Adviser may also provide the Fund with supervisory personnel who
will be responsible for supervising the performance of administrative services,
accounting and related services, net asset value and yield calculation, reports
to and filings with regulatory authorities, and services relating to such
functions. However, the Administrator will provide personnel who will be
responsible for performing the operational components of such services. The
personnel rendering such supervisory services may be employees of the Adviser,
of its affiliates or of other organizations.
The Advisory Agreement was initially approved on August 27, 1999 by
the Board of Directors, including a majority of the directors who are not
interested persons (as defined in the 1940 Act) of the Fund or the Adviser and
by the initial shareholder. The Agreement, which currently extends to August 31,
2001, may be continued in force thereafter for successive twelve-month periods
beginning each September 1, provided that such continuance is specifically
approved annually by majority vote of the Fund's outstanding voting securities
or by the Board of Directors, and in either case by a majority of the directors
who are not parties to the Advisory Agreement or interested persons of any such
party, by votes cast in person at a meeting called for the purpose of voting on
such matter.
The Advisory Agreement is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of the
outstanding voting shares of the Fund or by a vote of a majority of the Fund's
Board of Directors, or by the Adviser on sixty days' written notice, and will
automatically terminate in the event of its assignment. The Advisory Agreement
provides that in the absence of willful misfeasance, bad faith or gross
negligence on the part of the Adviser, or of reckless disregard of its
obligations thereunder, the Adviser shall not be liable for any action or
failure to act in accordance with its duties thereunder.
2. Adviser's Fees. Pursuant to the terms of the Advisory Agreement,
the Fund, on behalf of each Class, will pay an annual advisory fee paid monthly
equal to 1.25% of the Fund's average daily net assets.
This fee is higher than the fee paid by most other mutual funds;
however, the Board of Directors believes that this fee is reasonable in light of
the advisory services performed by the Adviser for the Fund. Any portion of the
advisory fees received by the Adviser may be used by the Adviser to provide
investor and administrative services and for distribution of Fund shares.
The Adviser may voluntarily waive a portion of its fee or assume
certain expenses of the Fund. This would have the effect of lowering the overall
expense ratio of the Fund and of increasing yield to investors.
Voluntary Expense Subsidization. From time to time, the Adviser may
voluntarily assume certain expenses of the Fund. This would have the effect of
lowering the overall expense ratio and of increasing yield to investors. Subject
to any such voluntary assumption of certain expenses by the Adviser, the Fund
has, under the Advisory Agreement, confirmed its obligation for payment of all
other expenses, including without limitation: (i) fees payable to the Adviser,
Administrator, Custodian, Transfer Agent and Dividend Agent; (ii) brokerage and
commission expenses; (iii) Federal, state or local taxes, including issuance and
transfer taxes incurred by or levied on it; (iv) commitment fees, certain
insurance premiums and membership fees and dues in investment company
organizations; (v) interest charges on borrowings; (vi) telecommunications
expenses; (vii) recurring and non-recurring legal and accounting expenses;
(viii) costs of organizing and maintaining the Fund's existence as a
corporation; (ix) compensation, including directors' fees, of any directors,
officers or employees who are not also officers of the Adviser or its affiliates
and costs of other personnel providing administrative and clerical services; (x)
costs of stockholders' services and costs of stockholders' reports, proxy
solicitations, and corporate meetings; (xi) fees and expenses of registering its
shares under the appropriate Federal securities laws and of qualifying its
-11-
<PAGE>
shares under applicable state securities laws, including expenses attendant upon
the initial registration and qualification of these shares and attendant upon
renewals of, or amendments to, those registrations and qualifications; and (xii)
expenses of preparing, printing and delivering the Prospectus to existing
shareholders and of printing shareholder application forms for shareholder
accounts.
The Fund may from time-to-time hire its own employees or contract to
have management services performed by third parties, and the management of the
Fund intends to do so whenever it appears advantageous to the Fund. The Fund's
expenses for employees and for such services are among the expenses subject to
the expense limitation described above.
B. THE DISTRIBUTION AND SERVICE PLAN
The Fund has adopted a distribution and service plan, pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Plan"). Rule 12b-1
provides that an investment company which bears any direct or indirect expense
of distributing its shares must do so only in accordance with a plan permitted
by the Rule.
The Plan provides that the Fund will compensate the Adviser for
certain expenses and costs incurred in connection with providing shareholder
servicing and maintaining shareholder accounts and to compensate parties with
which it has written agreements and whose clients own shares of the Fund for
providing servicing to their clients ("Shareholder Servicing"). These fees are
subject to a maximum of 0.25% per annum of the Fund's average daily net assets.
The Plan also provides that Lepercq, de Neuflize Securities Inc. (the
"Distributor") is paid a fee equal to 0.10% of the Fund's average daily net
assets (the "Distribution Fee") on an annual basis to permit it to make payments
to broker-dealers and other financial institutions with which it has written
agreements and whose clients are Fund shareholders (each a "broker-dealer") for
providing distribution assistance and promotional support to the Fund. Fees paid
under the Plan may not be waived for individual shareholders.
Under the Plan, each shareholder servicing agent and broker-dealer
will, as agent for its customers, among other things: (i) answer customer
inquiries regarding account status and history, the manner in which purchases
and redemptions of shares of each Class of the Fund may be effected and certain
other matters pertaining to the Fund; (ii) assist shareholders in designating
and changing dividend options, account designations and addresses; (iii) provide
necessary personnel and facilities to establish and maintain shareholder
accounts and records; assist in processing purchase and redemption transactions;
(iv) arrange for the wiring of funds; (v) transmit and receive funds in
connection with customer orders to purchase or redeem shares; (vi) verify and
guarantee shareholder signatures in connection with redemption orders and
transfers and changes in shareholder designated accounts; (vii) furnish
quarterly and year-end statements and confirmations within five business days
after activity in the account; (viii) transmit to shareholders of each Class
proxy statements, annual reports, updated prospectuses and other communications;
(ix) receive, tabulate and transmit proxies executed by shareholders with
respect to meetings of shareholders of the Fund; and (x) provide such other
related services as the Fund or a shareholder may request.
The Plan, the shareholder servicing agreements and the distribution
agreement each provide that the Adviser and the Distributor may make payments
from time to time from their own resources which may include the advisory fee,
the Distribution Fee and past profits for the following purposes: (i) to defray
the costs of and to compensate others, including financial intermediaries with
whom the Distributor or the Adviser has entered into written agreements, for
performing shareholder servicing and related administrative functions of the
Fund; to compensate certain financial intermediaries for providing assistance in
distributing Fund shares; (ii) to pay the costs of printing and distributing the
Fund's Prospectus to prospective investors; and (iii) to defray the cost of the
preparation and printing of brochures and other promotional materials, mailings
to prospective shareholders, advertising, and other promotional activities,
including the salaries and/or commissions of sales personnel in connection with
the distribution of the Fund's shares. Further, the Agreements provide that the
Adviser may use its service fee for the purposes enumerated in (i) above and any
asset based sales charges paid to the Distributor also may be used for purposes
of (ii) or (iii) above. The Distributor or the Adviser, as the case may be, in
their sole discretion, will determine the amount of such payments made pursuant
to the Plan with the
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shareholder servicing agents and broker-dealers with whom they have contracted,
provided that such payments made pursuant to the Plan will not increase the
amount which the Fund is required to pay the Distributor or the Adviser for any
fiscal year under the shareholder servicing agreements or otherwise.
Shareholder servicing agents and broker-dealers may charge investors
a fee in connection with their use of specialized purchase and redemption
procedures offered to investors by the shareholder servicing agents and
broker-dealers. In addition, shareholder servicing agents and broker-dealers
offering purchase and redemption procedures similar to those offered to
shareholders who invest in the fund directly may impose charges, limitations,
minimums and restrictions in addition to or different from those applicable to
shareholders who invest in the Fund directly. Accordingly, the net yield to
investors who invest through shareholder servicing agents and broker-dealers may
be less than realized by investing in the Fund directly. An investor should read
the Prospectus in conjunction with the materials provided by the shareholder
servicing agent and broker-dealer describing the procedures under which Fund
shares may be purchased and redeemed through the shareholder servicing agent and
broker-dealer.
In accordance with the Rule, the Plan provides that all written
agreements relating to the Plan entered into by the Fund, the Distributor or the
Adviser, and the shareholder servicing agents, broker-dealers, or other
organizations, must be in a form satisfactory to the Fund's Board of Directors.
In addition, the Plan requires the Fund and the Distributor to prepare, at least
quarterly, written reports setting forth all amounts expended for distribution
purposes by the Fund and the Distributor pursuant to the Plan and identifying
the distribution activities for which those expenditures were made.
C. ADMINISTRATOR
1. General Information. The Administrator for the Fund is Firstar
Mutual Fund Services, LLC (the "Administrator"), which has its principal office
at 615 East Michigan Street, Milwaukee, Wisconsin 53202 and is primarily in the
business of providing administrative, fund accounting and stock transfer
services to retail and institutional mutual funds.
Pursuant to a Fund Administration Servicing Agreement with the Fund,
the Administrator provides all administrative services necessary for the Fund,
other than those provided by the Adviser, subject to the supervision of the
Fund's Board of Directors. The Administrator will provide persons to serve as
officers of the Fund. Such officers may be directors, officers or employees of
the Administrator or its affiliates.
The Fund Administration Servicing Agreement is terminable by the
Board of Directors of the Fund or the Administrator on sixty days' written
notice and may be assigned provided the non-assigning party provides prior
written consent. The Agreement shall remain in effect for two years from the
date of its initial approval, and subject to annual approval of the Fund's Board
of Directors for one-year periods thereafter. The Agreement provides that in the
absence of willful misfeasance, bad faith or gross negligence on the part of the
Administrator or reckless disregard of its obligations thereunder, the
Administrator shall not be liable for any action or failure to act in accordance
with its duties thereunder.
Under the Fund Administration Servicing Agreement, the Administrator
provides all administrative services, including, without limitation: (i)
providing services of persons competent to perform such administrative and
clerical functions as are necessary to provide effective administration of the
Fund; (ii) overseeing the performance of administrative and professional
services to the Fund by others, including the Fund's Custodian; (iii) preparing,
but not paying for, the periodic updating of the Fund's Registration Statement,
Prospectus and Statement of Additional Information in conjunction with Fund
counsel, including the printing of such documents for the purpose of filings
with the Securities and Exchange Commission and state securities administrators,
preparing the Fund's tax returns, and preparing reports to the Fund's
shareholders and the Securities and Exchange Commission; (iv) preparing in
conjunction with Fund counsel, but not paying for, all filings under the
securities or "Blue Sky" laws of such states or countries as are designated by
the Distributor, which may be required to register or qualify, or continue the
registration or qualification, of the Fund and/or its shares under such laws;
(v) preparing notices and agendas for meetings of the Fund's Board of Directors
and minutes of such meetings in all matters required by the 1940 Act to be acted
upon by the Board; and (vi) monitoring daily and periodic compliance with
respect to all requirements and restrictions of the Investment Company Act, the
Internal Revenue Code and the Prospectus.
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The Administrator, pursuant to the Fund Administration Servicing
Agreement, provides the Fund with all accounting services, including, without
limitation: (i) daily computation of net asset value; (ii) maintenance of
security ledgers and books and records as required by the Investment Company
Act; (iii) production of the Fund's listing of portfolio securities and general
ledger reports; (iv) reconciliation of accounting records; (v) calculation of
yield and total return for the Fund; (vi) maintaining certain books and records
described in Rule 31a-1 under the 1940 Act, and reconciling account information
and balances among the Fund's Custodian and Adviser; and (vii) monitoring and
evaluating daily income and expense accruals, and sales and redemptions of
shares of the Fund.
2. Administrator's Fees. For the administrative services rendered to
the Fund by the Administrator, the Fund pays the Administrator a minimum annual
fee of $35,000. The Administrator charges the Fund an annual fee of .07% of the
average daily net assets on the first $200 million, .05% on the next $500
million, and .04% on the balance.
For the fund accounting services rendered to the Fund by the
Administrator, the Fund pays the Administrator at an annual rate of $23,000 for
the first $40 million, .01% of the average daily net assets of the Fund on the
next $200 million, and .005% on the balance. The Administrator is also entitled
to certain out-of-pocket expenses, including pricing expenses.
D. CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT
Firstar Bank Milwaukee, N.A., 615 East Michigan Street, Milwaukee,
Wisconsin 53202, serves as custodian for the Fund's cash and securities.
Pursuant to a Custodian Servicing Agreement with the Fund, it is responsible for
maintaining the books and records of the Fund's portfolio securities and cash.
The Custodian receives an annual fee equal to .02% of the Fund's average daily
net assets. The Custodian does not assist in, and is not responsible for,
investment decisions involving assets of the Fund. Firstar Mutual Fund Services
LLC, the Fund's Administrator, also acts as the Fund's transfer and dividend
agent. Firstar Mutual Fund Services LLC has its principal office at 615 East
Michigan Street, Milwaukee, Wisconsin 53202.
E. COUNSEL AND INDEPENDENT AUDITORS
Legal matters in connection with the issuance of shares of common
stock of the Fund are passed upon by Battle Fowler LLP, 75 East 55th Street, New
York, NY 10022. PricewaterhouseCoopers LLP, 100 E. Wisconsin Ave., Suite 1500,
Milwaukee, Wisconsin 53202 have been selected as auditors for the Fund.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
The Adviser makes the Fund's portfolio decisions. In the
over-the-counter market, where a majority of the portfolio securities are
expected to be traded, orders are placed with responsible primary market-makers
unless a more favorable execution or price is believed to be obtainable.
Regarding exchange-traded securities, the Adviser determines the broker to be
used in each specific transaction with the objective of negotiating a
combination of the most favorable commission and the best price obtainable on
each transaction (generally defined as best execution). The Adviser will also
consider the reliability, integrity and financial condition of the
broker-dealer, the size of and difficulty in executing the order, the value of
the expected contribution of the broker-dealer to the investment performance of
the Fund on a continuing basis, as well as other factors such as the
broker-dealer's ability to engage in transactions in securities of issuers which
are thinly traded. The Adviser does not intend to employ a broker-dealer whose
commission rates fall outside of the prevailing ranges of execution costs
charged by other broker-dealers offering similar services. When consistent with
the objective of obtaining best execution, brokerage may be directed to persons
or firms supplying investment information to the Adviser, or portfolio
transactions may be effected by the Adviser or through the Distributor. Neither
the Fund nor the Adviser has entered into agreements or understandings with any
brokers regarding the placement of securities transactions because of research
services they provide. To the extent that such persons or firms supply
investment information to the Adviser for use in rendering investment advice to
the Fund, such information may be supplied at no cost to the Adviser and,
therefore, may
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have the effect of reducing the expenses of the Adviser in rendering advice to
the Fund. While it is impossible to place an actual dollar value on such
investment information, its receipt by the Adviser probably does not reduce the
overall expenses of the Adviser to any material extent. Consistent with the
Conduct Rules of the NASD, and subject to seeking best execution, the Adviser
may consider sales of shares of the Fund as a factor in the selection of brokers
to execute portfolio transactions for the Fund.
The investment information provided to the Adviser is of the type
described in Section 28(e) of the Securities Exchange Act of 1934 and is
designed to augment the Adviser's own internal research and investment strategy
capabilities. Research services furnished by brokers through which the Fund
effects securities transactions are used by the Adviser in carrying out its
investment management responsibilities with respect to all of its clients'
accounts. There may be occasions where the transaction cost charged by a broker
may be greater than that which another broker may charge if the Adviser
determines in good faith that the amount of such transaction cost is reasonable
in relation to the value of brokerage and research services provided by the
executing broker. The Adviser may consider the sale of shares of the Fund by
brokers including the Distributor as a factor in its selection of brokers of
Fund transactions.
A majority of the portfolio securities that the Fund purchases or
sells will be done as principal transactions. In addition, debt instruments are
normally purchased directly from the issuer, from banks and financial
institutions or from an underwriter or market maker for the securities. There
usually are not brokerage commissions paid for any such purchases. Any
transactions involving such securities for which the Fund pays a brokerage
commission will be effected at the best price and execution available. Purchases
from underwriters of portfolio securities include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as
market makers include the spread between the bid and asked price. The Fund may
purchase Government Obligations with a demand feature from banks or other
financial institutions at a negotiated yield to the Fund based on the applicable
interest rate adjustment index for the security. The interest received by the
Fund is net of a fee charged by the issuing institution for servicing the
underlying obligation and issuing the participation certificate, letter of
credit, guarantee or insurance and providing the demand repurchase feature.
Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser in its best judgment and in a manner deemed
in the best interest of shareholders of the Fund rather than by a formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price.
Investment decisions for the Fund will be made independently from
those for any other investment companies or accounts that may become managed by
the Adviser or its affiliates. If, however, the Fund and other investment
companies or accounts managed by the Adviser are simultaneously engaged in the
purchase or sale of the same security, the transactions will be averaged as to
price and allocated equitably to each account. In some cases, this policy might
adversely affect the price paid or received by the Fund or the size of the
position obtainable for the Fund. In addition, when purchases or sales of the
same security for the Fund and for other investment companies managed by the
Adviser occur contemporaneously, the purchase or sale orders may be aggregated
in order to obtain any price advantage available to large denomination
purchasers or sellers.
In addition to managing the assets of the Fund, the Adviser manages
assets on a discretionary basis for other clients and, as a result, the Adviser
may effect transactions in such clients' accounts in securities in which the
Fund currently holds or, in the near future may hold, a position. The Adviser
makes the determination to purchase or sell a security based on numerous
factors, including those that may be particular to one or more of its clients.
Therefore, it is possible that the Adviser will effect transactions in certain
securities for select clients, which may or may not include the Fund, that it
may not deem, in its sole discretion, as being appropriate for other clients,
which may or may not include the Fund.
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<PAGE>
VII. CAPITAL STOCK AND OTHER SECURITIES
The authorized capital stock of the Fund consists of twenty billion
shares of stock having a par value of one-tenth of one cent ($.001) per share.
The Fund's Board of Directors is authorized to divide the unissued shares into
separate classes and series of stock, each series representing a separate,
additional investment portfolio. Currently there is only one class of shares
outstanding. Shares of any class or series will have identical voting rights,
except where, by law, certain matters must be approved by a majority of the
shares of the affected class or series. Each share of any class or series of
shares when issued has equal dividend, distribution, liquidation and voting
rights within the class or series for which it was issued, and each fractional
share has those rights in proportion to the percentage that the fractional share
represents of a whole share. Shares will be voted in the aggregate.
There are no conversion or preemptive rights in connection with any
shares of the Fund. All shares, when issued in accordance with the terms of the
offering, will be fully paid and non-assessable. Shares are redeemable at net
asset value, at the option of the investor.
The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares outstanding voting for the
election of directors can elect 100% of the directors if the holders choose to
do so, and, in that event, the holders of the remaining shares will not be able
to elect any person or persons to the Board of Directors. Unless specifically
requested by an investor who is an investor of record, the Fund does not issue
certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings
of the Fund's shareholders. This is because the By-laws of the Fund provide for
annual meetings only (a) for the election of directors, (b) for approval of
revisions to the Fund's investment advisory agreement, (c) for approval of
revisions to the Fund's distribution agreement with respect to a particular
class or series of stock, and (d) upon the written request of holders of shares
entitled to cast not less than twenty-five percent of all the votes entitled to
be cast at such meeting. Annual and other meetings may be required with respect
to such additional matters relating to the Fund as may be required by the 1940
Act including the removal of Fund directors and communication among
shareholders, any registration of the Fund with the Securities and Exchange
Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of shareholders called
for the purpose of considering the election or reelection of such Director or of
a successor to such Director, and until the election and qualification of his or
her successor, elected at such meeting, or until such Director sooner dies,
resigns, retires or is removed by the vote of the shareholders.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
The material relating to the purchase, redemption and pricing of
shares is located in the Shareholder Information section of the Prospectus and
is incorporated by reference herein.
IX. TAXATION OF THE FUND
Prospective investors should consult their tax advisors with respect
to the tax consequences of an investment in the Fund.
The Fund intends to elect, effective for its tax year ending August
31, 2000, to be treated as a regulated investment company under the Internal
Revenue Code of 1986. To qualify as a regulated investment company, the Fund
must distribute to shareholders at least 90% of its investment company taxable
income (which includes, among other items, dividends, taxable interest and the
excess of net short-term capital gains over net long-term capital losses), and
meet certain diversification of assets, source of income, and other requirements
discussed below. If the Fund meets these requirements, it generally will not be
subject to Federal income tax on investment company taxable income distributed
to its shareholders,
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and on net long-term capital gains designated by the Fund as capital gain
dividends distributed to shareholders. In determining the amount of net capital
gains to be distributed, any capital loss carryover from prior years will be
applied against capital gains to reduce the amount of distributions paid. If the
Fund does not meet all of these requirements, it will be taxed as an ordinary
corporation and distributions will generally be taxed to shareholders as
ordinary income to the extent of the Fund's current or accumulated earnings and
profits. Such distributions generally would be eligible for the dividends
received deduction in the case of corporate shareholders. The Fund's policy is
to declare dividends annually and distribute as dividends each year 100% (and in
no event less than 90%) of its investment company taxable income.
Amounts not distributed on a timely basis, other than tax-exempt
interest, may be subject to a nondeductible 4% excise tax. To avoid the excise
tax, the Fund must distribute for the calendar year an amount equal to the sum
of (1) at least 98% of its ordinary income (excluding any capital gains or
losses) for the calendar year, (2) at least 98% of the excess of its capital
gains over capital losses (adjusted for certain losses) for the one-year period
ending October 31 of such year, and (3) all ordinary income and capital gain net
income (adjusted for certain ordinary losses) for previous years that were not
distributed during such years.
Distributions of investment company taxable income, including net
short term capital gains, generally are taxable to shareholders as ordinary
income. Distributions of net capital gains, if any, designated by the Fund as
capital gain dividends are taxable to shareholders as long-term capital gains,
regardless of the length of time the Fund's shares have been held by the
shareholder. Shareholders will be notified annually as to the Federal tax status
of distributions.
Distributions are taxable to shareholders whether received in cash or
reinvested in additional shares of the Fund. Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution equal to the amount of the cash dividend that otherwise would have
been distributable (where the additional shares are purchased in the open
market), or the fair market value of the shares received, determined as of the
reinvestment date. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the value of a share on the reinvestment date. The
Fund does not expect that any of its distributions will qualify for the
dividends-received deduction for corporations.
In addition to satisfying the distribution requirement described
above, a regulated investment company must derive at least 90% of its gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign currencies (to the extent such currency gains are directly related to
the regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies.
The Fund must also satisfy an asset diversification test in order to
qualify as a regulated investment company. Under this test, at the close of each
quarter of the Fund's taxable year, at least 50% of the value of the Fund's
assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of such issuer and as to which the Fund does
not hold more than 10% of the outstanding voting securities of such issuer), and
no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses. Generally, an option (call or put) with respect to a security is
treated as issued by the issuer of the security, not the issuer of the option.
Investors should carefully consider the tax implications of buying
shares prior to a distribution by the Fund. The price of shares purchased at
such a time includes the amount of the forthcoming distributions, but the
distribution would be taxable to the shareholder as ordinary income or capital
gain as described above, even though, from an investment standpoint, it may
constitute a partial return of capital.
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Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid by domestic
issuers. The Fund does not expect that it will qualify to elect to pass through
to its shareholders the right to take a foreign tax credit for foreign taxes
withheld from dividends and interest payments. Gains or losses attributable to
fluctuations in exchange rates resulting from transactions in which the Fund
accrues interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency generally are treated as ordinary income or
ordinary loss. These gains or losses may increase, decrease, or eliminate the
amount of the Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
Upon the taxable disposition (including a sale or redemption) of
shares of the Fund, a shareholder may realize a gain or loss. Such gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and will be long-term if the shareholder's holding period
for the shares is more than one year. Non-corporate shareholders are subject to
tax at a maximum rate of 20% on long-term capital gains resulting from the
disposition of shares held for more than 12 months (10% if the taxpayer is, and
would be after accounting for such gains, subject to the 15% tax bracket for
ordinary income). However, a loss realized by a shareholder on the disposition
of Fund shares with respect to which capital gains dividends have been paid
will, to the extent of such capital gain dividends, also be treated as long-term
capital loss if such shares have been held by the shareholder for six months or
less. Further, a loss realized on a disposition will be disallowed to the extent
the shares disposed of are replaced (whether by reinvestment of distributions or
otherwise) within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income ($1,500 for married individuals
filing separately).
If any net capital gains are retained by the Fund for reinvestment,
requiring federal income taxes thereon to be paid by it, the Fund will elect to
treat such capital gains as having been distributed to shareholders. As a
result, shareholders will report such capital gains as net capital gains, will
be able to claim their share of federal income taxes paid by the Fund on such
gains as a credit against their own federal income tax liability, and will be
entitled to increase the adjusted tax basis of their Fund shares by 65% of their
share of the undistributed gain.
The Fund will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of exempt
shareholders, which include most corporations. Under the backup withholding
provisions, distributions of taxable income and capital gains and proceeds from
the redemption or exchange of the shares of a regulated investment company may
be subject to withholding of federal income tax at the rate of 31% in the case
of non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and their required certifications regarding
their status under the federal income tax law. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld. Corporate shareholders should provide the Fund with their taxpayer
identification numbers and should certify their status in order to avoid
possible erroneous application of backup withholding.
The foregoing discussion of U.S. federal income tax law relates
solely to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of Fund shares, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of 30% (or at a
lower rate under an applicable income tax treaty) on amounts received by such
person.
The Fund may be subject to state or local tax in jurisdictions in
which the Fund is organized or may be deemed to be doing business. However,
Maryland taxes regulated investment companies in a manner that is generally
similar to the federal income tax rules described herein.
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Distributions may be subject to state and local income taxes. In
addition, the treatment of the Fund and its shareholders in those states that
have income tax laws might differ from their treatment under the federal income
tax laws.
X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their
net asset value. In effecting sales of Fund shares under the Distribution
Agreement, the Distributor, as agent for the Fund, will solicit orders for the
purchase of the Fund's shares, provided that any subscriptions and orders will
not be binding on the Fund until accepted by the Fund as a principal. For its
services under the Distribution Agreement, the Distributor will be entitled to
receive the Distribution Fee.
The Glass-Steagall Act limits the ability of a depository institution
to become an underwriter or distributor of securities. It is the Fund's
position, however, that banks are not prohibited from acting in other capacities
for investment companies, such as providing administrative and shareholder
account maintenance services and receiving compensation from the distributor for
providing such services. This is an unsettled area of the law, however, and if a
determination contrary to the Fund's position concerning shareholder servicing
and administration payments to banks from the distributor is made by a bank
regulatory agency or court, any such payments will be terminated and any shares
registered in the banks' names, for their underlying customers, will be
re-registered in the names of the customers at no cost to its shareholders. In
addition, state securities laws on this issue may differ from the interpretation
of Federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
XI. CALCULATION OF PERFORMANCE DATA
The Fund may from time to time include yield, effective yield and
total return information in advertisements or reports to investors or
prospective investors. Currently, the Fund intends to provide these reports to
investors and prospective investors semi-annually, but may from time to time, in
its sole discretion, provide reports on a more frequent basis, such as
quarterly. The "yield" refers to income generated by an investment in the Fund
over a thirty-day period. This income is then "annualized." That is, the amount
of income generated by the investment during that month is assumed to be
generated each month over a 12-month period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the monthly income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The "total
return" of the Fund is required to be included in any advertisement containing
the Fund's yield. Total return is the average annual total return for the period
which began at the inception of the Fund and ended on the date of the most
recent balance sheet, and is computed by finding the average annual compound
rates of return over the period that would equate the initial amount invested to
the ending redeemable value. Yield, effective yield and total return may
fluctuate daily and do not provide a basis for determining future yields,
effective yields or total returns. One-, five- and ten-year periods will be
shown, unless the Fund has been in existence for a shorter period.
The yield and the net asset value of the Fund will vary based on the
current market value of the securities held by the Fund and changes in the
Fund's expenses. The Adviser, the Administrator or the Distributor may
voluntarily waive a portion of their fees on a month-to-month basis. These
actions would have the effect of increasing the net income (and therefore the
yield and total rate of return) of the Fund during the period such waivers are
in effect. These factors and possible differences in the methods used to
calculate the yields and total rates of return should be considered when
comparing the yields or total rates of return of the Fund to yields and total
rates of return published for other investment companies and other investment
vehicles.
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The Fund computes yield based on a 30-day (or one month) period ended
on the date of the most recent balance sheet included in the registration
statement, computed by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[(a-b + 1)6 - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to
dividends.
d = the maximum offering price per share on the last day of the
period.
Actual future yields will depend on the type, quality, and maturities
of the investments held by the Fund, changes in interest rates on investments,
and the Fund's expenses during the period.
COMPUTATION OF TOTAL RETURN. Total return is the average annual
total return for the 1-, 5- and 10-year period ended on the date of the most
recent balance sheet included in the Statement of Additional Information,
computed by finding the average annual compounded rates of return over 1-, 5-
and 10-year periods that would equate the initial amount invested to the ending
redeemable value according to the following formula:
P(1 + T)n = ERV
Where:
P = a hypothetical initial investment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1000 payment made at the
beginning of the 1-, 5- or 10-year
periods at the end of the 1-, 5-or
10-year periods (or fractions
thereof).
Because the Fund has not had a registration in effect for 5 or 10
years, the period during which the registration has been effective shall be
substituted.
From time to time evaluations of performance of the Fund made by
independent sources may be used in advertisements. These sources may include
Lipper Analytical Services, Wiesenberger Investment Company Service, Donoghue's
Money Fund Report, Barron's, Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Personal Investor, Bank Rate Monitor, and The Wall
Street Journal. From time to time evaluations of performance of the Adviser made
by independent sources may be used in advertisements of the Fund.
The performance of the Fund may be compared in various financial and
news publications to the performance of various indices and investments for
which reliable performance data is available. The performance of the Fund may be
compared in publications to averages, performance rankings, or other information
prepared by nationally recognized mutual fund ranking and statistical services.
As with other performance data, performance comparisons should not be considered
representative of the Fund's relative performance for any future period.
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<PAGE>
XII. FINANCIAL STATEMENTS
The annual financial statements will be audited by the Fund's
independent financial accountants. Copies will be available, without charge,
upon request.
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