As filed with the Securities and Exchange Commission on May 5, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-09447
Jacob Internet Fund Inc.
(Exact name of registrant as specified in charter)
C/O Jacob Asset Management of New York LLC
507 Paseo de la Playa
Redondo Beach, CA 90277
(Address of principal executive offices) (Zip code)
Ryan Jacob
C/O Jacob Asset Management of New York LLC
507 Paseo de la Playa
Redondo Beach, CA 90277
(Name and address of agent for service)
(310) 316-2924
Registrant's telephone number, including area code
Date of fiscal year end: August 31
Date of reporting period: February 28, 2006
Item 1. Report to Stockholders.
Jacob Internet Fund Inc.
Semi-Annual Report
February 28, 2006
The Jacob Internet Fund is a mutual fund with the primary investment
objective of long-term growth of capital with current income
as a secondary objective.
Investment Adviser
Jacob Asset Management of New York LLC
[LOGO]
TABLE OF CONTENTS
<Table>
Letter From the Manager.............. 1
Industry Breakdown................... 3
Additional Information on Fund
Expenses........................... 4
Schedule of Investments.............. 5
Statement of Assets and
Liabilities........................ 8
Statement of Operations.............. 9
Statement of Changes in Net Assets... 10
Financial Highlights................. 11
Notes to the Financial Statements.... 12
Additional Information............... 17
</Table>
Dear Fellow Investors,
The equity markets, and technology stocks in particular, have posted solid
gains over the last six months. This is especially true for Internet-related
companies as significant fundamental improvement is being complemented by a
notable increase in merger & acquisition activity. We are pleased to report that
the Fund has benefited greatly from both of these trends. Although we still have
concerns in regards to the effects of rising interest rates and high energy
prices on the economy, we are confident in the Fund's positioning, and believe
it is positioned in a way to minimize risk and maximize return potential.
While the general markets have been rising as of late, many Internet leaders
have been weak performers so far this year. We have taken this as an opportunity
to add significantly to two of our holdings that we believe have fallen to
prices that underestimate their future growth potential: Google and Yahoo. With
the Internet advertising market continuing to gain share from traditional media,
both Google and Yahoo may stand to benefit the most from these additional
dollars being spent on Internet campaigns. Additionally, as distribution
channels become more fragmented and commoditized, we believe that the leading
content aggregators stand to benefit the most. Whether it's through the PC,
wireless device, phone or television, consumers are likely to increasingly rely
on both Google and Yahoo to guide their online needs.
Another area that continues to warrant a significant weighting for the Fund
are Chinese Internet companies. After a period of rocky transition in the
wireless market, it is becoming more evident that the early Internet players are
not only maintaining their position but also successfully fending off foreign
competitors. While China is still well behind the size of the more developed
U.S. market, more mainland Chinese companies are allocating advertising dollars
online as well. This fact, combined with the tremendous potential for future
development, clearly makes the Chinese market one of the most exciting areas
that the Fund is investing in today. However, mindful of the unique economic and
political risks that come with investing in China, we still try to limit the
overall holdings in the portfolio in order to manage that exposure.
From a higher-level portfolio perspective, as valuations have risen
recently, we have been more aggressive in taking profits on smaller
capitalization names and increasing our weightings in some of the larger
capitalization names that we have mentioned earlier. As some of these larger
companies are trading at the most reasonable valuations we've seen in a number
of years, it would not be surprising to see a few more of these larger names
move up on the Fund's holdings list this year. An additional side benefit from
this subtle shift is that it should help to lower the volatility of the
portfolio as a whole.
That all being said, our general approach to managing the Fund has remained
basically the same: to focus on companies that have solid market positions in
high-growth areas that benefit from the advancement of Internet-related
technologies. Additionally, we continue to believe that having a mix of growth-
and value-oriented holdings is helpful in mitigating overall portfolio
volatility. We believe this, in combination with an active trading approach, has
shown to be the most effective way to reach our goal of managing the Fund's risk
profile while allowing for potential gains.
Once again, we would like to take this opportunity to thank all of the
Fund's shareholders for their continued trust and confidence, and we look
forward to a bright future together.
Ryan Jacob
Portfolio Manager
THERE ARE SPECIFIC RISKS INHERENT IN INVESTING IN THE INTERNET AREA,
PARTICULARLY WITH RESPECT TO SMALLER CAPITALIZED COMPANIES AND THE HIGH
VOLATILITY OF INTERNET STOCKS.
The opinions expressed above are those of the portfolio manager and are subject
to change. Forecasts cannot be guaranteed.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. MUTUAL FUND INVESTING
INVOLVES RISK; LOSS OF PRINCIPAL IS POSSIBLE. THE FUND INVESTS IN FOREIGN
SECURITIES WHICH INVOLVE GREATER VOLATILITY AND POLITICAL, ECONOMIC AND CURRENCY
RISKS AND DIFFERENCES IN ACCOUNTING METHODS.
Must be preceded or accompanied by a prospectus.
Fund holdings are subject to change and should not be construed as a
recommendation to buy or sell any security. Please refer to the schedule of
investments for additional fund holdings information.
Quasar Distributors, LLC. Distributor (4/06)
2
INDUSTRY BREAKDOWN AS OF FEBRUARY 28, 2006
(AS A % OF TOTAL INVESTMENTS)
[GRAPHIC: JACOBINTERNET_41795A1]
<Table>
Internet--Commerce 23.7%
Internet--Media Content 23.2%
Internet--Infrastructure 33.6%
Cash & Cash Equivalents 9.3%
Internet--Communications 10.2%
</Table>
The Fund's Annual and Semiannual Reports include a complete schedule of
portfolio holdings for the second and fourth quarters of each fiscal year.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC website at http://www.sec.gov and may be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
3
ADDITIONAL INFORMATION ON FUND EXPENSES
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2006
As a shareholder of a mutual fund, you may incur two types of costs: (1)
transaction costs, including sales charges (loads) on purchase payments,
reinvested dividends, or other distributions; redemption fees; and exchange
fees; and (2) ongoing costs, including management fees; distribution and/or
service (12b-1) fees; and other fund expenses. The Fund does not currently
charge sales charges (loads) or exchange fees. The Fund assesses a redemption
fee of 2% on shares sold within 30 days following their purchase date. In
addition, you will be assessed fees for outgoing wire transfers, returned checks
and stop payment orders. The Fund charges management fees and distribution
and/or service (12b-1) fees. The Example reflects the 0.10% waiver of
distribution and/or service (12b-1) fees by the Adviser for the period from
12/29/05 - 2/28/06. The Expense Example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds. The Example is based
on an investment of $1,000 invested at the beginning of the period and held for
the entire period (9/1/05 - 2/28/06).
ACTUAL EXPENSES
The first line of the table below provides information about account values
based on actual returns and actual expenses. Although the Fund charges no sales
load, the Fund charges a redemption fee of 2% on shares sold within 30 days
following the purchase date. In addition, you will be assessed fees for outgoing
wire transfers, returned checks and stop payment orders at prevailing rates
charged by U.S. Bancorp Fund Services, LLC, the Fund's transfer agent. If you
request that a redemption be made by wire transfer, currently the Fund's
transfer agent charges a $15.00 fee. The Example does not reflect the redemption
fees or fees paid to the transfer agent. The Example reflects the 0.10% waiver
of distribution and/or service (12b-1) fees by the Adviser for the period from
12/29/05 - 2/28/06. You may use the information in the first line below,
together with the amount you invested, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading entitled 'Expenses Paid During the
Period' to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values based on a hypothetical return and hypothetical expenses based on
the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds. Please note that the
expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as redemption fees. Therefore, the
second line of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if the transactional costs were included, your costs would have been
higher.
<Table>
<Caption>
EXPENSES PAID
BEGINNING ACCOUNT ENDING ACCOUNT DURING THE PERIOD
VALUE 9/1/05 VALUE 2/28/06 9/1/05 - 2/28/06*
------------ ------------- -----------------
Actual........................................ $1,000.00 $1,228.20 $13.43
Hypothetical (5% annual return before
expenses)................................... $1,000.00 $1,012.74 $12.13
</Table>
- ---------
* Expenses are equal to the Fund's annualized expense ratio of 2.43% multiplied
by the average account value over the period multiplied by 181/365 (to reflect
the one-half year period).
4
JACOB INTERNET FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SHARES VALUE
------ -----
COMMON STOCKS 91.1%
- -------------------------------------------------------------------------------------------------
INTERNET -- COMMERCE 23.8%
132,875 51job, Inc. -- ADR*^(a) $ 2,112,713
714,163 Art Technology Group, Inc.*(a) 2,092,498
541,873 Autobytel Inc.* 2,530,547
1,978 Ctrip.com International Ltd. -- ADR^ 153,394
100,621 Digital River, Inc.*(a) 3,787,374
1,000 eBay Inc.*(a) 40,060
44,552 Expedia, Inc.*(a) 845,151
291,273 HomeStore, Inc.* 1,811,718
70,000 IAC/InterActiveCorp*(a) 2,046,800
17,100 Monster Worldwide Inc.*(a) 837,216
898,926 Napster Inc.* 3,218,155
1,309,466 PartyGaming plc (BP)*^ 2,921,653
55,700 TD Ameritrade Holding Corporation 1,212,032
-----------
23,609,311
- -------------------------------------------------------------------------------------------------
INTERNET -- COMMUNICATIONS 10.3%
468,400 Airspan Networks Inc.*(a) 2,880,660
107,500 Alvarion Limited*^(a) 1,004,050
537,240 deltathree, Inc.*(a) 1,708,423
929,400 iBasis, Inc.*(a) 1,923,858
134,467 Openwave Systems Inc.*(a) 2,669,170
-----------
10,186,161
- -------------------------------------------------------------------------------------------------
INTERNET -- INFRASTRUCTURE 33.8%
24,000 Adobe Systems Incorporated(a) 926,880
493,951 Agile Software Corporation* 3,428,020
1,700 Akamai Technologies, Inc.*(a) 45,050
20,000 Apple Computer, Inc.*(a) 1,370,800
1,285,000 CDC Corporation*^(a) 6,129,450
114,000 Digimarc Corporation* 844,740
830 Digital Insight Corporation* 27,432
153,069 Internet Security Systems, Inc.* 3,568,038
327,800 Interwoven, Inc.* 2,851,860
70,000 Macrovision Corporation* 1,414,700
199,001 MatrixOne, Inc.* 1,207,936
566,900 ONYX Software Corporation* 2,210,910
62,006 Open Text Corporation*^(a) 1,085,105
115,276 SafeNet, Inc.* 2,872,678
333,369 SumTotal Systems, Inc.*(a) 1,433,487
555,607 webMethods, Inc.* 4,133,716
-----------
33,550,802
-----------
</Table>
5
JACOB INTERNET FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SHARES VALUE
------ -----
COMMON STOCKS -- (CONTINUED) 91.1%
- -------------------------------------------------------------------------------------------------
INTERNET -- MEDIA CONTENT 23.2%
1,000,000 China.com Inc. (HK)*^ $ 77,747
1,000 CNET Networks, Inc.*(a) 13,840
1,000 Electronic Arts Inc.*(a) 51,970
8,500 Google Inc.*(a) 3,082,270
85,686 InfoSpace, Inc.* 2,065,890
376,352 iVillage Inc.* 3,067,269
98,300 Jupitermedia Corporation*(a) 1,458,772
137,100 SINA Corp*^ 3,066,927
168,500 Sohu.com Inc.*^ 3,543,555
1,600,000 Tencent Holdings Limited (HK)*^ 2,148,197
188,449 TheStreet.com 1,462,364
1,500 THQ Inc.* 36,000
94,274 Yahoo! Inc.*(a) 3,022,425
-----------
23,097,226
-----------
TOTAL COMMON STOCKS (COST $76,134,936) 90,443,500
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT
------
SHORT TERM INVESTMENTS 9.3%
- -------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS 4.4%
$ 4,370,000 Federal Home Loan Bank, 2.65%, 03/01/06 4,370,000
------------
Total U.S. Government Agency Obligations 4,370,000
------------
VARIABLE RATE DEMAND NOTES # 4.9%
1,343,634 American Family Financial Services, 4.23% 1,343,634
3,571,506 Wisconsin Corporate Central Credit Union, 4.30% 3,571,506
------------
Total Variable Rate Demand Notes 4,915,140
------------
TOTAL SHORT TERM INVESTMENTS
(COST $9,285,140) 9,285,140
------------
INVESTMENTS PURCHASED WITH CASH
PROCEEDS FROM SECURITIES LENDING 25.2%
- -------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 1.0%
1,000,000 CCN Orchard Park LLC Promissory Notes, 4.67%, Due
10/06/06 1,000,000
------------
Total Commercial Paper 1,000,000
------------
</Table>
6
JACOB INTERNET FUND
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SHARES VALUE
------ -----
INVESTMENTS PURCHASED WITH
CASH PROCEEDS FROM SECURITIES
LENDING -- (CONTINUED) 25.2%
- -------------------------------------------------------------------------------------------------
MONEY MARKET MUTUAL FUNDS 0.0%
885 Merrill Lynch Premier Institutional Fund $ 885
------------
Total Money Market Mutual Funds 885
------------
<Caption>
PRINCIPAL
AMOUNT
------
REPURCHASE AGREEMENTS 24.2%
Credit Suisse First Boston Repurchase Agreement:
$20,000,000 (Dated 02/28/06), 4.57%, Due 03/01/06 (Repurchase
Proceeds $20,002,539), (Collateralized by a
Fannie Mae Collateralized Mortgage Obligation) 20,000,000
4,000,000 (Dated 02/28/06), 4.61%, Due 03/01/06 (Repurchase
Proceeds $4,000,513), (Collateralized by a Wells
Fargo Mortgage Backed Securities Trust
Collateralized Mortgage Obligation) 4,000,000
------------
Total Repurchase Agreements 24,000,000
------------
TOTAL INVESTMENTS PURCHASED WITH CASH PROCEEDS
FROM SECURITIES LENDING (COST $25,000,885) 25,000,885
------------
TOTAL INVESTMENTS (COST $110,420,961) 125.6% 124,729,525
LIABILITIES LESS OTHER ASSETS (25.6)% (25,405,232)
------------
TOTAL NET ASSETS 100.0% $ 99,324,293
------------
------------
</Table>
* Non Income Producing
^ Foreign Security
ADR American Depository Receipt
(a) All or a portion of shares are on loan.
BP British Pounds
HK Hong Kong Dollars
# Variable rate demand notes are considered short-term
obligations and are payable upon demand. Interest rates
change periodically on specified dates. The rates listed are
as of February 28, 2006.
7
JACOB INTERNET FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 2006 (UNAUDITED)
- ---------------------------------------------------------------------------
<Table>
ASSETS:
Investments, at value (cost $86,420,961) $ 100,729,525
Repurchase Agreements (cost $24,000,000) 24,000,000
Receivable for investments sold 1,338,531
Receivable for capital shares sold 239,396
Interest receivable 20,616
Other assets 45,904
-------------
Total Assets 126,373,972
-------------
LIABILITIES:
Payable for collateral received for securities loaned 24,784,836
Cash payable due to overdraft from securities lending 216,049
Payable to Adviser 95,153
Payable for investments purchased 1,635,763
Payable for distribution expenses 143,925
Payable for capital shares repurchased 11,548
Accrued expenses and other liabilities 162,405
-------------
Total Liabilities 27,049,679
-------------
NET ASSETS $ 99,324,293
-------------
-------------
NET ASSETS CONSIST OF:
Capital Stock $ 230,666,813
Accumulated net realized loss on investments (145,651,084)
Net unrealized appreciation on investments 14,308,564
-------------
Total Net Assets $ 99,324,293
-------------
-------------
Shares outstanding (20 billion shares of $0.001 par
value authorized) 39,216,681
-------------
Net asset value, redemption price and offering price per
share $ 2.53
-------------
-------------
</Table>
See notes to the financial statements.
8
JACOB INTERNET FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
<Table>
INVESTMENT INCOME
Dividend income $ 190,200
Interest income 186,794
Securities lending income 57,710
-----------
Total Investment Income 434,704
-----------
EXPENSES
Investment advisory fee 502,058
Distribution expenses 140,576
Administration fee 32,295
Shareholder servicing and accounting costs 129,860
Custody fees 18,840
Federal and state registration 18,231
Professional fees 63,319
Reports to shareholders 30,010
Directors' fees and expenses 40,188
Other 18,766
-----------
Total expenses 994,143
-----------
Expense waiver (see Note 7) (16,291)
-----------
Net expenses 977,852
-----------
NET INVESTMENT LOSS (543,148)
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 9,243,098
Change in net unrealized appreciation/depreciation on
investments 7,049,661
-----------
Net realized and unrealized gain on investments 16,292,759
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $15,749,611
-----------
-----------
</Table>
See notes to the financial statements.
9
JACOB INTERNET FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED
FEBRUARY 28, 2006 AUGUST 31, 2005
----------------- ---------------
(UNAUDITED)
OPERATIONS:
Net investment loss $ (543,148) $ (1,544,736)
Net realized gain on investments 9,243,098 9,788,988
Change in net unrealized appreciation/depreciation on
investments 7,049,661 10,363,321
------------ ------------
Net increase in net assets resulting from operations 15,749,611 18,607,573
------------ ------------
CAPITAL SHARE TRANSACTIONS: (NOTE 3)
Proceeds from shares sold 37,364,867 64,032,290
Cost of shares redeemed (19,623,641) (68,313,135)
Redemption fees 13,441 7,816
------------ ------------
Net increase (decrease) in net assets resulting
from capital share transactions 17,754,667 (4,273,029)
------------ ------------
NET INCREASE IN NET ASSETS 33,504,278 14,334,544
NET ASSETS:
Beginning of period 65,820,015 51,485,471
------------ ------------
End of period $ 99,324,293 $ 65,820,015
------------ ------------
------------ ------------
</Table>
See notes to the financial statements.
10
JACOB INTERNET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<Table>
<Caption>
SIX MONTHS ENDED
FEBRUARY 28, 2006 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
(UNAUDITED) AUGUST 31, 2005 AUGUST 31, 2004 AUGUST 31, 2003 AUGUST 31, 2002
----------- --------------- --------------- --------------- ---------------
PER SHARE DATA:
Net asset value, beginning
of period $ 2.06 $ 1.51 $ 1.48 $ 0.60 $ 0.83
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment (loss)(1) (0.01) (0.05) (0.05) (0.01) (0.04)
Net realized and
unrealized gains
(losses) on investments 0.48 0.60 0.08 0.89 (0.19)
----------- ----------- ----------- ----------- -----------
Total from investment
operations 0.47 0.55 0.03 0.88 (0.23)
----------- ----------- ----------- ----------- -----------
Redemption fees 0.00 0.00 -- -- --
----------- ----------- ----------- ----------- -----------
Net asset value, end of
period $ 2.53 $ 2.06 $ 1.51 $ 1.48 $ 0.60
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total return 22.82%(4) 36.42% 2.03% 146.67% (27.71%)
SUPPLEMENTAL DATA AND
RATIOS:
Net assets, end of period $99,324,293 $65,820,015 $51,485,471 $92,507,052 $12,091,297
Ratio of gross operating
expenses (prior to
waiver or
reimbursements) to
average net assets 2.47%(5) 2.64% 2.63% 2.85%(3) 5.29%(3)
Ratio of net operating
expenses (after waiver
or reimbursements) to
average net assets 2.43%(5)(6) 2.64% 2.63% 2.13%(3) 4.60%(3)
Ratio of net investment
(loss) (prior to waiver
or reimbursements) to
average net assets (1.39%)(5) (2.29%) (2.44%) (2.60%)(3) (5.06%)(3)
Ratio of net investment
(loss) (after waiver or
reimbursements) to
average net assets (1.35%)(5)(6) (2.29%) (2.44%) (1.88%)(3) (4.37%)(3)
Portfolio turnover rate 57.34%(4) 127.13% 154.63% 363.27% 1,080.63%
<Caption>
YEAR ENDED
AUGUST 31, 2001
---------------
PER SHARE DATA:
Net asset value, beginning
of period $ 5.54
-----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment (loss)(1) (0.05)
Net realized and
unrealized gains
(losses) on investments (4.66)
-----------
Total from investment
operations (4.71)
-----------
Redemption fees --
-----------
Net asset value, end of
period $ 0.83
-----------
-----------
Total return (85.02%)(2)
SUPPLEMENTAL DATA AND
RATIOS:
Net assets, end of period $17,017,392
Ratio of gross operating
expenses (prior to
waiver or
reimbursements) to
average net assets 2.99%
Ratio of net operating
expenses (after waiver
or reimbursements) to
average net assets 2.82%
Ratio of net investment
(loss) (prior to waiver
or reimbursements) to
average net assets (2.42%)
Ratio of net investment
(loss) (after waiver or
reimbursements) to
average net assets (2.25%)
Portfolio turnover rate 347.84%
</Table>
- ---------
(1) Net investment loss per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
(2) If certain losses had not been assumed by the affiliate, total return would
have been lower by less than 0.01%.
(3) The net operating expense ratio and the net investment loss ratio includes
expense reductions from fees paid indirectly with brokerage commissions.
(4) Not annualized.
(5) Annualized.
(6) Reflects Adviser's waiver of 0.10% of the shareholder servicing fee for the
period December 29, 2005 through February 28, 2006.
See notes to the financial statements.
11
JACOB INTERNET FUND
NOTES TO THE FINANCIAL STATEMENTS
FEBRUARY 28, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 -- DESCRIPTION OF FUND
Jacob Internet Fund Inc. (the 'Corporation'), was organized as a Maryland
corporation on July 13, 1999 and is registered under the Investment Company Act
of 1940, as amended (the '1940 Act'), as an open-end management investment
company issuing its shares in series. The Corporation currently consists of one
'diversified' series, the Jacob Internet Fund (the 'Fund') and the authorized
capital stock of the Fund consists of twenty billion shares of stock having a
par value of one-tenth of one cent ($0.001) per share. The primary investment
objective of the Fund is long-term growth of capital with current income as a
secondary objective. The Fund commenced operations on December 14, 1999.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
(a) Investment Valuation -- Investment securities traded on a national
securities exchange are valued at their market value determined by their last
sales price in the principal market in which these securities are normally
traded, except those traded on the NASDAQ National Market and Capital Market
exchanges, unless there are no transactions on the valuation date, in which
case they are valued at the mean between the closing bid and ask prices.
Securities traded over-the-counter are valued at the last reported sales
price unless there is no reported sales price, in which case the mean between
the closing bid and ask prices is used. Securities traded on the NASDAQ
National Market and Capital Market exchanges are valued at the NASDAQ
Official Closing Price ('NOCP'). Foreign securities, currencies and other
assets denominated in foreign currencies are translated into U.S. dollars at
the exchange rate of such currencies. Foreign equity securities are valued at
the last sale price at the close of the exchange on which the security is
principally traded. Debt securities with maturities of sixty days or less are
valued at amortized cost, which approximates market value. Where market
quotations are not readily available or are unreliable, securities are valued
at fair value using procedures approved by the Board of Directors that are
designed to determine a security's fair value.
(b) Income Recognition -- Interest income is accrued as earned. Dividend
income is recorded on the ex-dividend date. All discounts and premiums are
amortized using the effective interest method for tax and financial reporting
purposes.
(c) Securities Transactions -- Security transactions are accounted for on
trade date. Realized gains and losses on securities sold are determined using
specific identification. Fluctuations resulting from changes in foreign
exchange rates on investments from the fluctuations arising from changes in
those foreign exchange rates are included with the net realized and
unrealized gain or loss from investments in the Fund's financial statements.
(d) Distributions to Shareholders -- The Fund records distributions to
shareholders on the ex-dividend date. Dividends from net investment income,
if any, are declared and paid annually. Distributions of net realized capital
gains, if any, will be declared and distributed at least annually. The
amounts of distributions from net investment income and net realized capital
gains are
12
JACOB INTERNET FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
determined in accordance with federal income tax regulations, which may
differ from those amounts determined under U.S. generally accepted accounting
principles. These book/tax differences are either temporary or permanent in
nature. To the extent these differences are permanent, reclassifications are
made in the capital accounts in the period that the differences arise.
(e) Federal Income Taxes -- The Fund complies with provisions of the Internal
Revenue Code applicable to regulated investment companies, including the
distribution of substantially all of the Fund's taxable income. Accordingly,
no provision for federal income taxes is considered necessary in the
financial statements.
(f) Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amount
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(g) Repurchase Agreements. 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 U.S. government securities by the Federal
Reserve Bank of New York. Repurchase agreements involve an agreement to
purchase a security and to sell that security back to the original seller at
an agreed-upon price and an agreed-upon time. Because the security purchased
constitutes collateral for the repurchase obligation, a repurchase agreement
may be considered a loan that is collateralized by the security purchased.
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 of the
security back to the original seller 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. In the event that the repurchase
agreement is held for more than one day, the security serving as collateral
for the repurchase agreement will be marked-to-market daily to ensure that
the value of the collateral does not decrease below the purchase price, plus
accrued interest. If a decrease occurs, the seller will provide additional
collateral to add to the account to maintain appropriate collateralization.
The use of repurchase agreements involves certain risks. One risk is the
seller's ability to pay the agreed upon repurchase price on the repurchase
date. If the seller defaults, the Fund may incur costs in disposing of the
collateral, which would reduced the amount realized thereon. If the seller
seeks relief under the bankruptcy laws, the disposition of the collateral may
be delayed or limited. Delays may result in possible decline in the value of
the underlying security while the Fund seeks its rights thereto, possible
lack of access to income on the underlying security during the delayed
period, and expenses in enforcing the Fund's rights.
13
JACOB INTERNET FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 -- CAPITAL SHARE TRANSACTIONS
At February 28, 2006, there were twenty billion shares, $0.001 par value,
authorized.
Transactions in shares of the Fund were as follows:
<Table>
<Caption>
SIX MONTHS ENDED
FEBRUARY 28, 2006
-------------------------
SHARES AMOUNT
------ ------
Sales 16,021,468 $ 37,364,867
Redemptions (8,704,133) (19,623,641)
Redemption Fees -- 13,441
---------- ------------
Net Increase 7,317,335 $ 17,754,667
---------- ------------
------------
SHARES OUTSTANDING:
Beginning of period 31,899,346
----------
End of period 39,216,681
----------
----------
</Table>
<Table>
<Caption>
YEAR ENDED
AUGUST 31, 2005
--------------------------
SHARES AMOUNT
------ ------
Sales 33,049,937 $ 64,032,290
Redemption (35,333,556) (68,313,135)
Redemption Fees -- 7,816
----------- ------------
Net Decrease (2,283,619) $ (4,273,029)
----------- ------------
------------
SHARES OUTSTANDING:
Beginning of period 34,182,965
-----------
End of period 31,899,346
-----------
-----------
</Table>
NOTE 4 -- INVESTMENT TRANSACTIONS
During the six months ended February 28, 2006, purchases and sales of investment
securities (excluding short-term investments) were $55,872,300 and $41,082,089,
respectively. The Fund did not purchase U.S. Government securities as a part of
its investment strategy during the six months ended February 28, 2006.
14
JACOB INTERNET FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
At August 31, 2005, the components of accumulated earnings/(losses) on a tax
basis were as follows:
<Table>
Cost of Investments....................................... $ 75,926,325
-------------
-------------
Gross unrealized appreciation............................. 12,631,055
Gross unrealized depreciation............................. (6,788,494)
-------------
Net unrealized appreciation............................... $ 5,842,561
-------------
-------------
Undistributed ordinary income............................. --
Undistributed long-term capital gain...................... --
-------------
Total distributable earnings.............................. $ --
-------------
-------------
Other accumulated losses.................................. $(153,477,840)
-------------
Total accumulated losses.................................. $(147,635,279)
-------------
-------------
</Table>
At August 31, 2005, the Fund had an accumulated net realized capital loss
carryover of $153,477,840, of which $63,601,480 expires in 2009, and $89,876,360
expires in 2010. To the extent the Fund realizes future net capital gains,
taxable distributions to its shareholders will be offset by any unused capital
loss carryover.
The Fund made no distributions during the six months ended February 28, 2006 and
the fiscal year ended August 31, 2005.
NOTE 5 -- INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Corporation has an Investment Advisory Agreement (the 'Advisory Agreement')
with Jacob Asset Management of New York LLC (the 'Adviser'), with whom certain
officers and Directors of the Board are affiliated, to furnish investment
advisory services to the Fund. Under the terms of the Advisory Agreement, the
Corporation, on behalf of the Fund, compensates the Adviser for its management
services based on an annual rate of 1.25% of the Fund's average daily net
assets.
U.S. Bancorp Fund Services, LLC serves as transfer agent, administrator and
accounting services agent for the Fund. U.S. Bank, N.A. serves as custodian for
the Fund. U.S. Bancorp Asset Management serves as the securities lending agent.
NOTE 6 -- SECURITIES LENDING
The Fund may lend portfolio securities up to 33% of its total assets (including
such loans) to borrowers under terms of participation in a securities lending
program administered by U.S. Bancorp Asset Management. The Agreement requires
that loans are collateralized at all times in an amount equal to at least 102%
of the market value of any loaned securities at the time of the loan, plus
accrued interest.
15
JACOB INTERNET FUND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund receives compensation in the form of fees and earns interest on the
cash collateral. The amount of fees depends on a number of factors including the
types of security, length of the loan and credit standing of the borrower. The
Fund continues to receive interest or dividends on the securities loaned during
the borrowing period. The Fund has the right under the terms of the securities
lending agreement to recover the securities from the borrower on demand. U.S.
Bancorp Asset Management received $17,778 from the Fund for its securities
lending administrative services during the six months ended February 28, 2006.
As of February 28, 2006, the Fund had loaned securities that were collateralized
by cash equivalents. The cash collateral is invested by the custodian with the
approval of the Adviser. Although risk is mitigated by the collateral, the Fund
could experience a delay in recovering its securities and possible loss of
income or value if the borrower fails to return the borrowed securities. As of
February 28, 2006, the value of the Fund's securities on loan was $22,066,024
and the value of the related collateral was $24,784,836.
NOTE 7 -- DISTRIBUTION AND SERVICE PLAN
The Corporation, on behalf of the Fund, has adopted a distribution and service
plan (the 'Plan'), pursuant to Rule 12b-1 under the 1940 Act. The Plan provides
that the Fund will compensate the Adviser up to 0.25% per annum of the Fund's
average daily net assets 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 Fee'). Effective December 29, 2005, the Adviser has contractually
agreed to waive 0.10% of this fee through December 31, 2006. The Plan also
provides for a distribution fee equal to 0.10% of the Fund's average daily net
assets on an annual basis ('Asset Based Sales Charge'). Such a fee is paid to
Quasar Distributors, LLC, ('distributor') to compensate the Distributor for
basic distribution services, out of pocket expenses incurred in connection with
activities to sell Fund shares, advertising compliance reviews, and licensing of
the Adviser's staff. The Distributor may make payments from time to time from
the Asset Based Sales Charge to broker-dealers, other financial professionals
whose clients are Fund shareholders, and for providing distribution assistance
and promotional support to the Fund. The Fund incurred $124,285 in expenses
pursuant to the 12b-1 Plan for the six months ended February 28, 2006. At
February 28, 2006, $143,925 of the Shareholder Servicing Fee was available for
eligible 12b-1 expenses.
16
JACOB INTERNET FUND
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT
At an in-person meeting held October 21, 2005, the Board, including all of the
Directors who are not parties to the Advisory Agreement and are not 'interested
persons' (as defined in the 1940 Act) of any parties to the Advisory Agreement
(the 'independent Directors'), approved the renewal of the Advisory Agreement.
In reaching this decision, the Board took into account a combination of factors,
including the nature and quality of services provided by the Adviser, the Fund's
performance, and Fund expenses. The Board did not identify any single factor as
all-important or controlling, and this summary does not detail all the matters
considered.
In making their determination, the Board took into account information furnished
throughout the year at regular Board meetings, as well as information prepared
specifically in connection with the annual renewal review process. The Board
regularly received reports on the Fund's investment performance and portfolio
composition, including the performance of the Fund in reference to a peer group
of similar funds and relevant securities indices. The Board regularly reviewed
sales and redemptions of Fund shares and soft-dollar brokerage commissions
generated by the Fund. Throughout the year, the Board also received periodic
updates from the Adviser on Fund asset levels, Fund performance, market factors
affecting Fund performance and investment strategies utilized as a result of
those market factors. In addition, the Board regularly received information
about the scope and quality of services provided by the Adviser, the financial
resources of the Adviser, and reports relating to compliance with the Fund's
investment policies and restrictions. Information furnished specifically for
consideration at the Board meeting to consider renewal of the investment
advisory agreement included, among others, information on the nature and quality
of services, the fees for the services, terms and conditions of the agreement,
and information comparing the Fund's performance and expenses with peer funds.
In considering the nature, extent and quality of services, the Board considered
the experience of the portfolio managers of the Fund and the fact that the
primary focus of the Adviser is managing the Fund. The Board placed emphasis on
the fact that the Adviser has specialized skill in the area of the Fund's
investments. The Board considered the Fund's compliance with regulatory policies
and procedures, as well as the Fund's compliance with its investment objectives.
The Board also considered the soft-dollar research benefits to the Adviser and
the fact that the Fund was the only client beneficiary of the soft-dollar
research. In addition, the Board reviewed the nature and quality of services
provided by third-party service providers and the Adviser's supervision of the
third-party service providers. The Board expressed satisfaction with the nature
and quality of the services provided by the Adviser and concluded that the
services provided by the Adviser benefited the Fund and its shareholders.
In evaluating performance, attention was given to the performance of the Fund in
comparison to its peer group and in comparison to relevant indices. The Board
reviewed comparative performance throughout the year and noted that the fund
consistently outperformed its peer funds. The Board considered the Fund's
performance in relation to its investment objective and reviewed the Adviser's
portfolio management style to achieve the investment objective. The Board
concluded that the Fund and its shareholders will continue to benefit from the
Adviser's management of the Fund. In considering
17
JACOB INTERNET FUND
ADDITIONAL INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
the reasonableness of expenses, consideration was given to the advisory fee
level in relation to those within the relevant peer group of similar funds. The
Board considered the Adviser's expertise, portfolio management, and research
capabilities in Internet-related investments. The Board reviewed the Adviser's
financials provided in connection with the meeting to consider renewal of the
advisory agreement, as well as the Adviser's financials received throughout the
year during regular Board meetings. The Board considered the fact that the
Adviser was agreeable to fee breakpoints in the event that the Fund's assets
grow to a level where economies of scale may be achieved. The Board determined
that the advisory fee was reasonable given the specialized skill of the Adviser
and the fact that the Fund is the Adviser's prominent focus.
In considering such material, the independent Board members received assistance
and advice from and met separately with independent counsel. Based upon its
review of such material and information together with such other information as
it deemed relevant, the Board, including a majority of independent Directors,
concluded that the fee payable under the Advisory Agreement was reasonable and
that continuance of the Advisory Agreement was appropriate and in the best
interest of Fund shareholders.
PROXY VOTING
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available by calling
toll-free 1-888-Jacob-fx (522-6239) or on the SEC website at http://www.sec.gov.
PROXY VOTING RECORD
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available
without charge by calling 1-888-Jacob-fx (522-6239) or on the SEC website at
http://www.sec.gov.
18
Investment Advisor
Jacob Asset Management of New York LLC
Administrator and Transfer Agent
and Dividend Agent
U.S. Bancorp Fund Services, LLC
Underwriter and Distributor
Quasar Distributors, LLC
Custodian
U.S. Bank, N.A.
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
This report has been prepared for the information of share-
holders of the Jacob Internet Fund and is not authorized for
distribution to prospective investors unless preceded or
accompanied by an effective prospectus that includes infor-
mation regarding the Fund's objectives, policies, manage-
ment, records and other information.
Jacob Asset Management of New York LLC
1-888-Jacob-fx (522-6239)
www. JacobInternet.com
Jacob Internet
Fund Inc.
J A C O B I N T E R N E T F U N D I N C . [LOGO]
Semi-Annual
Report
-----------------
February 28, 2006
Item 2. Code of Ethics.
Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semi-annual reports.
Item 4. Principal Accountant Fees and Services.
Not applicable for semi-annual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable to open-end investment companies.
Item 6. Schedule of Investments.
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable to open-end investment companies.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable to open-end investment companies.
Item 10. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 11. Controls and Procedures.
(a) The registrant's principal executive officer/President and principal
financial officer/Treasurer have reviewed the registrant's disclosure
controls and procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940 (the "1940 Act")) as of a date within 90 days of the
filing of this report, as required by Rule 30a-3(b) under the Act and Rules
13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on
their review, such officers have concluded that the disclosure controls and
procedures are effective in ensuring that information required to be
disclosed in this report is appropriately recorded, processed, summarized
and reported and made known to them by others within the registrant and by
the registrant's service provider.
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred
during the second fiscal quarter of the period covered by this report that
has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
Item 12. Exhibits.
(a) (1) Any code of ethics or amendment thereto, that is subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy Item 2 requirements through filing an exhibit. Not Applicable.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act sent or given during the period covered by the report by or on
behalf of the registrant to 10 or more persons. Not applicable to open-end
investment companies.
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Jacob Internet Fund Inc.
---------------------------------------------
By (Signature and Title) /s/ Ryan Jacob
--------------------------------------------
Ryan Jacob, President
Date 5/3/06
---------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ Ryan Jacob
-----------------------------------------
Ryan Jacob, President
Date 5/3/06
-----------------------------------------------------
By (Signature and Title) /s/ Francis Alexander
--------------------------------------
Francis Alexander, Treasurer
Date 5/3/06
-----------------------------------------------------------