<PAGE>
SEMIANNUAL REPORT
NEEDHAM GROWTH FUND
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SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
[LOGO]
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[LOGO]FUNDS
NEEDHAM GROWTH FUND
445 PARK AVENUE
NEW YORK, NEW YORK 10022-2606
1-800-625-7071
SEMIANNUAL REPORT
FOR THE PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
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Semiannual Report 1997
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THE NEEDHAM GROWTH FUND SEEKS LONG-TERM CAPITAL APPRECIATION THROUGH INVESTMENT
IN EQUITY SECURITIES OF GROWTH COMPANIES AND SELECTIVELY HEDGES TO REDUCE RISK
AND VOLATILITY.
Contents
Letter from the Portfolio Manager 2
Statement of Net Assets 4
Schedule of Securities Sold Short 11
Statement of Operations 13
Statements of Changes in Net Assets 14
Financial Highlights 15
Notes to Financial Statements 16
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NEEDHAM GROWTH FUND
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Six-Month Results
August 1997
DEAR SHAREHOLDER,
The Needham Growth Fund (the "Fund") is pleased to report our results for the
six months ended June 30, 1997. For the period, the net asset value increased
11.66% to $16.18 per share from $14.49 at year-end 1996. This compared with a
10.16% gain for the average capital appreciation fund and a 12.97% return for
the average equity fund. For the same period, the S&P 500 and the Dow Jones
Industrial Average rose 20.62% and 20.10%, respectively, while the Russell 2000
appreciated 10.20%. Since its inception on January 1, 1996, the Fund has
appreciated 69.24% compared with a 35.21% return for the average equity fund and
a 27.01% rise in the average capital appreciation fund.
While the first half of 1997 was a rewarding period for investors, there was a
large dichotomy of performance in the marketplace. The larger capitalization
"blue chip index" stocks significantly outperformed the broader market averages.
Most actively managed portfolios underperformed these averages as evidenced by
the significant differential between the broad averages and the average equity
mutual fund.
S&P Index funds (dominated by about 50 very large capitalization stocks) rose
about 20% in the first half versus 12.97% for the average equity fund. This
disparity in both performance and valuation between this small number of mega
capitalization stocks and the overall broader market of small and mid
capitalization issues is likely to close soon. We have already seen this trend
developing in the marketplace during the latter part of the second quarter and
into mid-July, as the Nasdaq and Russell 2000 averages are closing the gap. This
is obviously favorable for the Fund as we diversify our portfolio broadly among
market capitalization sizes and are earnings growth and valuation driven in our
investment disciplines.
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Inception
YTD to 1/01/96
6/30/97 to 6/30/97
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Benchmarks(1) % Change % Change
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NEEDHAM GROWTH FUND + 11.66% + 69.24%
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S&P 500(2) + 20.62% + 48.31%
Dow Jones Industrial Average(2) + 20.10% + 54.58%
Russell 2000(2) + 10.20% + 28.38%
Average Equity Fund(3) + 12.97% + 35.21%
Average Capital Appreciation Fund(4) + 10.16% + 27.10%
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(1) Total return includes reinvestment of all dividends.
(2) Unmanaged indices of common stocks representative of the broader market
or segments thereof.
(3) Source: Lipper Analytical Services and includes reinvestment of all
dividends. Equally weighted unmanaged index of 2005 funds which invest
primarily in equity securities. Index includes funds with a different
focus than the Needham Growth Fund, including the production of current
income.
(4) Source: Lipper Analytical Services and includes reinvestment of all
dividends. Equally weighted unmanaged index of 181 funds which have a
capital appreciation orientation.
THE ABOVE PERFORMANCE DATA REPRESENTS PAST PERFORMANCE AND MAY NOT BE
INDICATIVE OF FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF
AN INVESTMENT IN THE FUND WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THE COST. THIS MATERIAL MUST BE
PRECEDED OR ACCOMPANIED BY A COPY OF THE FUND'S CURRENT PROPECTUS.
INVESTMENT STRATEGY
We apply primarily a bottom up investment strategy, selecting stocks based on
individual earnings growth prospects rather than on macro economic
considerations. We look for companies with large market opportunities, earnings
growth of at least 20% a year, industry leadership with strong product
offerings, and experienced management teams with a sound strategy and the
incentive to succeed. We typically select stocks of companies whose
price/earnings ratios are lower than their estimated growth rate. We also
selectively hedge our portfolio to reduce volatility and market risk.
Most of our assets are invested in the Technology, Health Care, and Specialty
Retailing sectors, which we believe have the strongest long-term growth
prospects in the economy. These three sectors generally account for about 90% of
our invested assets. We also broadly diversify the Fund, and no one position
accounts for more than 3% of assets.
CURRENT PORTFOLIO WEIGHTINGS
The Technology sector continues to look very attractive, especially on a P/E
ratio to earnings growth basis, and we have overweighted this sector. We expect
that capital spending for technology equipment and soft-
2
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Semiannual Report 1997
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ware/services will continue to grow as a percentage of GDP. End market demand
from most industries remains very strong. Therefore, when a number of stocks
reacted negatively in the second quarter to summer seasonality, concerns about a
European slowdown, and several negative earnings pre-announcements in the
networking and PC sectors, we took advantage and added to our major holdings.
We have invested primarily in the PC related, networking, semiconductor and
related equipment, and contract manufacturing industries. We are convinced that
the PC industry is healthy, and that strong demand for newer products coupled
with favorable pricing and an upgrade cycle will drive unit sales in the second
half of 1997. Similarly, we believe networking equipment demand for wide area,
local area and Internet access products will stay strong well into 1998 and
beyond. This will drive demand for all types of integrated circuits, and the
semiconductor capital equipment industry should thrive over the next several
years as newer and more complex chips will require more advanced production
equipment. We also believe that the contract manufacturing industry will
continue to grow rapidly as the outsourcing concept becomes more accepted and
viable as an alternative in the electronics and industrial markets. The Fund's
major technology positions include 3Com, Altera, Applied Materials, Cisco, Dell,
DII Group, Gateway 2000, Intel, KLA-Tencor, LAM Research, PMC-Sierra, Solectron,
Sun Microsystems, and Western Digital.
Trends in Specialty Retailing have been mixed thus far in 1997. Although the
macro environment is favorable for retail spending low unemployment, mild
inflation, income growth, high consumer confidence consumers are being very
fickle and selective with their dollars. As such, we have been selective with
our specialty retailing selections and have continued to focus on companies
with favorable demographics, popular lifestyle themes, and consumer brand
recognition. Within this context we have found a number of attractive growth
investments. The branded and discount apparel sector has favorable long term
fundamentals, and we have invested in stocks such as Intimate Brands,
Nautica, Stride Rite, The North Face, American Eagle Outfitters, Inc., Tommy
Hilfiger, and TJX. We also favor the superstore concept when it is tied into
a favorable demographic environment and currently own Barnes & Noble,
Borders, Petco, and Williams-Sonoma.
We continue to underweight the Health Care sector due to regulatory
uncertainties. We do, however, find the physician practice management industry
and the health care information systems sectors to be attractive growth areas.
These industries are benefiting from healthcare cost containment and
consolidation and should continue to grow in excess of 20% per year. Positions
in Health Care have included FPA Medical Management, HBO & Company, Hologic,
Phycor, Medic Systems, and Medpartners.
OUTLOOK
It is hard not to be fundamentally optimistic about the long-term outlook for
growth stocks given the extremely favorable economic backdrop of moderate
growth, mild inflation, low interest rates, strong corporate profit growth, and
the prospects for continued large inflows of cash into equity funds.
We do believe that the overall market will continue to broaden its
capitalization parameters and that the gap between small- and mid-capitalization
stocks relative to large capitalization stocks will close. We see, therefore, an
exciting opportunity in the second half for our growth stock portfolio.
However, as always, we are wary of the unknown and will also continue to
selectively hedge our stock positions. Since inception, this strategy has
enabled us to better protect our long-term gains by reducing the Fund's
short-term downside risk and volatility during market corrections.
We thank you for your continued support and confidence in the Needham Growth
Fund.
Sincerely,
/s/ Howard S. Schachter
Howard S. Schachter
EXECUTIVE VICE PRESIDENT AND PORTFOLIO MANAGER
NEEDHAM INVESTMENT MANAGEMENT L.L.C.
3
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NEEDHAM GROWTH FUND
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Statement of Net Assets (Unaudited)
JUNE 30, 1997
SHARES VALUE
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COMMON STOCKS & WARRANTS - 96.9%
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APPAREL MANUFACTURERS - 1.9%
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American Eagle Outfitters, Inc.* 8,000 $ 120,000
Nautica Enterprises, Inc.* 5,000 132,187
Stride Rite Corp.* 5,000 64,375
The North Face, Inc.* 5,000 91,250
Vans, Inc.* 5,000 75,625
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483,437
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BANKING & FINANCIAL SERVICES - 4.8%
Ahmanson (H.F.) & Co. 5,000 215,000
Flagstar Bancorp, Inc.* 5,000 81,250
Fleet Financial Group, Inc. 5,000 316,250
Green Tree Financial Corp.+ 2,500 89,063
Hamilton Bancorp, Inc.*+ 5,000 133,750
Uniao de Bancos Brasileiros S.A. GDR* 2,500 92,813
Wachovia Corp.+ 5,000 291,562
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1,219,688
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BEVERAGES - 1.2%
Coca-Cola Enterprises, Inc. 5,000 115,000
Pepsico, Inc. 5,000 187,813
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302,813
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BIOTECHNOLOGY - 0.1%
Cephalon, Inc.*+ 2,300 26,450
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26,450
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BROADCASTING/MEDIA - 6.6%
Comcast Corp. Class A+ 15,500 331,312
Evergreen Media Corp. Class A*+ 8,000 357,000
Heftel Broadcasting Corp.* 2,500 138,125
New York Times Co., Class A 5,000 247,500
Outdoor Systems, Inc.*+ 2,500 95,625
Scientific Atlanta, Inc. 5,000 109,375
Tele-Communications, Inc., Liberty Media Group, Class A* 5,000 118,750
Westinghouse Electric Corp. 12,000 277,500
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1,675,187
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COMPUTERS HARDWARE - 16.2%
Applied Magnetics Corp.*+ 10,000 226,25
Data General Corp.* 10,000 260,000
Dell Computer Corp.*+ 10,000 1,174,375
Encad, Inc.*+ 3,500 145,250
Gateway 2000, Inc.*+ 10,200 330,862
International Business Machines Corp.+ 6,000 541,125
Quantum Corp.*+ 8,300 168,594
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
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Semiannual Report 1997
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SHARES VALUE
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COMPUTERS HARDWARE - 16.2% (CONTINUED)
Sun Microsystems, Inc.*+ 10,000 $ 372,187
Western Digital Corp.*+ 15,000 474,375
Xerox Corp. 5,000 394,375
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4,087,393
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COMPUTER SOFTWARE & SERVICES - 8.1%
Autodesk, Inc. 5,000 191,562
Avant! Corp.* 2,500 80,781
BMC Software, Inc.*+ 2,000 110,750
Citrix Systems, Inc.*+ 2,500 109,687
Discreet Logic, Inc.*+ 5,000 82,500
First Data Corp.+ 10,000 439,375
HBO & Co. 2,500 172,187
Peoplesoft, Inc.*+ 4,000 211,000
Phamis, Inc.*+ 5,000 123,750
Sterling Commerce, Inc.* 5,000 164,375
Western Atlas, Inc.*+ 5,000 366,250
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2,052,217
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CONTRACTOR MFG. - 6.8%
DII Group, Inc.*+ 14,800 651,200
Hadco Corp.*+ 5,000 327,500
Praegitzer Industries, Inc.* 5,200 57,850
Solectron Corp.*+ 10,000 700,625
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1,737,175
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HOSPITAL & PHYSICIAN MANAGEMENT - 3.2%
Access Health, Inc.*+ 5,000 122,500
FPA Medical Management, Inc.* 5,000 118,438
Medaphis Corp.* 5,000 50,313
Medpartners, Inc.* 10,000 216,250
Oxford Health Plans, Inc.*+ 2,500 179,375
Wellpoint Health Networks, Inc.*+ 2,500 114,688
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801,564
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HOTEL & CASINO - 1.5%
Host Marriott Corp.* 5,000 89,063
MGM Grand, Inc.*+ 5,000 185,000
Servico, Inc.* 7,000 104,125
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378,188
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INSURANCE - 3.7%
Ace, Ltd.+ 5,000 369,375
CMAC Investment Corp. 5,000 238,750
Hartford Life, Inc.* 1,100 41,250
Reliance Group Holdings, Inc. 5,000 59,375
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
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NEEDHAM GROWTH FUND
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Statement of Net Assets (Unaudited)--CONTINUED
JUNE 30, 1997
SHARES VALUE
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INSURANCE - 3.7% (CONTINUED)
USF&G Corp. 10,000 $ 240,000
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948,750
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MEDICAL DEVICES - 1.2%
Bard (C.R.), Inc. 5,000 181,563
Hologic, Inc.* 5,000 133,125
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314,688
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NETWORKING & TELECOMMUNICATIONS - 6.5%
3Com Corp.*+ 10,000 450,000
Bay Networks, Inc.* 5,000 132,812
Cisco Systems, Inc.* 4,000 268,500
Ericsson (LM) Telephone - ADR 5,000 196,875
Harmonic Lightwaves, Inc.*+ 4,000 68,500
Mobile Telecommunications Technologies Corp.* 5,000 71,563
Newbridge Networks Corp.*+ 7,500 326,250
Pairgain Technologies, Inc.*+ 2,500 38,750
RMH Teleservices, Inc.* 5,000 37,500
Westell Technologies, Inc.*+ 2,500 62,500
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1,653,250
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OIL EQUIPMENT & SERVICES - 2.9%
Falcon Drilling Company, Inc.* 5,000 288,125
Hanover Compressor Co.* 100 1,950
Reading & Bates Corp.* 5,000 133,750
Schlumberger, Ltd. 2,500 312,500
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736,325
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RETAILING - 8.2%
Abercrombie & Fitch Co. Class A* 5,000 92,500
Books-A-Million, Inc.* 5,000 23,750
Borders Group, Inc.* 5,000 120,625
CUC International, Inc.* 3,750 96,797
DM Management Co.* 11,000 125,125
Federated Department Stores, Inc.*+ 5,000 173,750
Galoob (Lewis) Toys, Inc.* 5,000 94,375
General Nutrition Companies, Inc.* 5,000 140,000
HFS, Inc.* 5,000 290,000
Intimate Brands, Inc. Class A 2,500 52,500
Petco Animal Supplies, Inc.* 7,500 225,000
Ralcorp Holdings, Inc.* 5,000 73,750
TJX Companies, Inc. 10,000 263,750
Williams-Sonoma, Inc.*+ 7,500 320,625
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2,092,547
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
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Semiannual Report 1997
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SHARES VALUE
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SEMI-CONDUCTOR MANUFACTURERS - 7.5%
Actel Corp.* 5,000 $ 85,313
Adaptec, Inc. * 5,000 173,750
Advanced Micro Devices, Inc.*+ 5,000 180,000
Altera Corp.*+ 7,500 378,750
Analog Devices, Inc.* 5,000 132,812
Atmel Corp.* 2,500 70,000
Intel Corp.+ 2,000 283,625
Lattice Semiconductor Corp.*+ 2,000 113,000
PMC-Sierra, Inc.* 5,500 144,375
Quality Semiconductor, Inc.* 7,500 79,688
Sipex Corp.*+ 3,800 137,750
Xilinx, Inc.*+ 2,500 122,656
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1,901,719
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SEMI-CONDUCTORS CAPITAL EQUIPMENT/ELECTRONICS - 15.3%
Applied Materials, Inc.*+ 5,500 389,469
Applied Science and Technology, Inc.* 5,000 83,750
Credence Systems Corp.*+ 10,000 299,375
DuPont Photomasks, Inc.*+ 2,000 108,000
Electro Scientific Industries, Inc.* 4,700 196,812
ETEC Systems, Inc.*+ 7,500 321,562
FSI International, Inc.* 9,000 144,000
Integrated Process Equipment Corp.* 5,520 139,725
KLA-Tencor Corp.*+ 15,000 731,250
Kulicke & Soffa Industries, Inc.*+ 10,500 340,922
LAM Research Corp.*+ 10,500 389,156
Photronics, Inc.*+ 2,500 119,375
Semitool, Inc.* 2,500 29,063
Teradyne, Inc.*+ 15,000 588,750
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3,881,209
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TOTAL COMMON STOCKS (COST $22,118,182) 24,292,600
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WARRANTS - 1.2%
Intel Warrants, $20.875 03/14/98* (Cost $342,050) 3,000 304,500
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TOTAL COMMON STOCKS & WARRANTS (COST $22,460,232) 24,597,100
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INVESTMENT COMPANY - 0.7%
Automatic Common Exchange SecurityTrust II*
(Cost $167,125) 7,000 171,500
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
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NEEDHAM GROWTH FUND
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Statement of Net Assets (Unaudited)--CONTINUED
JUNE 30, 1997
PAR (000) VALUE
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CORPORATE BONDS - 0.4%
The Men's Wearhouse, Inc. Convertible Debenture 5.25%,
Due 03/01/03 (Cost $100,000) $ 100 $ 112,500
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SHORT TERM INVESTMENTS - 7.3%
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Time Deposits - 7.1%
PNC Bank N.A. (Time Deposits)
5.25%, Due 07/01/97 (Cost $1,800,000) 1,800 1,800,000
SHARES
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MONEY MARKET FUNDS - 0.2%
Temporary Investment Fund, Inc.
Temp Fund Portfolio 29,685 29,685
Temp Cash Portfolio 29,685 29,685
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(Cost $59,370) 59,370
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TOTAL SHORT TERM INVESTMENTS (Cost $1,859,370) 1,859,370
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NUMBER
NAME/EXPIRATION DATE/STRIKE PRICE OF CONTRACTS
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PUT OPTIONS PURCHASED - 1.2%
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3Com Corp. July $45 50 10,625
Actel Corp., July $20 50 15,312
Adaptec, Inc., July $35 50 8,125
Ahmanson H.F. & Co., July $45 50 13,125
Alliance Semiconductor Corp., July $7.50 50 1,875
Altera Corp., July $50 50 8,125
Atmel Corp., July $25 25 1,250
Autodesk, Inc., July $35 50 3,125
Bay Networks, Inc., July $45 50 3,750
Borders Group, Inc., July $22.50 50 782
Cisco Systems, Inc., July $65 40 6,000
Comcast Corp., July $22.50 75 10,312
Credence Systems Corp., July $25 50 1,250
Data General Corp., July $25 50 3,437
Dell Computer Corp., July $115 25 9,375
DII Group, Inc., July $35 100 5,625
Electro Scientific Industries, Inc., July $35 50 2,500
Ericsson LM Telephone, July $35 50 469
ETEC Systems, Inc., July $35 50 625
First Data Corp., July $40 50 1,563
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
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Semiannual Report 1997
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NUMBER
NAME/EXPIRATION DATE/STRIKE PRICE OF CONTRACTS VALUE
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PUT OPTIONS PURCHASED - 1.2% (CONTINUED)
Fleet Financial Group, Inc., July $65 50 $ 11,250
FSI International, Inc., July $15 90 1,407
Gateway 2000, Inc., July $32.50 50 10,000
General Nutrition Companies, Inc., July $25 50 313
Goldman Sachs Technology Industry Multimedia Networking
Index, July $115 20 2,625
HBO & Co., July $65 25 3,750
HFS, Inc., July $60 50 10,937
Hologic, Inc., August $25 50 6,250
Integrated Process Equipment Corp., July $22.50 50 1,563
Intel Corp., July $145 20 13,500
Interactive Week Internet Index, July $235 15 12,562
KLA-Tencor Corp., July $45 50 5,937
Kulicke & Soffa Industries, Inc., July $25 50 1,250
LAM Research Corp., July $30 40 625
Medpartners, Inc., July $22.50 100 11,875
Morgan Stanley High Tech Index, July $425 28 35,000
Nautica Enterprises, Inc., July $22.50 50 1,875
New York Times Co., July $45 50 938
Newbridge Networks Corp., July $40 50 2,500
Petco Animal Supplies, Inc., July $25 75 2,344
Quantum Corp., July $20 50 5,000
Republic Industries, Inc., July $22.50 70 3,937
Sterling Commerce, Inc., July $30 50 2,188
Stride Rite Corp., July $12.50 50 2,032
Sun Microsystems, Inc., July $32.50 50 1,563
Tele-Communications, Inc., August $25 50 8,750
Teradyne, Inc., July $40 50 8,125
TJX Companies, Inc., July $22.50 100 1,875
Vans, Inc., July $15 50 4,219
Western Digital Corp., August $30 50 10,000
Westinghouse Electric Corp., July $20 120 750
Williams-Sonoma, Inc., July $35 50 1,250
Xerox Corp., July $75 50 3,437
Xerox Corp., July $80 50 13,900
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TOTAL PUT OPTIONS PURCHASED (Cost $407,685) 310,777
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CALL OPTIONS PURCHASED - 0.0%
Interactive Week Internet Index, July $240 (Cost $11,108) 15 11,063
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TOTAL INVESTMENTS - 106.5% (COST $25,005,520) 27,062,310
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
NEEDHAM GROWTH FUND
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Statement of Net Assets (Unaudited)--CONTINUED
JUNE 30, 1997
VALUE
- --------------------------------------------------------------------------------
OTHER LIABILITIES IN EXCESS OF ASSETS - (-6.5%)
- --------------------------------------------------------------------------------
Receivable from Brokers for Securities Sold Short $10,559,021
Receivable for Investment Securities Sold 679,089
Other Assets 141,367
Net Amounts due to Affiliates (12,844)
Payable for Investment Securities Purchased (1,722,687)
Securities Sold Short at Value (proceeds - $10,559,021) (11,075,947)
Organization Costs Payable to Distributor (105,209)
Other Liabilities (129,014)
- --------------------------------------------------------------------------------
(1,666,224)
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NET ASSETS - (100%), (applicable to 1,569,571 shares outstanding,
$.001 par value, 1,000,000,000 shares authorized) $25,396,086
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NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 16.18
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY
+ SECURITY POSITION IS EITHER ENTIRELY OR PARTIALLY PLACED IN A SEGREGATED
ACCOUNT AS COLLATERAL FOR SECURITIES SOLD SHORT.
ADR -- AMERICAN DEPOSITORY RECEIPT
GDR -- GLOBAL DEPOSITORY RECEIPT
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Semiannual Report 1997
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Schedule of Securities Sold Short (Unaudited)
JUNE 30, 1997
NAME OF ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
3Com Corp. 5,000 $ 225,000
Access Health, Inc. 5,000 122,500
Ace, Ltd. 5,000 369,375
Advanced Micro Devices, Inc. 5,000 180,000
Altera Corp. 2,500 126,250
Applied Magnetics Corp. 10,000 226,250
Applied Materials, Inc. 5,500 389,469
BMC Software, Inc. 2,000 110,750
Cephalon, Inc. 2,300 26,450
Citrix Systems, Inc. 2,500 109,688
Comcast Corp. Class A 8,000 171,000
Credence Systems Corp. 5,000 149,687
Dell Computer Corp. 7,500 880,781
DII Group, Inc. 8,800 387,200
Discreet Logic, Inc. 5,000 82,500
DuPont Photomasks, Inc. 2,000 108,000
Encad, Inc. 3,500 145,250
ETEC Systems, Inc. 2,500 107,188
Evergreen Media Corp. Class A 4,000 178,500
Federated Department Stores, Inc. 5,000 173,750
First Data Corp. 5,000 219,687
Gateway 2000, Inc. 5,000 162,187
Green Tree Financial Corp. 2,500 89,063
Hadco Corp. 5,000 327,500
Hamilton Bancorp, Inc. 5,000 133,750
Harmonic Lightwaves, Inc. 4,000 68,500
Intel Corp. 2,000 283,625
International Business Machines Corp. 6,000 541,125
KLA-Tencor Corp. 10,000 487,500
Kulicke & Soffa Industries, Inc. 5,500 178,577
LAM Research Corp. 6,500 240,906
Lattice Semiconductor Corp. 2,000 113,000
MGM Grand, Inc. 5,000 185,000
Newbridge Networks Corp. 2,500 108,750
Outdoor Systems, Inc. 2,500 95,625
Oxford Health Plans, Inc. 2,500 179,375
Pairgain Technologies, Inc. 2,500 38,750
Peoplesoft, Inc. 4,000 211,000
Phamis, Inc. 5,000 123,750
Photronics, Inc. 2,500 119,375
Quantum Corp. 5,000 101,563
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
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NEEDHAM GROWTH FUND
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Schedule of Securities Sold Short (Unaudited)--CONTINUED
JUNE 30, 1997
NAME OF ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
Sipex Corp. 3,800 $ 137,750
Solectron Corp. 10,000 700,625
Sun Microsystems, Inc. 5,000 186,094
Teradyne, Inc. 10,000 392,500
Wachovia Corp. 5,000 291,563
Wellpoint Health Networks, Inc. 2,500 114,688
Westell Technologies, Inc. 2,500 62,500
Western Atlas, Inc. 5,000 366,250
Western Digital Corp. 10,000 316,250
Williams-Sonoma, Inc. 2,500 106,875
Xilinx, Inc. 2,500 122,656
- --------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT (proceeds $10,559,021) $11,075,947
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Semiannual Report 1997
- --------------------------------------------------------------------------------
Statement of Operations (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------------
Dividends $ 22,402
Interest 173,996
- --------------------------------------------------------------------------------
Total Investment Income 196,398
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
Investment Advisory fee 116,163
Administration and Accounting fee 43,749
Custodian fee 31,432
Transfer Agent fee 15,749
Legal fee 25,795
Directors' fees 18,419
Audit fee 13,389
Distribution fees 23,361
Shareholders' reports 5,951
Organization expenses 13,109
Other expenses 41,756
- --------------------------------------------------------------------------------
TOTAL EXPENSES 348,873
- --------------------------------------------------------------------------------
Expenses Waived and Reimbursable (116,546)
- --------------------------------------------------------------------------------
NET EXPENSES 232,327
- --------------------------------------------------------------------------------
NET INVESTMENT LOSS (35,929)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Net Realized Gain on Investment Securities 2,319,095
Net Realized Loss on Option Contracts (561,176)
Change in Unrealized Appreciation of Investment Securities 324,937
- --------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 2,082,856
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,046,927
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
NEEDHAM GROWTH FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996*
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
- -------------------------------------------------------------------------------------------------------
Net Investment Loss $ ( 35,929) $ (111,272)
Net Realized Gain on Investment Securities 2,319,095 1,319,364
Net Realized Loss on Option Contracts (561,176) (333,389)
Change in Unrealized Appreciation of Investment Securities 324,937 1,214,927
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,046,927 2,089,630
- -------------------------------------------------------------------------------------------------------
Distributions From Net Realized Gains - (615,164)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
- -------------------------------------------------------------------------------------------------------
Shares Issued 16,168,182 14,236,574
Shares Issued in Reinvestment of Distributions - 576,920
Shares Redeemed (7,198,349) (2,448,634)
- -------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 8,969,833 12,364,860
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 11,016,760 13,839,326
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------
Beginning of Period 14,379,326 540,000
End of Period $ 25,396,086 $ 14,379,326
- -------------------------------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED
- -------------------------------------------------------------------------------------------------------
Shares Issued 1,036,878 1,066,793
Shares Reinvested - 39,569
Shares Redeemed (459,498) (168,171)
- -------------------------------------------------------------------------------------------------------
577,380 938,191
- -------------------------------------------------------------------------------------------------------
</TABLE>
*FUND COMMENCED OPERATIONS ON JANUARY 1, 1996.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Semiannual Report 1997
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997 YEAR ENDED
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD (UNAUDITED) DECEMBER 31, 1996*
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 14.49 $ 10.00
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------------
Net Investment Loss (0.03)+++ (0.11)
Net Gain on Securities (Realized and Unrealized) 1.72+++ 5.27
- -------------------------------------------------------------------------------------------------------
Total From Investment Operations 1.69 5.16
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------------
Net Realized Gains - (0.67)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 16.18 $ 14.49
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN 11.66%++ 51.56%
- -------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $ 25,396 $ 14,379
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Ratio of Expenses to Average Net Assets 2.50%(a)+ 2.50%(a)
Ratio of Net Investment Loss to Average Net Assets (0.39)%(a)+ (1.27)%(a)
Portfolio Turnover Rate 389.39%++ 568.93%
Average Commission Rate Paid(1) $ 0.0469 $ 0.0511
</TABLE>
(a) HAD CERTAIN WAIVERS AND REIMBURSEMENTS NOT BEEN IN EFFECT, THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS, FOR THE PERIODS ENDED JUNE 30, 1997 AND
DECEMBER 31, 1996, WOULD HAVE BEEN 3.75% AND 4.60%, RESPECTIVELY AND THE
RATIO OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS, FOR THE PERIODS ENDED
JUNE 30, 1997 AND DECEMBER 31, 1996, WOULD HAVE BEEN (1.64%) AND (3.37%),
RESPECTIVELY.
(1) COMPUTED BY DIVIDING THE TOTAL AMOUNT OF BROKERAGE COMMISSIONS PAID BY THE
TOTAL SHARES OF INVESTMENT SECURITIES PURCHASED AND SOLD DURING THE YEAR
FOR WHICH COMMISSIONS WERE CHARGED.
+ ANNUALIZED.
++ NON-ANNUALIZED.
* FUND COMMENCED OPERATIONS ON JANUARY 1, 1996.
+++ CALCULATED USING AVERAGE OUTSTANDING SHARES DURING THE PERIOD.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
NEEDHAM GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (Unaudited)
1. ORGANIZATION
Needham Growth Fund (the "Fund") is a portfolio of The Needham Funds, Inc.,
which is registered under the Investment Company Act of 1940 as a
non-diversified, open-end management investment company. The Needham Funds, Inc.
was organized as a Maryland corporation on October 12, 1995. Prior to the Fund s
commencement of operations on January 1, 1996, it had no operations other than
the issuance of 54,000 shares for $540,000.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION: Investments in securities (including options) listed or
traded on a nationally recognized securities exchange are valued at the last
quoted sales price on the date the valuations are made. Securities regularly
traded in the over-the-counter market are valued at the last quoted sales price
on the NASDAQ System. If no sales price is available for a listed or NASDAQ
security, or if the security is not listed on NASDAQ, such security is valued at
a price equal to the mean of the latest bid and ask prices. All other securities
and assets for which market quotations are not readily available are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Fund's Board of Directors.
FEDERAL INCOME TAXES: The Fund's policy is to comply with the requirements of
the Internal Revenue Code that are applicable to regulated investment companies
and to distribute all its taxable income to its shareholders. Therefore, no
federal income tax provision is required. The Fund's net investment loss of
$111,272 for the year ended December 31, 1996, was reclassified against net
realized gains. Net assets were not affected by this reclassification.
ORGANIZATIONAL COSTS: Organizational costs have been capitalized and are being
amortized on a straight line basis over a period of 60 months.
OTHER: Security transactions are accounted for on the date the securities are
purchased or sold. Costs used in determining realized gains and losses on the
sale of investment securities are those of specific securities sold. Dividend
income and distributions to shareholders are recorded on the ex-dividend date.
Interest income is recorded on an accrual basis.
3. INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
The Fund has engaged Needham Investment Manage-ment L.L.C. (the "Advisor") to
manage its investments. The Fund pays the Advisor a fee at the annual rate of
1.25% of the average daily net asset value of the Fund.
The Advisor has voluntarily agreed to waive its fee for, and to reimburse
expenses of, the Fund in an amount that operates to limit annual operating
expenses for the year end December 31, 1997 to not more than 2.50% of average
daily net assets. For the six months ended June 30, 1997, the Advisor waived its
fee of $116,163 and has agreed to reimburse other expenses in the amount of
$383.
PFPC, Inc. ("PFPC") acts as the Fund's Administrator. The Fund pays PFPC a fee
at the annual rate of 0.10% of the average daily net asset value of the Fund,
subject to certain minimums. PFPC also acts as the Fund's shareholder servicing
agent and transfer agent.
Certain officers and directors of the Fund are also officers and directors of
the Advisor.
4. DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Under the plan, the Fund pays Needham &
Company, Inc. and any other distributor or financial institution with which the
Fund has an agreement, a fee at an annual rate of 0.25 of 1% of the Fund's daily
average net assets. For the six months ended June 30, 1997, the Fund incurred
$23,361 of distribution fees.
5. INVESTMENT TRANSACTIONS
The following summarizes the aggregate amount of purchases and sales of
investment securities and securities sold short, excluding short-term
securities, during the six months ended June 30, 1997.
16
<PAGE>
PURCHASES SALES
- ------------------------------------------------------------
Long transactions $ 61,194,302 $ 50,502,051
Short sale transactions 9,188,574 14,607,739
Total $ 70,382,876 $ 65,109,790
- ------------------------------------------------------------
At June 30, 1997, net unrealized appreciation of $1,539,864 was comprised of
gross unrealized appreciation and depreciation for financial reporting and
federal income tax purposes of $1,928,534 and $388,670, respectively.
6. OPTION TRANSACTIONS
The Fund may write call options on securities it owns or has the right to
acquire, and may purchase put and call options on individual securities and
indices written by others. Put and call options give the holder the right to
sell or purchase, respectively, a specified amount of a security at a specified
price on a certain date.
Put and call options purchased are accounted for in the same manner as portfolio
securities. The cost of securities acquired through the exercise of call options
is increased by the premium paid. The proceeds from securities sold through the
exercise of put options are decreased by the premiums paid. Options on stock
indices differ from options on securities in that the exercise of an option on a
stock index does not involve delivery of the actual underlying security and is
settled in cash only.
When the Fund writes an option, the premium received by the Fund is recorded as
a liability and is subsequently adjusted to the current market value of the
option written. Premiums received from writing options which expire unexercised
are recorded by the Fund on the expiration date as realized gains from option
transactions. When the Fund enters into a closing purchase transaction, the Fund
realizes a gain or loss equal to the difference between the cost of a closing
purchase transaction and the premium received when the call option was written.
If a call option is exercised, the premium is added to the proceeds from the
sale of the underlying security in determining whether the Fund has a realized
gain or loss.
A summary of call options written by the Fund for the six months ended June 30,
1997 is as follows:
NUMBER OF PREMIUM
OPTIONS WRITTEN CONTRACTS RECEIVED
- -------------------------------------------------------------------------
Options outstanding at
beginning of period 705 $ 202,128
Options written 160 68,707
Options expired (150) (42,287)
Options exercised (25) (3,669)
Options terminated in
closing transactions (690) (224,879)
- -------------------------------------------------------------------------
Options outstanding at
June 30, 1997 0 $ 0
- -------------------------------------------------------------------------
7. SHORT SALE TRANSACTIONS
The Fund may sell securities short for hedging purposes. During the six months
ended June 30, 1997, the Fund sold securities short against the box. This
occurs when the Fund enters into a short sale while holding an offsetting long
position in the security sold short. An equivalent amount of securities owned by
the Fund are segregated as collateral while the short sale is outstanding. At
June 30, 1997, the market value of securities separately segregated to cover
short positions was $11,075,947. For financial statement purposes, an amount
equal to the settlement amount is included in the Statement of Net Assets as an
asset and an equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current value of the short position. Securities
sold short at June 30, 1997 and their related market values and proceeds are set
forth in the schedule of securities sold short.
8. COMPONENTS OF NET ASSETS
At June 30, 1997 net assets consisted of:
Paid-in Capital $ 21,874,693
Accumulated Net Investment Loss (35,929)
Undistributed Net Realized Gains 2,017,458
Net Unrealized Appreciation (Depreciation)
of Investment Securities 1,539,864
- --------------------------------------------------------
Total Net Assets $ 25,396,086
- --------------------------------------------------------
17
<PAGE>
[LOGO]FUNDS
NEEDHAM GROWTH FUND
445 PARK AVENUE
NEW YORK, NEW YORK 10022-2606
1-800-625-7071
INVESTMENT ADVISER:
NEEDHAM INVESTMENT MANAGEMENT L.L.C.
445 PARK AVENUE
NEW YORK, NY 10022-2606
PRESIDENT
---------
JOHN C. MICHAELSON
EXECUTIVE VICE PRESIDENT
AND PORTFOLIO MANAGER
------------------------
HOWARD S. SCHACHTER
DIRECTORS
---------
GEORGE A. NEEDHAM
JOHN C. MICHAELSON
GEORGE D. GOULD
ROGER W. JOHNSON
JAMES P. POITRAS
F. RANDALL SMITH
DISTRIBUTOR:
NEEDHAM & COMPANY, INC.
445 PARK AVENUE
NEW YORK, NY 10022-2606
212-371-8300
ADMINISTRATOR, SHAREHOLDER SERVICING
AGENT AND TRANSFER AGENT:
PFPC INC.
400 BELLEVUE PARKWAY
WILMINGTON, DE 19809
1-800-625-7071
CUSTODIAN:
PNC BANK, N.A.
200 STEVENS DRIVE
AIRPORT BUSINESS CENTER
LESTER, PA 19113
COUNSEL:
FULBRIGHT & JAWORSKI L.L.P.
666 FIFTH AVENUE
NEW YORK, NY 10103
INDEPENDENT AUDITORS:
ERNST & YOUNG LLP
787 SEVENTH AVENUE
NEW YORK, NY 10019
