<PAGE> 1
INVESTMENT ADVISER
Needham Investment Management L.L.C.
445 Park Avenue
New York, NY 10022
DISTRIBUTOR
Needham & Company, Inc.
445 Park Avenue
New York, NY 10022
(212) 371-8300
ADMINISTRATOR, SHAREHOLDER SERVICING
AGENT AND TRANSFER AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 625-7071
CUSTODIAN
PNC Bank, N.A.
200 Stevens Drive,
Airport Business Center
Lester, PA 19113
DIRECTORS
George A. Needham
John Michaelson
George D. Gould
Roger W. Johnson
James P. Poitras
F. Randall Smith
EXECUTIVE OFFICERS
John Michaelson, President
Howard S. Schachter,
Executive Vice President
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
[NEEDHAM LOGO]
NEEDHAM
GROWTH FUND
ANNUAL
REPORT
YEAR ENDED
DECEMBER 31, 1996
ADVISER
NEEDHAM INVESTMENT MANAGEMENT L.L.C.
445 PARK AVENUE
NEW YORK, NEW YORK 10022
For more information call the Fund's Administrator
during regular business hours at 1-800-625-7071
or call the Fund's Distributor
after regular business hours at 1-800-344-9028
<PAGE> 2
NEEDHAM GROWTH FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT -- DECEMBER 1996
January 1997
DEAR SHAREHOLDER,
1996 YEAR END RESULTS
We are pleased to report performance results for the Needham Growth Fund
("Fund") for the twelve month period ended December 31, 1996. 1996 was a good
year in general for the equity markets overall and for the Fund in particular.
In a year in which many equity funds underperformed the broad averages (see
Benchmarks) the Fund significantly outperformed the market. For the year ended
December 31, 1996, the Fund rose 51.56% as compared to the 22.96% gain for the
S&P 500, the 19.47% gain for the average equity mutual fund, and the 18.12% gain
for the Russell 2000 Index. In addition, the Fund finished 1996 as the top
performing Capital Appreciation fund according to Lipper Analytical Services, a
fund category that gained an average 16.4% last year. The Fund is included in
the Capital Appreciation category because of our investment style and hedging
strategies. We were also pleased to pay out our first capital gains distribution
of $0.67 per share in November.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
BENCHMARKS 1996
--------------------------------------------------------------------------------------
<S> <C>
NEEDHAM GROWTH FUND(1) +51.56%
S&P 500(2) +22.96
Dow Jones Industrial Average(2) +28.71
Russell 2000(2) +18.12
Average Equity Fund(3) +19.47
Average Growth Fund(4) +19.25
Average Capital Appreciation Fund(5) +16.40
--------------------------------------------------------------------------------------
</TABLE>
(1) Total return includes reinvestment of all dividends.
(2) Investment results calculated after reinvestment of dividends.
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 645 funds which have a
growth of earnings orientation.
(5) Source: Lipper Analytical Services and includes reinvestment of all
dividends. Equally weighted unmanaged index of 181 funds which have a
capital appreciation orientation.
<PAGE> 3
NEEDHAM GROWTH FUND
COMPARATIVE INVESTMENT RETURNS
An initial investment of $10,000 as of January 1, 1996 (inception) would be
worth $15,156
as of December 31, 1996.
<TABLE>
<CAPTION>
Measurement Period Needham Growth NASDAQ Indus- S&P 500 Stock
(Fiscal Year Covered) Fund trial Average Index Russe ll 2000
<S> <C> <C> <C> <C>
1/2/96 10000.00 10000.00 10000.00 10000.00
1/15/96 10060.00 9592.81 9695.00 9537.00
1/31/96 10850.00 9994.11 10152.00 9955.00
2/15/96 11530.00 10330.16 10561.00 10124.00
2/29/96 12160.00 10468.64 10387.00 10256.00
3/15/96 12420.00 10378.60 10324.00 10261.00
3/29/96 12570.00 10425.99 10454.00 10441.00
4/15/96 12710.00 10474.63 10257.00 10527.00
4/30/96 13530.00 11297.17 10538.00 10993.00
5/15/96 14090.00 11742.35 10723.00 11304.00
5/31/96 14430.00 11768.00 10821.00 11422.00
6/14/96 14300.00 11637.00 10760.00 11208.00
6/28/96 14150.00 11128.00 10770.00 10941.00
7/15/96 13830.00 10072.00 10146.00 9934.00
7/31/96 13800.00 10264.00 10309.00 9974.00
8/15/96 14290.00 10778.00 10669.00 10343.00
8/30/96 14320.00 10842.00 10503.00 10539.00
9/13/96 14680.00 11290.00 10963.00 10757.00
9/30/96 15070.00 11656.00 11072.00 10934.00
10/15/96 15400.00 11950.00 11318.00 11016.00
10/31/96 15000.00 11602.00 11362.00 10750.00
11/15/96 15270.00 11985.00 11883.00 10938.00
11/29/96 15280.00 12277.00 12195.00 11177.00
12/13/96 15240.00 12204.00 11738.00 11180.00
12/31/96 15116.00 12262.00 11933.00 11446.00
</TABLE>
The above illustration compares a $10,000 investment in the Needham Growth Fund
on January 1, 1996 to a $10,000 investment in the noted benchmarks on that date.
All dividends and capital gain distributions are reinvested.
The Fund's performance takes into account all applicable fees and expenses. The
benchmarks are widely accepted unmanaged indices of overall market performance
and do not take into account charges, fees and other expenses.
Past performance is not predictive of future performance. The Fund's share price
and return will vary so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
2
<PAGE> 4
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 also select stocks of companies whose price/earnings
ratios are lower than the estimated growth rate.
We invest most of our assets in industries within Technology, Healthcare, and
Specialty Retailing, sectors we believe have the best long term growth prospects
in the economy. These three sectors generally account for more than 90% of our
invested assets. We also broadly diversify the Fund and no one position accounts
for more than 3% of assets.
During the year, we made several significant changes in sector weightings in the
Fund as the fundamental and valuation parameters changed. We increased our
holdings in the Technology sector in the second half of the year as a number of
strong product cycles became apparent and we reduced our exposure to the
Healthcare sector due to regulatory and political issues. We generally
maintained our weightings in Specialty Retailing as we believe this group still
has favorable demographics and life style trends.
We believe that the Technology sector offers the best long term growth prospects
in the economy and we took advantage of the summer correction to add to existing
holdings and initiate a number of new positions. Capital spending trends remain
strong for both networking equipment and computer hardware and software as
corporate America strives to improve overall productivity. We are seeing
explosive growth in spending for both local and wide area networks as well as
Internet infrastructure. There is also explosive demand for remote access
devices from the SOHO (Small Office/Home Office) and branch office environments.
As such, we have major core positions in a number of related stocks including:
3Com, Applix, Ascend Communications, Cisco Systems, Lucent Technologies, Network
General, Pairgain Technologies and Xircom.
We established new positions during the second half in the semiconductor and
related capital equipment areas and in component suppliers to the PC industry
after being generally void of these stocks in the earlier part of the year when
it was obvious that a major inventory imbalance had to be worked through. This
inventory correction and eventual pricing adjustment was painful but short lived
and created many excellent buying opportunities. We felt that the stock market
was overlooking several strong PC product cycles and improving pricing trends in
the computer market that would drive new and upgraded unit demand (Pentium Pro,
MMX, Windows NT, multimedia/digital video and client/server, etc.). Several
important holdings to participate in these trends include: Atmel, Cirrus Logic,
Dell Computers, ESS Technology, Etec Systems, Intel, KLA Instruments, Oak
Technology, Read-Rite, S3, Seagate, Speedfam, Stormedia and Western Digital.
We continue to have a generally positive outlook on Specialty Retailing although
we have become more selective as the consumer becomes more fickle with his
dollar. We have invested in companies with proven concepts, favorable
demographics, life style trends and brand loyalty. We favor the superstore
concept and businesses that are seeing significant consolidation. Important
positions include: GAP, TJX, Tommy Hilfiger, and Vans in apparel, Barnes & Noble
and Borders Group in book retailing, Petco in pet supplies, CUC International in
consumer services, Staples in office supplies and GT Bicycle and Rockshox in
sporting equipment.
3
<PAGE> 5
As previously stated, we have gradually reduced our exposure to the Health Care
services sector due to regulatory concerns relating to salary equivalency issues
and possible Medicare reimbursement changes from HCFA (Health Care Finance
Administration). We will revisit this group as soon as the regulatory cloud
lifts. Current positions include: FPA Management, Hologics, Home Health Corp.,
MedPartners and Physician Support Systems.
OUTLOOK
We continue to remain optimistic about the long term potential for growth stocks
considering the favorable economic backdrop. Long term interest rates will
likely remain low, economic growth appears moderate, inflationary pressures
should remain modest, earnings growth within our sector still looks strong, and
mutual fund flows based on demographics should remain positive.
Despite this favorable macro picture, however, we do recognize that virtually
all stock market indicators are in or close to record high territory. Though we
are still positive on the market long term, we have become more selective in our
stock selections and have upgraded our portfolio in terms of quality and
liquidity. We will also selectively hedge our portfolio by selling (writing)
covered options against certain positions, and will purchase put options on
industry indices according to our portfolio weightings. This strategy enables us
to protect our gains while significantly reducing the Fund's downside risk and
volatility during market corrections. During the summer downturn for example,
this strategy enabled us to significantly outperform the market on the downside
while participating in the ensuing rally.
Looking into 1997, we will continue to be opportunistic and purchase quality
growth stocks at reasonable valuations. We clearly expect this year to be more
volatile than in 1996 and this should create more trading opportunities on both
the upside and downside. We will continue to take advantage of any sharp
corrections by initiating new positions and adding to existing positions at more
attractive prices. Selectivity of stocks in terms of earnings visibility and
liquidity will be critical and we will continue to look for attractive
investment opportunities.
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
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 prospectus.
4
<PAGE> 6
NEEDHAM GROWTH FUND
STATEMENT OF NET ASSETS -- DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C>
COMMON STOCKS & WARRANTS -- (78.4%)
APPAREL MANUFACTURERS -- (4.0%)
Liz Claiborne, Inc.# 5,000 $ 193,125
Tommy Hilfiger Corp*# 5,000 240,000
Vans, Inc.* 5,000 62,500
Wolverine World Wide, Inc. 2,500 72,500
-----------
568,125
-----------
BIOTECHNOLOGY -- (0.9%)
Sangstat Medical Corp*# 5,000 132,500
-----------
BUSINESS SERVICES -- (1.5%)
American Residential Services,
Inc.* 1,500 40,688
Checkpoint System, Inc.* 2,500 61,875
International Network Services*# 2,000 60,375
Metro Networks, Inc.* 800 20,200
Metzler Group, Inc.* 500 15,875
NCO Group, Inc.* 1,050 17,719
-----------
216,732
-----------
COMPUTER HARDWARE -- (6.1%)
Amdahl Corp.* 5,000 60,625
Compaq Computer Corp. 2,000 148,500
Dell Computer Corp* 2,000 106,250
Quantum Corp.* 2,000 57,250
Read-Rite Corp.*# 7,500 189,375
Scagate Technology, Inc. 2,000 79,000
Stormedia, Inc.* 2,500 40,313
Western Digital Corp.* 3,500 199,062
-----------
880,375
-----------
COMPUTER SOFTWARE -- (5.8%)
Adobe Systems, Inc. 2,500 93,437
Applix, Inc.* 2,500 54,687
Computer Task Group, Inc.# 2,500 107,812
Cybermedia, Inc. 2,700 42,525
Document Sciences Corp. 3,000 29,625
Ecsoft Group P.L.C. 2,000 19,250
Hyperion Software Corp.* 5,000 106,250
Peerless Systems Corp.* 4,000 68,000
Puma Technology, Inc.* 3,200 55,200
Rogue Wave Software*# 2,000 31,500
Segue Software Inc.* 2,500 45,625
Sterling Commerce, Inc.* 3,000 105,750
Tecnomatix Technologies Ltd.* 3,000 79,500
-----------
839,161
-----------
ELECTRONIC DESIGN AUTOMATION -- (3.5%)
Cadence Design Systems, Inc.*# 4,500 178,875
IKOS Systems, Inc.*# 5,000 100,000
Synopsys, Inc.*# 5,000 231,250
-----------
510,125
-----------
FINANCIAL SERVICES -- (0.6%)
Ocwen Financial Corp.*# 3,000 80,250
-----------
FOOD & RELATED -- (1.1%)
Brinker International, Inc. 2,500 40,000
Dean Foods Co.* 2,500 80,625
Twinlab Corp.* 2,500 30,313
-----------
150,938
-----------
HOSPITAL & PHYSICIAN MANAGEMENT -- (3.7%)
FPA Medical Management, Inc.* 5,000 111,875
Medquist, Inc. 5,000 123,750
Oxford Health Plans, Inc.*# 4,000 234,250
United Healthcare Corp.*# 1,500 67,500
-----------
537,375
-----------
MEDICAL DEVICES & SUPPLIES -- (1.9%)
Guidant Corp.# 2,500 142,500
Hologic, Inc.* 5,000 123,750
-----------
266,250
-----------
NETWORKING & COMMUNICATIONS -- (15.5%)
Allin Communications Corp.* 1,500 29,250
Cisco Systems, Inc.* 3,000 190,875
Fore Systems, Inc.*# 5,000 164,375
Glenayre Technologies, Inc.* 2,000 43,125
Lucent Technologies, Inc. 3,000 138,750
Madge Networks N.V.* 3,000 29,625
Network General Corp.* 5,000 151,250
Pairgain Technologies, Inc.* 4,000 121,750
Premisys Communications, Inc.*# 5,000 168,750
Shiva Corp.*# 5,000 174,375
Univision Communications, Inc.,
Class A*# 1,000 37,000
Vanstar Corp.* 2,500 61,250
</TABLE>
5
<PAGE> 7
NEEDHAM GROWTH FUND
STATEMENT OF NET ASSETS -- DECEMBER 31, 1996 (CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C>
COMMON STOCKS & WARRANTS -- (78.4%) (CONT'D.)
NETWORKING & COMMUNICATIONS -- (15.5%) (CONT'D.)
Xircom, Inc.* 5,000 $ 108,750
3Com Corp.*# 11,000 807,125
-----------
2,226,250
-----------
OIL & GAS -- (0.8%)
Ensco International, Inc.*# 2,500 121,250
-----------
RETAILING -- (10.1%)
Amscan Holdings, Inc.* 5,000 60,000
Barnes & Noble, Inc.* 2,500 67,500
Borders Group, Inc.*# 10,000 358,750
CUC International, Inc.* 3,750 89,062
Eagle Hardware & Garden, Inc.*# 2,500 51,875
Equity Marketing, Inc.*# 5,500 101,750
Gadzooks, Inc.*# 4,500 82,125
Gap, Inc. 2,500 75,313
General Nutrition Companies,
Inc.* 2,500 42,188
GT Bicycles, Inc.* 2,500 32,188
Pep Boys - Manny, Moe, & Jack 3,000 92,250
Petco Animal Supplies, Inc.* 5,000 103,750
Rockshox, Inc.* 2,500 36,250
Staples, Inc.* 5,000 90,312
TJX Companies, Inc.# 2,000 94,750
Toys 'R' Us, Inc.* 2,500 75,000
-----------
1,453,063
-----------
SEMI-CONDUCTOR MANUFACTURERS -- (7.7%)
Adaptec, Inc.*# 4,000 160,000
Atmel Corp.*# 10,000 331,250
Cirrus Logic, Inc.* 3,500 54,250
ESS Technology, Inc.*# 7,500 210,937
Exar Corp.* 2,500 38,750
Lattice Semiconductor Corp.*# 2,500 115,000
LSI Logic Corp.* 2,000 53,500
Oak Technology, Inc.* 5,000 56,250
Quality Semiconductor, Inc.* 5,000 45,000
S3, Inc.* 3,000 48,750
-----------
1,113,687
-----------
SEMI-CONDUCTOR CAPITAL EQUIPMENT -- (4.3%)
Applied Materials, Inc.* 2,000 71,875
Cognex Corp.* 2,500 46,250
Cymer, Inc.*# 2,000 96,250
KLA Instruments Corp.* 2,000 71,000
Kulicke & Soffa Industries,
Inc.*# 5,000 95,000
Speedfam International, Inc.*# 7,500 213,750
Tencor Instruments* 1,000 26,375
-----------
620,500
-----------
TOTAL COMMON STOCK
(Cost $8,554,103) 9,716,581
-----------
WARRANTS -- (10.9%)
Intel Warrants $41.75,
03/14/98*# (Cost $969,656) 17,000 1,568,250
-----------
TOTAL COMMON STOCKS & WARRANTS
(Cost $9,523,759) 11,284,831
-----------
CORPORATE BONDS -- (0.7%)
<CAPTION>
PAR
(000)
-------
<S> <C> <C>
The Men's Wearhouse, Inc.
Convertible Debenture 5.25%,
Due 03/01/03 (Cost $100,000) $ 100 96,375
-----------
SHORT TERM INVESTMENTS -- (21.6%)
TIME DEPOSITS -- (12.6%)
PNC BANK N.A. (Time Deposits)
4.75%, Due 01/02/97 (Cost
$1,807,356) 1,807 1,807,356
-----------
<CAPTION>
SHARES
-------
<S> <C> <C>
MONEY MARKET FUNDS -- (9.0%)
Temporary Investment Fund,
Inc. -
Temp Fund Portfolio 649,999 649,999
Temp Cash Portfolio 649,999 649,999
-----------
(Cost $1,299,998) 1,299,998
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $3,107,354) 3,107,354
-----------
</TABLE>
6
<PAGE> 8
NEEDHAM GROWTH FUND
STATEMENT OF NET ASSETS -- DECEMBER 31, 1996 (CONTINUED)
<TABLE>
<CAPTION>
NUMBER
NAME/EXPIRATION DATE/STRIKE OF
PRICE CONTRACTS VALUE
- -------------------------------- --------- -----------
<S> <C>
PUT OPTIONS PURCHASED -- (0.8%)
Gadzooks, Inc., Jan., $17.50, 20 $ 1,625
Interactive Week Internet Index,
Jan., $240 10 4,937
Interactive Week Internet Index,
Jan., $250 25 25,000
Morgan Stanley Healthcare
Provider Index, Jan., $310 20 4,750
Morgan Stanley High Tech Index,
Jan., $390 43 59,125
Network General Corp., Jan.,
$22.50 50 782
S & P Retail Index, Jan., $375 20 18,000
-----------
TOTAL PUT OPTIONS PURCHASED
(Cost $129,051) 114,219
-----------
TOTAL INVESTMENTS -- (101.5%)
(Cost $12,860,164) 14,602,779
-----------
COVERED CALL OPTIONS WRITTEN -- (-1.1%)
Adobe Systems, Inc., Jan., $40 25 (3,750)
Applix, Inc., Jan., $35 25 (469)
Borders Group, Inc., Feb., $35 50 (16,875)
Cirrus Logic, Inc., Jan., $20 25 (625)
Cisco Systems, Inc., Jan., $70 25 (1,094)
Compaq Computer Corp., April,
$85 20 (7,750)
CUC International, Inc., Jan.,
$26.625 25 + (234)
Dell Computer Corp., Feb.,
$57.50 20 (6,500)
ESS Technology Inc., April, $30 25 (8,125)
Fore Systems, Inc., April, $35 25 (11,250)
FPA Medical Management, Inc.,
Feb., $30 50 (1,563)
Gadzooks, Inc., March, $35 20 (1,000)
Hologic, Inc., March, $30 50 (7,188)
Hyperion Software Corp., Feb.,
$25 50 (4,375)
Network General Corp., April,
$30 50 (16,875)
Oak Technology, Inc., March,
$12.50 50 (6,875)
Pairgain Technologies, Inc.,
April, $37.50 40 (10,750)
Shiva Corp., Feb., $65 20 (500)
Western Digital Corp., Jan., $50 35 (27,562)
Xircom, Inc., March, $22.50 50 (12,812)
3Com Corp., Jan., $70 25 (13,437)
-----------
TOTAL COVERED CALL OPTIONS WRITTEN
(Premiums Received $202,128) (159,609)
-----------
OTHER LIABILITIES IN EXCESS OF ASSETS -- (-0.4%)
Receivable from Brokers for
Securities Sold Short 5,139,856
Receivable for Investment
Securities Sold 740,310
Other Assets 121,111
Net Amounts due from Affiliates 56,190
Securities Sold Short at Value
(Proceeds - $5,139,856) (5,710,063)
Payable for Investment
Securities Purchased (168,871)
Organization Costs Payable to
Distributor (131,511)
Other Liabilities (110,866)
-----------
(63,844)
-----------
NET ASSETS -- (100%)
(applicable to 992,191 shares outstanding,
$.001 par value, 1,000,000,000 shares
authorized) $14,379,326
===========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $14.49
======
</TABLE>
* Non-Income producing security.
# Security position is either entirely or partially placed in a segregated
account as collateral for securities sold short.
+ Entitles the holder to purchase 150 shares for each contract held.
See accompanying notes to financial statements.
7
<PAGE> 9
NEEDHAM GROWTH FUND
SCHEDULE OF SECURITIES SOLD SHORT -- DECEMBER 31, 1996
<TABLE>
<CAPTION>
NAME OF ISSUER SHARES VALUE
- -------------------------------- ------- -----------
<S> <C> <C>
Adaptec, Inc. 4,000 $ 160,000
Atmel Corp. 8,000 265,000
Borders Group, Inc. 5,000 179,375
Cadence Design Systems, Inc. 2,500 99,375
Computer Task Group, Inc. 2,500 107,813
Cymer, Inc. 2,000 96,250
Eagle Hardware & Garden, Inc. 2,500 51,875
Ensco International, Inc. 2,500 121,250
Equity Marketing, Inc. 5,500 101,750
ESS Technology, Inc. 5,000 140,625
Fore Systems, Inc. 2,500 82,188
Gadzooks, Inc. 2,500 45,625
Guidant Corp. 2,500 142,500
IKOS Systems, Inc. 5,000 100,000
Intel Warrants 03/14/98 15,000 1,383,750
International Network Services 2,000 60,375
Kulicke & Soffa Industries, Inc. 2,500 47,500
Lattice Semiconductor Corp. 2,500 115,000
Liz Claiborne, Inc. 5,000 193,125
Ocwen Financial Corp. 3,000 80,250
Oxford Health Plans, Inc. 4,000 234,250
Premysis Communications, Inc. 5,000 168,750
Read-Rite Corp. 5,000 126,250
Rogue Wave Software 2,000 31,500
Sangstat Medical Corp. 5,000 132,500
Shiva Corp. 3,000 104,625
Speedfam International, Inc. 7,500 213,750
Synopsys, Inc. 5,000 231,250
TJX Companies, Inc. 2,000 94,750
Tommy Hilfiger Corp. 3,000 144,000
United Healthcare Corp. 1,500 67,500
Univision Communications, Inc.,
Class A 1,000 37,000
3Com Corp. 7,500 550,312
----------
TOTAL SECURITIES SOLD SHORT
(Proceeds $5,139,856) $5,710,063
==========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 10
NEEDHAM GROWTH FUND
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 10,247
Interest 96,874
----------
Total Investment Income 107,121
----------
EXPENSES:
Investment Advisory fee 105,162
Administration and Accounting fee 37,373
Custodian fee 29,476
Transfer Agent fee 19,548
Legal fee 50,000
Directors' fees 34,122
Audit fee 25,500
Distribution fees 21,829
Shareholders' reports 12,000
Organization expenses 25,625
Other expenses 40,939
----------
Total Expenses 401,574
Expenses Waived and Reimbursable (183,181)
----------
Net Expenses 218,393
----------
NET INVESTMENT LOSS (111,272)
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT SECURITIES:
Net Realized Gain on Investment Securities 1,319,364
Net Realized Loss on Option Contracts (333,389)
Change in Unrealized Appreciation of
Investment Securities 1,214,927
----------
Net Gain on Investments 2,200,902
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $2,089,630
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, 1996
<TABLE>
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment loss $ (111,272)
Net realized gain on investment securities 1,319,364
Net realized loss on option contracts (333,389)
Change in unrealized appreciation of
investment securities 1,214,927
----------
Net increase in net assets resulting from
operations 2,089,630
----------
Distributions from:
Net realized gains (615,164)
----------
CAPITAL SHARE TRANSACTIONS (1):
Shares issued 14,236,574
Shares issued in reinvestment of
distributions 576,920
Shares redeemed (2,448,634)
----------
Net increase from capital share transactions 12,364,860
----------
TOTAL INCREASE IN NET ASSETS 13,839,326
NET ASSETS
Beginning of period 540,000
----------
END OF PERIOD $14,379,326
==========
(1) SHARES ISSUED AND REDEEMED:
Shares issued 1,066,793
Shares reinvested 39,569
Shares redeemed (168,171)
----------
938,191
==========
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 11
NEEDHAM GROWTH FUND
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Year
<TABLE>
<CAPTION>
Year Ended
December 31,
1996(*)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.11)
Net gain on securities (realized and
unrealized) 5.27
---------
TOTAL FROM INVESTMENT OPERATIONS 5.16
---------
LESS DISTRIBUTIONS
Net realized gains (0.67)
---------
NET ASSET VALUE, END OF YEAR $ 14.49
=========
TOTAL RETURN 51.56%
=========
Net assets, end of year (thousands) $ 14,379
Ratio of expenses to average net assets 2.50%(a)
Ratio of net investment loss to average net
assets (1.27)%(a)
Portfolio turnover rate 568.93%
Average commission rate paid(1) $ 0.0511
</TABLE>
(a) Had certain waivers and reimbursements not been in effect, the ratio of
expenses to average net assets, would have been 4.60% and the ratio of net
investment loss to average net assets would have been (3.37%).
(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.
(*) Fund commenced operations on January 1, 1996.
See accompanying notes to financial statements.
10
<PAGE> 12
NEEDHAM GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
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 Management 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 ended December 31, 1996 to not more than 2.50% of average
daily net assets. For the year ended December 31, 1996, the Advisor waived its
fee of $105,162 and has agreed to reimburse other expenses in the amount of
$78,019.
11
<PAGE> 13
NEEDHAM GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 year ended December 31, 1996, the Fund incurred $21,829 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 year ended December 31, 1996.
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Long transactions $37,674,129 $26,518,197
Short sale transactions 5,300,712 10,440,568
----------- -----------
Total $42,974,841 $36,958,765
=========== ===========
</TABLE>
At December 31, 1996, net unrealized appreciation of $1,214,927 was comprised of
gross unrealized appreciation and depreciation for financial reporting and
federal income tax purposes of $2,523,115 and $1,308,188, 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.
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of call options written by the Fund for the year ended December 31,
1996 is as follows:
<TABLE>
<CAPTION>
NUMBER OF PREMIUM
OPTIONS WRITTEN CONTRACTS RECEIVED
- ----------------------------------- --------- ---------
<S> <C> <C>
Options outstanding at beginning of
period -- --
Options written 2,590 $ 866,398
Options expired -- --
Options exercised (10) (1,908)
Options terminated in closing
transactions (1,875) (662,362)
------ ---------
Options outstanding at December 31,
1996 705 $ 202,128
====== =========
</TABLE>
7. SHORT SALE TRANSACTIONS
The Fund may sell securities short for hedging purposes. During the year ended
December 31, 1996, 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 December
31, 1996, the market value of securities separately segregated to cover short
positions was $5,710,063. 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 December 31, 1996 and their related market values and proceeds are
set forth in the schedule of securities sold short.
8. COMPONENTS OF NET ASSETS
At December 31, 1996 net assets consisted of:
<TABLE>
<S> <C>
Paid-in Capital $12,904,860
Accumulated Net Realized Gains 259,539
Net Unrealized Appreciation (Depreciation) of
Investment Securities 1,214,927
-----------
Total Net Assets $14,379,326
===========
</TABLE>
13
<PAGE> 15
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Needham Growth Fund
We have audited the accompanying statement of net assets of Needham Growth Fund
(a portfolio of The Needham Funds, Inc.) including the schedule of securities
sold short, as of December 31, 1996, and the related statements of operations
and changes in net assets, and the financial highlights for the period from
January 1, 1996 (commencement of operations) through December 31, 1996. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of December 31, 1996 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Needham Growth Fund at December 31, 1996, and the results of its operations, the
changes in its net assets and the financial highlights for the period from
January 1, 1996 to December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG
New York, New York
January 31, 1997
14
