Semiannual
Report
Needham Growth Fund
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Six months ended June 30, 1998
(unaudited)
[LOGO]
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[LOGO]
Needham Growth Fund
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Semiannual Report
for the six months ended June 30, 1998
(unaudited)
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Semiannual Report 1998
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The Needham Growth Fund -- seeking to build wealth
for long-term investors.
Contents
Letter from the Advisor 2
Statement of Net Assets 5
Schedule of Securities Sold Short 8
Statement of Operations 9
Statement of Changes in Net Assets 10
Financial Highlights 11
Notes to Financial Statements 12
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Needham Growth Fund
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Six Month Results
June 30, 1998
Dear Shareholders, Friends of Needham, or Prospective Shareholders,
We are pleased to report performance results for the Needham Growth Fund ("NGF")
for the quarter ended June 30, 1998. Our performance relative to the major
indices for the quarter ended June 30, 1998 (2Q98), for the six month period
ended June 30, 1998 (YTD) and since inception is as follows:
Benchmarks 2Q98 YTD(6) Since Inception(7)
---------- ---- ------ ------------------
Needham Growth Fund(1) 3.9% 11.0% 94.6%
Dow Jones Industrial Average(2) 2.1% 14.1% 83.8%
S&P 500 Index(3) 3.3% 17.7% 93.0%
S&P 400 Midcap Index(4) (2.2)% 8.6% 71.2%
Russell 2000 Index(5) (4.6)% 5.3% 49.9%
1. Investment results calculated after reinvestments of dividends.
2. Dow Jones industrial average is a daily measure of stocks traded on the
NYSE.
3. S&P 500 stock index is a broad unmanaged measure of the U.S. stock market
and is not available for purchase.
4. S&P 400 Midcap stock index is a broad unmanaged measure of the U.S. stock
market and is not available for purchase.
5. Russell 2000 is a broad unmanaged index comprised of the smallest 2000
NASDAQ companies and is not available for purchase.
6. The time period between 12/31/97 to 6/30/98.
7. The time period between 1/1/96 to 6/30/98.
Note: The returns shown above are historical and reflect changes in share price,
reinvested dividends and are net of expenses. Investment results and the
principal value of an investment will vary. Past performance noted above
does not guarantee future results. When shares are redeemed, they may be
worth more or less than their original cost. Since inception, the Fund's
Adviser has absorbed certain expenses of the Fund, without which returns
would have been lower.
Background
The second quarter of 1998 has been a period of consolidation and change of
focus at the Needham Growth Fund. The first quarter of 1998 was characterized by
a sharp rally in January and February and then the market in general and
technology stocks specifically started to climb the wall of worry during March
leading up to earnings releases in April. During the second quarter, NGF has
focused on companies whose earnings are predominantly domestic or European, not
overly affected by the downturn in the Asian economies and where cash flow is
particularly strong.
Investment Strategy
NGF is seeking to create long-term tax efficient capital appreciation for its
investors. To this end, NGF targets companies with products or services that are
selling or marketing into high growth markets. They normally have earnings
growth of at least 20%, product and market dominance, and the ability to
consolidate their market positions. They may have a competitive advantage by
acquiring and retaining more customers, driving costs down and profits up. NGF
also looks for seasoned and motivated management with "incentives" to win.
Companies with these characteristics sometimes find themselves in a temporary
earnings downturn or
2
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Semiannual Report 1998
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shortfall or maybe in a product transition. This often causes aggressive growth
and momentum for investors to sell. At this point, NGF may deem the stock to be
reasonably priced and purchase it for long-term capital appreciation. Hence, the
discipline called, "Growth At a Reasonable Price" ("GARP").
Investment Profile
At June 30, 1998, NGF's sector holdings consisted of the following: 34% in
Technology & Telecommunications; 25.8% Media, Leisure, Entertainment, Cable;
12.1% Retailing & Business Services; 9.9% in Healthcare; 6.6% Oil & Gas
Services; 5% Drugs and Biotechnology; 5% in Aerospace and other Manufacturing
and finally 1.8% in short-term investments. The market value of hedges and
stocks sold short represents approximately 12% of the total value of the long
portfolio owned by NGF.
NGF's top ten holdings at quarter end (in descending order of market value) were
Telebras, Comcast, Cablevision, Hasbro, Amdocs, Pharmacia & Upjohn, First Data
Corp., Columbia/HCA, Viacom and Liberty Media.
Investment Analysis
While the technology sector in general offers some of the most attractive
long-term growth prospects in the economy, we are currently witnessing the
fall-out of the Asian turmoil, especially as it relates to the semiconductor
manufacturers. Areas of strength this quarter in technology included data and
telecom services, networking and its equipment manufacturers, Internet and
related companies and finally software. On the computer manufacturing side, we
are just beginning to see a pick-up after an inventory correction. This bodes
well for the disk drive companies too. One area of semiconductors that we have
chosen to focus on is the Programmable Logic Device (PLD) companies because of
their networking focus. One topic of hot debate this year is how to evaluate
Internet stocks where traditional earnings and P/E criteria are not applicable,
so we must turn to yardsticks such as revenue growth, sales to price ratios and
discounted cash flow models. The new era logic is that there is more to a
company than its bottom line. Actually, this is just a restatement of an
evaluation method that the market uses when earnings are absent. It is called
cash flow or earnings before income taxes, depreciation and amortization
(EBITDA). This brings us full circle to the bottom line that cash is the key,
whether it is Internet, software or cable stocks that we are analyzing.
To counterbalance our concerns in the technology sector, we have added
significantly to our exposure to the media, leisure, entertainment and cable
companies, cable equipment and construction companies and most importantly the
media content companies. These companies have accelerating growth, strong cash
flow, little Asian exposure and an improving technology content. Also, cable has
a significant advantage as coaxial cable has more capacity than traditional
copper cable, and many operators are installing fiber optic wiring for
additional speed and capacity for phone and Internet service. Recently the focus
in this area has intensified as AT&T has proposed to acquire
Tele-Communications, Inc., thus adding credibility and acceptance to the thesis
that access to the home for entertainment and Internet activities will be
through the coaxial cable or fiber-optic connection rather than the phone line.
While the sophistication of the cable box will increase exponentially and the
construction and buildout projects will be huge, the big payoff will, in our
opinion, be for the content providers.
In the healthcare area, this quarter has seen difficult times for the Physician
Practice Management (PPM) and Health Management Organization (HMO) companies. We
have invested in smaller PPMs focused on less competitive markets and in high
quality HMOs. We have also maintained our investments in the drug and
biotechnology areas. Our overall exposure to the sector remains relatively low
but we anticipate increasing it over the next two quarters by focusing on
medical software and information systems.
Retailing and business services have shown strong growth during the quarter.
These companies have relatively little exposure to Asia and the consumer cycle
in the USA has remained strong. We continue to focus on companies whose product
transition is almost complete and where management changes have been
implemented. It remains a challenge to find growth companies at a reasonable
price in this sector.
In the oil and gas services and drilling sector we have scaled back our
positions as crude prices declined in spring and early summer. Day rates have
started to come down as rigs have come off contract and earnings estimates have
been cut across the board. While we believe that weak current demand obscures
longer-term growth dynamics, we believe the improvement in the sector has been
pushed out and is only mitigated by the ongoing consolidation in the industry.
Therefore, we continue to focus on those companies with a high technology
component serving specialized areas such as
3
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Needham Growth Fund
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seismic services, marine data library work and deep water drilling.
Outlook
The US macro-economic picture remains relatively favorable despite dislocations
due to Asia. Of concern is the potential for reduced earnings growth for the
remainder of 1998 and first half of 1999 especially as it relates to certain
areas of technology. We remain cautiously optimistic for the remainder of 1998
and take great comfort in our media, leisure and telecommunications exposure.
On a more positive note, inflationary pressures remain muted and the interest
rate environment benign. Flows of funds into the equity market remain strong,
led by the mutual funds and international institutions. Markets are again at all
time highs, and as households continue to switch from real assets (home and auto
ownership) to financial assets (equities and leases), we continue to believe
there is significant life left in the bull market.
Nevertheless, it is important to remain vigilant. We should no longer look for a
general sell-off or an old fashioned bear market, but rather a series of sector
disappointments and rolling corrections as one industry runs out of steam and
another picks up the pace. Money is not leaving the market, it is just going to
other places in a restless rotation. We are always poised to take advantage of
this, using our liquidity to initiate or increase positions, especially where we
can buy long-term earnings growth at a reasonable price.
The Needham Growth Fund thanks you for your interest, support and confidence. If
you have any questions, concerns or thoughts, please don't hesitate to call us
at 212-705-0327.
Yours sincerely,
/s/ Peter J. R. Trapp
-----------------
Peter J. R. Trapp
Portfolio Manager
NEEDHAM GROWTH FUND
Comparative Investment Returns
An initial investment of $10,000 as of January 1, 1996 (inception) would be
worth $19,460 as of June 30, 1998
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts the
following plot points:
Needham S&P 400 RUSSELL
Growth MIDCAP DJI S&P 500 2000
Fund Index AVERAGE Index Index
------- ------- ------- ------- -------
1/2/96 10000 10000 10000 10000 10000
1/31/96 10850.5 10134.043 10543.626 10326.173 9981.33
2/29/96 12160 10460.43 10720.132 10397.772 10283.57
3/29/96 12570 10571.979 10918.524 10480.087 10468.4
4/30/96 13530 10882.758 10883.231 10620.85 11022.57
5/31/96 14430 11012.211 11028.039 10863.572 11452.04
6/28/96 14150 10833.639 11050.415 10888.088 10969.71
7/31/96 13800 10089.974 10804.73 10389.979 10000.95
8/30/96 14320 10655.986 11053.503 10585.456 10566.83
9/30/96 15070 11105.858 11495.079 11158.898 10962.75
10/31/96 15000 11124.679 11782.761 11450.49 10778.55
11/29/96 15281.38 11733.841 12785.903 12290.682 11207.08
12/31/96 15155.86 11732.464 12601.366 12026.367 11476.09
1/31/97 15752.06 12159.842 13314.306 12763.788 11692.57
2/28/97 15835.73 12043.702 13440.646 12839.446 11395.07
3/31/97 15908.95 11514.873 12865.596 12292.306 10841.54
4/30/97 15950.79 11800.863 13697.138 13010.245 10855.46
5/30/97 16662.04 12814.91 14326.496 13772.344 12050.51
6/30/97 16923.53 13158.74 14994.352 14370.789 12544.55
7/31/97 17885.8 14444.546 16068.824 15493.481 13117.7
8/29/97 18063.61 14412.872 14895.918 14603.445 13400.96
9/30/97 18600.61 15224.936 15526.82 15379.67 14362.76
10/31/97 17944.24 14546.915 14543.493 14849.415 13712.06
11/28/97 17753.68 14747.062 15288.15 15511.503 13606.36
12/31/97 17526.67 15303.434 15454.494 15755.524 13831.06
1/30/98 17891.31 14997.246 15451.074 15915.445 13610.47
2/27/98 19374.15 16222.457 16700.253 17036.676 14616.26
3/31/98 18729.96 16939.038 17196.802 17887.585 15212.84
4/30/98 19276.91 17232.372 17711.857 18049.941 15282.78
5/29/98 18766.43 16440.966 17392.498 17710.129 14451.37
6/30/98 19460 17120 18380 19300 14990
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.
4
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<CAPTION>
Semiannual Report 1998
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Statement of Net Assets (Unaudited)
June 30, 1998
Shares Value
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<S> <C> <C>
Common Stocks - (94.0%)
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Aerospace - (2.4%)
Boeing Co. 10,000 $ 445,625
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Business Services - (8.8%)
Amdocs, Ltd.* 50,000 756,250
Harte-Hanks, Inc.+ 20,000 516,250
West TeleServices Corp.* 30,000 363,750
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1,636,250
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Cable - (15.4%)
CBS Corp. 5,000 158,750
Cablevision Systems Corp., Class A* 10,000 835,000
Comcast Corp., Class A 22,000 893,063
Tele-Communications, Inc., Liberty Media Group, Series A* 15,000 582,187
Tele-Communications, Inc., TCI Group, Series A*+ 10,000 384,375
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2,853,375
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Computer Hardware - (3.7%)
Compaq Computer Corp. 20,000 567,500
Iomega Corp.* 20,000 117,500
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685,000
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Computer Software - (3.9%)
Novell, Inc.* 30,000 382,500
Remedy Corp.* 20,000 340,000
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722,500
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Contract Manufacturing - (1.7%)
Altron, Inc.* 25,000 321,875
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Data Processing - (5.7%)
Electronic Data Systems Corp.+ 10,000 400,000
First Data Corp.+ 20,000 666,250
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1,066,250
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Diversified - (2.6%)
Seagram Company, Ltd. 12,000 491,250
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Electronic Design Automation - (1.1%)
Mentor Graphics Corp.*+ 20,000 211,250
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Electronics & Electrical Equipment - (2.9%)
C-Cor Electronics, Inc.* 10,000 190,000
Remec, Inc.* 30,000 341,250
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531,250
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Healthcare - (9.9%)
American Oncology Resources, Inc.* 30,000 366,562
Columbia/HCA Healthcare Corp. 20,000 582,500
Medaphis Corp.* 40,000 240,000
ProMedCo Management Co.* 10,000 102,500
Wellpoint Health Networks, Inc.*+ 7,500 555,000
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1,846,562
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</TABLE>
See accompanying notes to financial statements.
5
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<TABLE>
<CAPTION>
Needham Growth Fund
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Shares Value
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<S> <C> <C>
Internet - (2.9%)
America Online, Inc.* 5,000 $ 530,000
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Leisure & Entertainment - (7.4%)
Hasbro, Inc. 20,000 786,250
Viacom, Inc., Class B*+ 10,000 582,500
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1,368,750
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Networking & Communications - (3.6%)
ADC Telecommunications, Inc.* 10,000 365,313
3Com Corp.* 10,000 306,875
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672,188
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Oil Equipment & Services - (6.6%)
BJ Services Co.* 10,000 290,625
EVI Weatherford, Inc.* 5,000 185,625
Transocean Offshore, Inc. 10,000 445,000
Varco International, Inc.* 15,000 297,188
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1,218,438
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Pharmaceuticals - (3.7%)
Pharmacia & Upjohn, Inc.+ 15,000 691,875
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Retailing - (3.3%)
Saks Holdings, Inc.* 10,000 276,250
Sunglass Hut International, Inc.*+ 30,000 331,875
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608,125
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Telecommunications - (8.4%)
Allegiance Telecom, Inc.* 1,000 15,000
Northern Telecom, Ltd. 10,000 567,500
Telecomunicacoes Brasileiras S.A., Sponsored ADR 9,000 982,687
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1,565,187
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Total Common Stock (Cost $16,365,383) 17,465,750
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Preferred Stock - (3.0%)
Leisure & Entertainment
News Corporation, Ltd., Sponsored ADR (Cost $454,950) 20,000 565,000
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Par
(000)
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Short-Term Investments - (1.8%)
Commercial Paper
Texas Utilities Co. 6.90%, Due 07/01/98
(Cost $340,000) $ 340 340,000
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</TABLE>
See accompanying notes to financial statements.
6
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<TABLE>
<CAPTION>
Semiannual Report 1998
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Shares Value
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<S> <C> <C>
Investment Companies - (1.6%)
H & Q Healthcare Investors Fund 10,000 $ 160,625
H & Q Life Sciences Investors Fund 10,000 131,875
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Total Investment Companies (Cost $308,407) 292,500
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Number of
Contracts
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Name/Expiration Date/Strike Price
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Put Options Purchased - (1.0%)
Philadelphia Semi-Conductor Index, August $235 50 43,750
Philadelphia Semi-Conductor Index, August $240 50 54,375
Philadelphia Semi-Conductor Index, August $255 50 91,875
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Total Put Options Purchased (Cost $242,950) 190,000
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Total Investments - (101.4%) (Cost $17,711,690) 18,853,250
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Other Liabilities in Excess of Assets - (-1.4%)
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Receivable from Brokers for Securities Sold Short 2,225,094
Receivable for Investment Securities Sold 985,690
Securities Sold Short at Value (proceeds - $2,225,094) (2,145,000)
Payable for Investment Securities Purchased (1,210,182)
Organization Costs Payable to Distributor (78,907)
Net Amounts due to Affiliates (44,553)
Net Other Liabilities (6,305)
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(274,163)
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Net Assets - (100.0%) (Applicable to 1,160,413 shares outstanding,
$.001 par value, 1,000,000,000 shares authorized) $18,579,087
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Net Asset Value, Offering and Redemption Price Per Share $ 16.01
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</TABLE>
* Non-Income producing security
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
ADR - American Depository Receipt
See accompanying notes to financial statements.
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<CAPTION>
Needham Growth Fund
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Schedule of Securities Sold Short (Unaudited)
June 30, 1998
Name of Issuer Shares Value
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<S> <C> <C>
Credence Systems Corp. 10,000 $ 190,000
DuPont Photomasks, Inc. 10,000 345,000
Gartner Group, Inc., Class A 10,000 350,000
I2 Technologies, Inc. 5,000 175,625
MacDermid, Inc. 10,000 282,500
Powerwave Technologies, Inc. 10,000 167,500
Sirrom Capital Corp. 10,000 260,000
Venator Group, Inc. 10,000 191,250
Visual Networks, Inc. 5,000 183,125
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Total Securities Sold Short (Proceeds $2,225,094) $2,145,000
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</TABLE>
See accompanying notes to financial statements.
8
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<CAPTION>
Semiannual Report 1998
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Statement of Operations (Unaudited)
For the Six Months Ended June 30, 1998
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<S> <C>
Investment Income
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Dividends $ 35,416
Interest 45,926
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Total Investment Income 81,342
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Expenses
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Investment Advisory fee 125,282
Administration and Accounting fee 32,500
Distribution fees 25,550
Custodian fee 20,996
Transfer Agent fee 15,000
Legal fee 20,000
Directors' fees 17,967
Audit fee 13,500
Organization expenses 13,142
Shareholders' reports 9,804
Other expenses 49,655
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Total Expenses 343,396
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Expenses Waived and Reimbursable (92,832)
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Net Expenses 250,564
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Net Investment Loss (169,222)
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Net Realized and Unrealized Gain (Loss) on Investment Securities
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Net Realized Gain on Investment Securities 2,386,680
Net Realized Loss on Option Contracts (387,539)
Change in Unrealized Appreciation of Investment Securities 274,722
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Net Gain on Investments 2,273,863
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Net Increase in Net Assets Resulting from Operations $2,104,641
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</TABLE>
See accompanying notes to financial statements.
9
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<CAPTION>
Needham Growth Fund
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Statement of Changes in Net Assets
Six Months Ended
June 30, 1998 Year Ended
(Unaudited) December 31, 1997
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<S> <C> <C>
Increase (Decrease) in Net Assets
- -------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) $ (169,222) $ 86,118
Net Realized Gain on Investment Securities 2,386,680 5,483,523
Net Realized Loss on Option Contracts (387,539) (2,314,395)
Change in Unrealized Appreciation (Depreciation)
of Investment Securities 274,722 (267,995)
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Net Increase in Net Assets Resulting from Operations 2,104,641 2,987,251
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Distributions:
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Net Investment Income -- (76,131)
Net Realized Gains -- (3,428,667)
In Excess of Net Realized Gains -- (37,925)
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Total Distributions -- (3,542,723)
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Capital Share Transactions (1):
- -------------------------------------------------------------------------------------------------------
Shares Issued 2,272,255 23,293,242
Shares Issued in Reinvestment of Distributions -- 3,271,954
Shares Redeemed (7,566,845) (18,620,014)
- -------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions (5,294,590) 7,945,182
- -------------------------------------------------------------------------------------------------------
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Total Increase (Decrease) in Net Assets (3,189,949) 7,389,710
- -------------------------------------------------------------------------------------------------------
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Net Assets
- -------------------------------------------------------------------------------------------------------
Beginning of Period 21,769,036 14,379,326
End of Period $18,579,087 $21,769,036
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(1) Shares Issued and Redeemed:
- -------------------------------------------------------------------------------------------------------
Shares Issued 148,685 1,459,181
Shares Reinvested -- 218,994
Shares Redeemed (497,957) (1,160,681)
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(349,272) 517,494
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</TABLE>
See accompanying notes to financial statements.
10
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<TABLE>
<CAPTION>
Semiannual Report 1998
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Financial Highlights
Six Months Ended
June 30, 1998 Year Ended Year Ended
For a Share Outstanding Throughout each Period (Unaudited) December 31, 1997 December 31, 1996(*)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.42 $ 14.49 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.14) 0.06 (0.11)
Net Gain on Securities (Realized and Unrealized) 1.73 2.26 5.27
- ---------------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 1.59 2.32 5.16
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- ---------------------------------------------------------------------------------------------------------------------------
Less Distributions
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- (0.05) --
Net Realized Gains -- (2.31) (0.67)
In Excess of Net Realized Gains -- (0.03) --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions -- (2.39) (0.67)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 16.01 $ 14.42 $ 14.49
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total Return 11.03%++ 15.66% 51.56%
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $18,579 $21,769 $14,379
- ---------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.50%(a)+ 2.50%(a) 2.50%(a)
Ratio of Net Investment Income (Loss) to
Average Net Assets (1.70)%(a)+ 0.37%(a) (1.27)%(a)
Portfolio Turnover Rate 388.49%++ 724.08% 568.93%
</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, 1998,
December 31, 1997 and December 31, 1996, would have been 3.40%, 3.29% and
4.60%, respectively and the ratio of net investment income (loss) to
average net assets, for the periods ended June 30, 1998, December 31, 1997
and December 31, 1996, would have been (2.60%), (0.42%) and (3.37%),
respectively.
+ Annualized
++ Non-Annualized
(*) Fund commenced operations on January 1, 1996.
See accompanying notes to financial statements.
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Needham Growth Fund
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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.
2. Significant Accounting Policies
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.
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.
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, 1998 to not more than 2.50% of average
daily net assets. For the six months ended June 30, 1998, the Advisor waived
$92,832 of its fee.
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, 1998, the Fund incurred $25,550 of
distribution fees.
5. Investment Transactions
The aggregate amount of purchases and sales of investment securities, excluding
securities sold short and short-term securities, during the six months ended
June 30, 1998 was $72,260,954 and $72,635,829, respectively.
At June 30, 1998, net unrealized appreciation of $1,221,654 was comprised of
gross unrealized appreciation and depreciation for financial reporting and
federal income tax purposes of $2,035,231 and $813,577, respectively.
12
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Semiannual Report 1998
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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.
7. Short Sale Transactions
Short sales are transactions in which the Fund sells a security it does not own,
in anticipation of a decline in the market value of that security. To complete
such a transaction, the Fund must borrow the security to deliver to the buyer
upon the short sale; the Fund then is obligated to replace the security borrowed
by purchasing it in the open market at some later date. The Fund will incur a
loss if the market price of the security increases between the date of the short
sale and the date on which the Fund replaces the borrowed security. The Fund
will realize a gain if the security declines in value between those dates. All
short sales must be fully collateralized. The Fund maintains the collateral in a
segregated account with its custodian, consisting of cash, equities and/or U.S.
government securities sufficient to collateralize its obligation on the short
positions. At June 30, 1998, equities held by the Fund with a total market value
of $3,183,375 were segregated as collateral for its short sales. The Fund may
also sell short "against the box" (i.e., the Fund enters into a short sale as
described above, while holding an offsetting long position in the security sold
short). If the Fund enters into a short sale against the box, it will hold an
equivalent amount of the securities to cover its position while the short sale
is outstanding. For the six months ended June 30, 1998, the cost of investments
purchased to cover short sales and proceeds from investments sold short were
$10,900,421 and $13,648,312, respectively.
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, 1998 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, 1998 net assets consisted of:
Paid-in Capital $15,555,452
Accumulated Net
Investment Loss (159,235)
Undistributed Net Realized Gains 1,961,216
Net Unrealized Appreciation
(Depreciation) of Investment
Securities 1,221,654
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Total Net Assets $18,579,087
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13
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[LOGO]
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
---------------------
Peter J. R. Trapp
Directors
---------
George A. Needham
John C. Michaelson
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
