<PAGE>
As filed with the
Securities and Exchange Commission on April 29, 1998
File No. 33-98310
811-9114
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. /_/
Post-Effective Amendment No. 4 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 6 /X/
THE NEEDHAM FUNDS, INC.
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(Exact name of Registrant as Specified in Charter)
445 Park Avenue
New York, NY 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 371-8300
John C. Michaelson
The Needham Funds, Inc.
445 Park Avenue
New York, NY 10022
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(Name and Address of Agent for Service)
Copy to:
William H. Bohnett, Esq.
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
It is proposed that this filing will become effective
(check appropriate box):
/X/ immediately upon filing pursuant to paragraph (b)
/_/ on (date) pursuant to paragraph (b)
/_/ 60 days after filing pursuant to paragraph (a)(1)
/_/ on (date) pursuant to paragraph (a)(1)
/_/ 75 days after filing pursuant to paragraph (a)(2)
/_/ on (date) pursuant to paragraph (a)(2) of Rule 485.
/_/ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
The Registrant has filed a declaration registering an indefinite
amount of securities pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. A Rule 24f-2 Notice for the fiscal year ended December
31, 1997 was filed on March 18, 1998.
<PAGE>
Prospectus
Needham Growth Fund
Prospectus April 29, 1998
Needham Funds
Needham Growth Fund
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Prospectus
April 29, 1998
Contents
Expense Summary 4
Financial Highlights 5
Management of the Fund 6
Advisory Services 7
Portfolio Manager 7
Investment Policies and Goals of Needham Growth Fund 7
Risks 15
How to Purchase Shares 16
Automatic Investment Program 18
How to Redeem Shares 18
Shareholder Services 20
Automatic Reinvestment of Dividends
and Capital Gains Distributions 20
Dividends, Distributions and Taxes 21
Determination of Net Asset Value 22
Performance Information 23
Administrator, Shareholder Servicing
Agent and Transfer Agent 23
Custodian 23
Legal Counsel and Independent Auditors 24
Organization of the Fund 24
Distribution and Services Agreement 25
Needham Growth Fund
445 Park Avenue
New York, NY 10022-2606
1-800-625-7071
<PAGE>
The Needham Funds, Inc. is offering shares of the Needham Growth Fund by this
Prospectus. Needham Growth Fund makes available to mutual fund investors the
expertise of the professionals at Needham Investment Management L.L.C., the
Fund's Adviser. The Needham Growth Fund seeks long-term capital appreciation
through investing primarily in the equity securities of growth companies with
superior earnings prospects, but whose share price or price/earnings multiple
provides a significant discount to that stated growth rate. Please see page 7
herein for a detailed explanation of the Fund's investment style.
The Fund invests in stocks from a variety of industries including but not
limited to the healthcare, technology, retail and oil services industries.
These are some of the sectors within the economy which the Adviser believes
will have significant long-term growth rates. The Fund may hedge its portfolio
to seek to reduce both stock volatility and over-all market risk.
The Needham Growth Fund does not invest for current income. The Fund may hold
any portion of its assets in cash or money market investments.
Minimum Investment
The minimum initial investment is $1,500. There is a $100 minimum for subsequent
investments.
Investor Profile
The Needham Growth Fund is most suitable for an investor who is seeking higher
returns but is willing to accept a higher degree of risk than in many other
mutual funds.
Offering of Shares
The Needham Growth Fund is a no load mutual fund. Shares of the Fund are
offered at net asset value. Shares may be purchased through any authorized
dealer, financial institution or directly from the Fund.
Investment in any mutual fund has inherent risks. In seeking to achieve its
investment objective the Fund may engage in option and futures strategies for
hedging and for income enhancement. These hedging and income enhancement
strategies may be considered speculative. These strategies may result in
higher risks and costs to the Fund. Needham Investment Management L.L.C. seeks
to identify opportunities in securities, markets and economic sectors. The
Adviser may then concentrate a higher percentage of the Fund's assets in
exploiting these opportunities than many other mutual funds.
This Prospectus sets forth concisely the information about the Needham Growth
Fund that you should know before investing. It should be read carefully and
retained for future reference.
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A Statement of Additional Information about the Fund, dated April 29, 1998,
has been filed with the Securities and Exchange Commission and is incorporated
into this Prospectus by reference. For a free copy of this Statement of
Additional Information, please call 1-800- 625-7071.
For a discussion of the Fund's investment objectives and policies, including
risks associated with the Fund's investment practices, see Investment
Policies and Goals on page 7 and Risks on page 15.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<PAGE>
Expense Summary
Shareholder Transaction Expenses
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Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed
on Reinvested Dividends and Capital Gains None
Deferred Sales Load None
Redemption Fees during
first six months after purchase(1) 0.50%
Thereafter None
Exchange Fee None
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Annual Fund Operating Expenses
(as a percentage of average net assets)
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Management Fees 1.25%
12b-1 Fees 0.25%
Other Expenses (after expense reimbursement) 1.00%
Total Fund Operating Expenses 2.50%
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(1) Redemption fee applies to shares redeemed or exchanged within six months of
purchase. The redemption fee currently is being waived by the Fund.
Example:
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
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1 Year $ 25
3 Years $ 78
5 Years $133
10 Years $284
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This information is to assist you in understanding the various costs and
expenses that an investor in the Fund will bear directly or indirectly. The
Adviser 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 ending December 31, 1998 to not more than 2.50% of average daily net
assets. Absent the limitation, for fiscal 1997, other expenses of the Fund would
have been approximately 1.79% and the total annual expenses of the Fund would
have been 3.29%. A fee of $10.00 is charged for each wire redemption. For a
further discussion of fees, see "Management of the Fund," "Administrator" and
"Distribution and Services Agreement" herein. The figures reflected in the
foregoing Example should not be considered a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown.
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Financial Highlights
The following financial highlights and the related financial statements for the
years ended December 31, 1997 and December 31, 1996 have been audited by Ernst &
Young LLP, Independent Auditors. Further financial data and related notes are
contained in the Statement of Additional Information, which is available upon
request.
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1997 December 31, 1996*
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<S> <C> <C>
Net asset value, beginning of year $14.49 $10.00
Income from investment operations:
Net investment income (loss) 0.06 (0.11)
Net gain on securities
(realized and unrealized) 2.26 5.27
Total from investment operations 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) --
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Total distributions (2.39) (0.67)
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Net Asset Value, End of Year $14.42 $14.49
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Total Return 15.66% 51.56%
Net assets, end of year (thousands) $21,769 $14,379
Ratios/Supplemental Data:
Ratio of expenses to average 2.50%** 2.50%**
net assets
Ratio of net investment income (loss)
to average net assets 0.37%** (1.27)%**
Portfolio turnover rate 724.08% 568.93%
Average commission rate paid*** $0.0359 $0.0511
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</TABLE>
*Fund commenced operations on January 1, 1996.
**Had certain waivers and reimbursements not been in effect, the ratio of
expenses to average net assets, for the years ended December 31, 1997 and 1996,
would have been 3.29% and 4.60%, respectively, and the ratio of net investment
income (loss) to average net assets, for the years ended December 31, 1997 and
1996, would have been (0.42)% and (3.37)%, respectively.
***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.
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Management of the Fund
The Directors of the Fund are responsible for generally overseeing the conduct
of the Fund's business. Needham Investment Management L.L.C. (the "Adviser"),
445 Park Avenue, New York, NY 10022, is the investment adviser for the Fund.
Needham Investment Management L.L.C. was formed in 1995 and is registered as an
investment adviser with the Securities and Exchange Commission. Needham
Investment Management L.L.C. is an affiliate of Needham & Company, Inc. Needham
& Company, Inc. is the Fund's distributor and is an investment banking firm
specializing in emerging growth companies. Needham & Company, Inc. has
substantial expertise in investment research, underwriting and private
investments. The Directors of the Fund include the following individuals:
George A. Needham--Mr. Needham founded Needham & Company, Inc. in 1985 and is
its Chairman and Chief Executive Officer. Mr. Needham received BS and BA degrees
from Bucknell University and an MBA from the Stanford University Graduate School
of Business. Mr. Needham is also a General Partner of Needham Capital Partners,
L.P., Needham Capital Partners, II, L.P. and a General Partner of Needham
Emerging Growth Partners, L.P., all private investment partnerships.
John C. Michaelson--Mr. Michaelson is President of Needham Investment Management
L.L.C. Mr. Michaelson joined Needham & Company, Inc. in 1986 and is a Managing
Director. Mr. Michaelson is also a General Partner of Needham Capital Partners,
L.P., Needham Capital Partners, II, L.P. and Needham Emerging Growth Partners,
L.P., all private investment partnerships. Mr. Michaelson received BA and MA
degrees with honors from Oxford University and an MBA with distinction from the
Harvard School of Business.
Roger W. Johnson--Mr. Johnson was the Administrator of the U.S. General Services
Administration from 1993 to March 1996 and was also a member of the President's
Management Council and the National Economic Council during that period. Prior
to 1993, Mr. Johnson served for nine years as Chairman and Chief Executive
Officer of Western Digital Corporation, a Fortune 500 technology firm. He is
currently a director of JTS Corporation, Group Technologies Corporation,
Insulectro, AST Research, Inc., Elexsys International, Inc. and Array
Microsystems, Inc.
James Poitras--Mr. Poitras has served as President, Chief Executive Officer and
Chairman of the Board of Integrated Silicon Systems, a computer software
company, from 1985 to 1996. Mr. Poitras is a Director of Knights Technology and
Alternative Realities Corporation, is a member of the Institute of Electrical
and Electronics Engineers' Industry Advisory Commission and has lectured widely
on business development and entrepreneurship.
F. Randall Smith--Mr. Smith is a founder and head of the research department of
Train, Smith Counsel, a registered investment advisory firm. He is a co-founder
of National
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<PAGE>
Journal, a weekly publication on the U.S. Government, and served as Special
Assistant to the Undersecretary of State for Economic Affairs prior to forming
his present firm.
Advisory Services
The Adviser directs investments of the Fund pursuant to an Investment Advisory
Agreement dated January 1, 1996 (the "Advisory Agreement"). The Fund pays the
Adviser a fee at the annual rate of 1.25% of the average daily net value of the
Fund. This fee is higher than that paid by most mutual funds. The Adviser or
persons employed by or associated with the Adviser are, subject to the authority
of the Fund's Board of Directors, responsible for the overall management of the
Fund's affairs.
Portfolio Manager
Peter J.R. Trapp - Mr. Trapp is a Managing Director of Needham & Co., and
Executive President and Portfolio Manager of Needham Growth Fund. Mr. Trapp
started his career in corporate finance at First Boston in 1973, worked at
Goldman Sachs, was appointed managing director at Dean Witter in 1982, and then
ran the investment banking side of Marine Midland/HSBC. He turned his attention
to the equity markets in 1990, joining Needham in 1994 as a Senior Vice
President in Institutional Sales and was appointed a Managing Director in 1996.
Born and raised in Europe, he studied economics at Fribourg University,
Switzerland and received his MBA from Columbia University in New York.
In January 1998, Mr. Trapp, who has approximately 25 years experience on Wall
Street, was appointed Portfolio Manager for the Fund.
Investment Policies and Goals of Needham Growth Fund
Needham Growth Fund ("NGF" or the "Fund") has as its goal to create long-term
tax efficient capital appreciation for its shareholders by investing in equities
of public companies with above average long-term growth rates. These above
average growth rates result from companies being at the vortex of rapid and
fundamental changes in the world economy resulting from technological or
demographic change. In this manner, the Fund seeks to build wealth for long-term
investors. There is no assurance that this investment objective or goal will be
met and the Fund is not intended to constitute a balanced investment program.
The central premise of the Fund's investment style is growth, but more
specifically, "Growth at a Reasonable Price" or "GARP." This style has become
more popular as the markets have risen to unprecedented levels and as investors
have come to understand some of the dangers and disadvantages of momentum or
aggressive growth investing.
The methodology used for GARP investing is detailed below:
The Fund relies on fundamental research. Investment decisions at the Fund are
based upon the independent analysis of business fundamentals. The first level of
analysis concerns industry prospects. Company-specific analysis includes company
visits, discussions with management and employees and discussions with customers
and competitors. The Fund focuses, above all, on the quality of the management
because it believes that management is the most critical element in determining
the success of a
-7-
<PAGE>
business. The Fund invests in people, not just in technology or products. The
executives of the Fund, John C. Michaelson and Peter J. R. Trapp, have
experienced several market cycles.
The Fund relies on macro-economic analysis. Investment decisions are also based
on detailed analysis of the U.S. and worldwide economies and these macro trends;
an analysis of the high growth sectors of those economies; an analysis of the
sector rotation within the respective equity markets; an analysis of the
dominant or growing companies within these sectors and finally a ranking by
sector and valuation of those stocks.
The Fund is not a technical trader. The Fund does not rely upon "technical"
investing (based upon computer-based stock selection, technical analysis and
charts), including "momentum" investing. The Fund invests for the long term.
Once the Fund qualitatively identifies great businesses and managements in which
it would like to invest, it then values those businesses to assess a reasonable
price at which to purchase the stock. The Fund seeks to purchase securities at
prices which the Fund believes have the potential to earn a return of at least
50% over an eighteen-month period. The Fund believes that 1998 will be a market
that rewards fundamental analysis and experience over formula approaches.
The Fund focuses on long-term values. In the short term, equity markets often
incorrectly value stocks. Good companies are often undervalued based on
short-term factors such as a disappointing quarter for the company not
representative of the strength of the business, undue general or
industry-specific pessimism, institutions wishing to exit the stock in size or a
lack of knowledge and support for the stock. The Fund believes that these
undervalued situations represent buying opportunities. Lower quality companies
are often overvalued based on short-term factors such as inordinate optimism
about a new industry or technology, aggressive forecasts, investment banks
promoting their clients, earnings spikes, momentum investors driving up prices
or accounting gimmicks. These overvalued situations represent opportunities for
short-selling as, in the long-term, real underlying value does eventually assert
itself.
The Fund invests in rapidly growing companies. The Fund invests in companies
that are likely to be the beneficiaries of long-lasting economic trends
resulting from fundamental technological change.
The Fund currently has significant investments in technology, healthcare,
communications, media and oil and gas services. Most of these areas benefit from
the power of information technology. In the industrial technology area this
includes instrumentation; oilfield services and equipment; and contract
manufacturing. In the electronics area this includes semiconductors (capital
equipment, devices, design software); telecommunications/Internet (equipment,
system software, content); and data storage. In the healthcare field this
includes medical devices; healthcare services (information systems, managed
care, physician practice management); and in the consumer/business services area
this includes branded consumer products; specialty retailers and outsourcing of
services such as data management and telemarketing.
-8-
<PAGE>
The Fund focuses on industries at the vortex of changes.
Our investment themes include:
1. The growth of industries centered on the microchip. The major
technological driver of the past ten years and the ten years to come is
the microchip. Major industries have been built around the capabilities
provided by this device. These industries include: the assembly,
distribution and service of personal computers, semiconductors, the
design of semiconductors and the equipment to manufacture
semiconductors, electronic components, data storage, networking of
computers, software and the whole new area of the Internet with its
many ramifications for networking equipment, content and operating
software and commerce. Each of these are now major industries in their
own right. Some of these companies have strong proprietary positions
and form core long-term holdings for the Fund. However, many technology
companies offer a commodity product without a strong proprietary
differentiation - these companies are the repeated victims of global
overcapacity and lack pricing power and do not make good long-term
investments.
2. The application of information technology to healthcare. Demand for
healthcare services grows insatiably with the aging population. Yet
this is one of the least efficient industries in America when it comes
to using data efficiently to improve the quality of service while
improving efficiency and reducing costs. Only recently have control of
costs and knowledge of outcomes been of any real interest to healthcare
providers. The environment has changed dramatically and information
systems are now a priority among healthcare providers. The
restructuring of the information systems of one of the largest
industries in America is in its infancy.
3. The application of information technology to oil and gas production.
The exploration for oil and gas has changed dramatically in the past
fifteen years with technological improvements based on electronics
leading to lower exploration costs and greater access to reserves.
Companies with advanced technology have established leadership
positions in providing equipment and services.
4. The growth of business outsourcing services. Strategic outsourcing by
business represents a true paradigm shift in how businesses operate.
The rapid expansion of communications capability has facilitated the
growth of business outsourcing. In the past, companies were constrained
by the high cost and primitive capabilities of communications and data
technology to do all possible jobs internally, many only tangential to
their main business. These services ranged from legal work to managing
data processing centers. Increasingly, well run businesses are, by
competitive necessity, focusing their own efforts on only a few areas
of core competency and contracting all other services to partners who
are focused on delivering a top quality service in that particular
area. Companies increasingly focus on the few things that they do
outstandingly well and leave the rest to others. As a result of huge
communications improvements, now further enhanced by the Internet,
suppliers are now able to maintain continuous, real time and low cost
-9-
<PAGE>
interface with customers over distances, reducing the need to maintain
in-house capability. Suppliers have become "transparent" to the
customer. Two areas of particular interest within outsourcing are the
outsourcing of manufacturing of products and the outsourcing of data
and telephone services. In manufacturing, there is a rapid transition
throughout American industry from strictly internal manufacturing to
the purchase of components and subassemblies to entire "box build,"
where the complete product is contracted to an outside manufacturer,
leaving the "manufacturer" only the high value-added design and
customer interface functions. The outsourcing of data service is a
rapidly growing industry with services ranging from electronic payments
to inbound and outbound telephone sales and fulfillment to brokerage
firms' clearing operations.
5. Restructurings and spin-offs. The Fund also look for investment
opportunities in restructurings and spin-offs, primarily in the
information technology industries. Business continues to restructure to
increase shareholders' value by focusing on core competencies and
operations. The divestiture of underperforming operations was a theme
of the 1980s and early 1990s. The Fund is now seeing the spin-off to
shareholders and the divestiture of good but unrelated businesses that
helps companies focus resources on core areas. These restructurings
often represent excellent investment opportunities at both the parent
and the subsidiary. The parent company's returns are often enhanced by
the divestiture as resources are directed at higher return
opportunities, management is better able to focus on the core business,
and the market finds the remaining business easier to understand and
therefore support. When good businesses are spun-off to shareholders,
an investment opportunity may arise as the former subsidiary management
is often more focused and provided with strong incentives to succeed,
but the company is often not adequately followed or understood in the
marketplace.
In summary, the keys to successful investing by the Fund include an
understanding of macroeconomic trends, an evaluation of the high growth sectors
of the economy, and their leaders and laggards, an analysis of the business
fundamentals, quality of management, and competitive position. After making an
evaluation, the Fund decides what price to pay for the growth prospects bearing
in mind the discipline of Growth At a Reasonable Price, or GARP. The Fund then
uses its patience and liquidity to execute on its investment opportunities. The
investment objective of the Fund is long-term tax efficient capital appreciation
by investing in public equities of strong growth companies.
The Fund may engage in investment strategies for hedging purposes or to seek to
increase its investment return. Each of the percentage limitations with respect
to investments in securities described below applies immediately after a
purchase and any subsequent change in the applicable percentage resulting from
market fluctuations does not require unwinding any part of the transaction.
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<PAGE>
The Fund has adopted certain investment restrictions which are fundamental and
may not be changed without a shareholder vote. Except as specifically noted, the
Fund's investment objective and policies described in the following pages are
not fundamental policies and may be changed or modified by the Fund's Board of
Directors without shareholder approval. The Fund will not, however, change its
investment objective without first providing written notice to shareholders at
least 30 days in advance. A complete list of the Fund's fundamental investment
restrictions and certain other policies not described in the Prospectus may be
found in the Statement of Additional Information.
Under normal market conditions, the Fund intends to invest at least 65% of its
total assets in equity securities of domestic issuers listed on a nationally
recognized securities exchange or traded on the Nasdaq System. The balance of
the Fund's assets may be held in cash or invested in other securities, including
preferred stock, common stock equivalents (mainly securities exchangeable for
common stock), options, futures and various corporate debt instruments.
Equity Securities
The Fund emphasizes investments in common stocks which may include equity
securities of smaller companies. The Fund also may buy securities such as
convertible debt, preferred stock, warrants, or other securities exchangeable
for shares of common stock and other equity securities, including publicly
traded partnership interests. In selecting equity investments for the Fund, the
Adviser seeks to identify companies, in a variety of industries, including but
not limited to the technology, healthcare and specialty retail industries, which
it believes will achieve superior growth rates, based on its market research and
company analysis. When investing in technology the Adviser focuses on product
cycles and unit growth. When investing in retailing and healthcare the Adviser
focuses heavily on demographic, regulatory and lifestyle trends. The Adviser
will consider overall growth prospects, financial condition, competitive
position, technology, research and development, productivity, labor costs, raw
materials costs and sources, competitive operating margins, return on
investment, management and other factors.
Investments in smaller companies may offer greater opportunities for capital
appreciation than larger companies, but may also involve certain special risks.
Such companies may have limited product lines, markets, or financial resources
and may be dependent on a limited management group. Such securities may also
trade less frequently and at a lower volume than more widely held securities,
and may fluctuate in value more sharply than those of other securities. There
may be less available information about these issuers or less market interest
than is normally the case with respect to larger companies.
Debt Securities
The Fund may buy debt securities of all types issued by both domestic and
foreign issuers, including government securities, corporate bonds and
debentures, commercial paper, and certificates of deposit. It is the Fund's
intention to invest no more than 35% of total assets in debt securities.
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<PAGE>
No more than 10% of the Fund's total assets (such 10% also being included in the
35% limitation stated above) may be invested in non-investment grade debt
securities (commonly called "junk bonds" or "high yield bonds"). These
securities are considered to be highly speculative, may have poor prospects of
attaining investment standing and may be in default. Like those of other
fixed-income securities, the value of lower-rated securities fluctuate in
response to changes in interest rates. In addition, the values of such
securities are also affected by changes in general economic conditions and
business conditions affecting the specific industries of their issuers. Changes
by recognized rating services in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. See Statement of Additional Information.
Foreign Securities
The Fund will invest primarily in securities of companies domiciled in the
United States, but the Fund may also invest up to 25% of its total assets,
measured at the time of investment, in securities of foreign issuers. Such
investments will be made either directly in such issuers or indirectly through
American Depository Receipts (ADRs) or closed-end investment companies. It is
possible that some material information about unsponsored ADRs will be
unavailable.
Foreign securities involve certain inherent risks that are different from those
of domestic issuers, including political or economic instability of the issuer
or the country of issue, changes in foreign currency and exchange rates, and the
possibility of adverse changes in investment or exchange control regulations.
Currency fluctuations may affect the net asset value of the Fund irrespective of
the performance of the underlying investments in foreign issuers if and to the
extent the Fund invests in non-dollar denominated securities.
The Fund may seek to hedge its position in foreign securities and/or protect
against foreign currency fluctuations by investing in put or call options on
securities and foreign currencies and enter into forward foreign currency
exchange contracts. See "-- Options, Futures and Forward Contracts."
Illiquid Investments
The Fund may not hold more than 15% of its net assets in securities for which
market quotations are not readily available, in repurchase agreements which have
a maturity longer than seven days and in securities subject to restrictions on
resale for which no adequate trading market exists. See Statement of Additional
Information.
Repurchase Agreements
A repurchase agreement arises when a buyer, such as the Fund, purchases a
security and simultaneously agrees to resell it to the vendor at an agreed upon
future date, normally within seven days. Such agreements permit the Fund to keep
all of its assets at work while retaining overnight flexibility in pursuit of
investments of a longer-term nature.
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<PAGE>
With respect to repurchase agreements, no more than 15% of the Fund's net assets
may be invested in illiquid investments, which include repurchase agreements
with maturities exceeding seven days. There is no percentage restriction on the
Fund's ability to enter into repurchase agreements with maturities of seven days
or less.
If the other party to a repurchase agreement becomes bankrupt, the Fund may
experience delays and costs in recovering its cash. To the extent that the value
of the security purchased has decreased in the meantime, the Fund could
experience a loss. The Fund's repurchase agreements are fully collateralized.
The Fund's Board of Directors has established procedures which enable the
Adviser to monitor the creditworthiness of the dealers with which the Fund
enters into a repurchase agreement transaction. The Fund may also invest in
reverse repurchase agreements. See Statement of Additional Information.
Borrowing and Leverage
As a fundamental policy, the Fund may borrow from banks up to 25% of its total
assets and may pledge its assets in connection with such borrowings. If the Fund
makes additional investments while borrowings are outstanding, this may be
construed as a form of leverage. This leverage may exaggerate changes in the
Fund's share value and the gains and losses on the Fund's investment. Leverage
also creates interest expenses that may exceed the return on investments made
with the borrowings.
Lending
The Fund may lend securities to broker-dealers and other institutions as a means
of earning additional income. If the borrower becomes bankrupt, the Fund could
experience delays and costs in recovering its securities. To the extent that the
value of securities loaned increased under such circumstances, the Fund could
experience a loss. Security loans must be fully collateralized, and the Adviser
must find the creditworthiness of the other party to the transaction
satisfactory. As a fundamental policy, loans (which include repurchase
agreements), in the aggregate, may not exceed 20% of the Fund's total assets.
Short Sales
The Fund may sell securities short and borrow the same security from a broker or
other institution to complete the sale. The Fund may make a profit or loss
depending upon whether the market price of the security decreases or increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. All short sales must be fully collateralized and the Fund
will not sell short securities whose underlying value exceeds 25% of its net
assets. The Fund will also limit short sales in any one issuer's securities to
2% of the Fund's net assets and will not sell short more than 2% of any one
class of the issuer's securities. The Fund may also engage in a short sale if at
the time of the short sale the Fund owns or has the right to obtain without
additional cost an equal amount of the security being sold short, an investment
technique known as a short sale "against the box."
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Options, Futures and Forward Contracts
The Fund may buy and sell options and futures contracts to manage its exposure
to changing interest rates, security prices, currency exchange rates and
precious metals prices. The Fund may enter into forward contracts as a hedge
against future fluctuations in foreign exchange rates. The Fund may buy and sell
stock index futures contracts or related options in anticipation of general
market or market sector movements. The Fund may also invest in indexed
securities or related options whose value is linked to currencies, interest
rates, commodities, indices, or other financial indicators. Options and futures
may be combined with each other or with forward contracts in order to adjust the
risk and return characteristics of the overall strategy. The Fund may invest in
options and futures based on any type of security, index, or currency related to
their investments, including options and futures traded on foreign exchanges and
options not traded on exchanges.
Except as described below, the Fund will not engage in options, futures or
forward transactions, other than for hedging purposes, if as a result more than
5% of its total assets would be so invested. The Fund may engage in such
transactions to an unlimited extent for hedging purposes.
Options, futures and forward contracts can be volatile investments and involve
certain risks. The ability of the Fund to use these strategies successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. If the Fund makes a transaction at an inappropriate time or
judges market conditions incorrectly, options and futures strategies may
significantly lower the Fund's return. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. See Statement of Additional Information.
Other Permitted Investments
The Fund may invest in securities issued by other investment companies within
the limits prescribed by the Investment Company Act of 1940 (the "1940 Act") and
applicable rules thereunder. As a shareholder of another investment company, the
Fund would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees. These expenses
thus would be in addition to the advisory and other expenses that the Fund bears
in connection with its own operations.
The Fund may also purchase or sell portfolio securities on a when-issued or
delayed delivery basis in compliance with applicable 1940 Act guidelines.
When-issued or delayed delivery transactions involve a commitment by the Fund to
purchase or sell securities with payment and delivery to take place in the
future in order to secure what is considered to be an advantageous price or
yield to the Fund at the time of entering into the transaction.
Defensive Investments
The Fund may invest temporarily up to 100% of its assets in cash or cash
equivalents, investment grade debt securities or repurchase agreements for
defensive purposes.
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Consistent with the Fund's investment objective and policies, its Adviser may
make changes in the portfolio consistent with the Fund's policies whenever it
believes doing so is in the best interest of the Fund.
Non-Diversification and Investment in Market Sectors
The Fund is "non-diversified" for purposes of the 1940 Act and so has the
flexibility to invest its assets in the securities of fewer issuers than if it
was "diversified." To the extent the Fund invests a significant portion of its
assets in a few issuers' securities, the performance of the Fund could be
significantly affected by the performance of those issuers. The Fund must,
however, meet certain diversification requirements under Federal tax law. See
Statement of Additional Information--"Investment Restrictions."
As a fundamental policy, the Fund will not invest more than 25% of its net
assets in issuers conducting their principal business in the same industry.
However, the Fund at times may invest more than 25% of its total assets in
securities of issuers in one or more market sectors. A market sector may be made
up of companies in a number of related industries. Business and economic
developments affecting that sector likely would have greater effect on the Fund
than those same developments would have on a fund invested in a wider spectrum
of market or industrial sectors.
Risks
For additional risks associated with an investment in the Fund, this section
should be read in conjunction with "Investment Objective and Policies" herein
and the Statement of Additional Information. The Fund invests primarily in
equity and debt securities, which fluctuate in value. Therefore, shares of the
Fund will also fluctuate in value. The net asset value of the Fund's shares, to
the extent the Fund invests in debt securities, is affected by changes in the
general level of interest rates.
Certain investment techniques described in this Prospectus, such as short sales,
options and futures strategies, and leverage, may entail risks and may result in
significant capital loss. The Fund may engage in various strategies as described
above, to varying degrees, both to seek to increase its return and to hedge its
portfolio against movements in the securities markets and exchange rates. Use of
such strategies involves the risk of imperfect correlation in movements in the
price of options and futures and movements in the price of the securities or
currencies which are the subject of the hedge. There can be no assurance that a
liquid secondary market for options and futures contracts will exist at any
specific time. Options and futures contracts, and certain of the other
investments described above, may be considered "derivative" investments, and
entail certain risks described above and in the Statement of Additional
Information.
In addition, the Fund may invest in the securities of non-U.S. issuers, which
have risks that are different from the risks associated with investments in the
securities of U.S. issuers. See "Investment Objective and Policies--Foreign
Securities" and the Statement of Additional Information.
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It is anticipated that in 1998 the rate of portfolio turnover of the Fund may be
approximately 200-300%. This rate of turnover will likely result in higher
brokerage commissions and higher levels of realized gains than if the turnover
rate was lower and may subject investors to higher levels of taxable gains.
Because of the nature of its investments, the Fund is designed for long-term
investors who can bear the risk of market fluctuations. An investment in the
Fund should not be considered a complete investment program. See "Investment
Objective and Policies" and Statement of Additional Information.
How to Purchase Shares
Shares of the Fund may be purchased at net asset value without any sales or
other charge by sending a completed application form to Needham Growth Fund, c/o
PFPC Inc. at P.O. Box 8949, Wilmington, DE 19899-8949. Applications sent by
overnight courier and all other correspondence should be sent to Needham Growth
Fund, c/o PFPC Inc. at 400 Bellevue Parkway, Suite 108, Wilmington, DE 19809.
Telephone transactions may not be used for initial purchases. If you want to
make subsequent telephone transactions, select this feature on your Application
or call 1-800-625-7071 to request an authorization form to set up your account
for this feature. See "Redemption of Shares--Telephone Redemptions" for a
discussion of liability for telephone errors. PFPC Inc. is the Administrator of
the Fund.
Shares of the Fund may also be purchased through authorized broker-dealers or
other institutions who may charge for their services. Such sales agents have the
responsibility of transmitting purchase orders and funds, and of crediting their
customers' accounts following redemptions in a timely manner and in accordance
with their customer agreements and this Prospectus.
The minimum initial investment for individuals, corporations, partnerships, IRAs
or trusts is $1,500. There is a $100 minimum for subsequent investments. Shares
of the Fund are offered on a continuous basis. The Fund, however, reserves the
right, in its sole discretion, to reject any application to purchase shares.
Applications will not be accepted unless they are accompanied by a check drawn
on a U.S. bank, savings and loan, or credit union in U.S. funds for the full
amount of the shares to be purchased.
After an account is opened, additional shares may be purchased by sending a
check payable to Needham Growth Fund and following the instructions given above.
All shares will be purchased at the net asset value per share next determined
after receipt of the shareholder's application in proper order and acceptance of
such application by the Fund. Subsequent investments may also be made by
telephone (electronic funds transfer) from a bank checking or money market
account. The transfer must specify account name, address and Needham account
number. This feature must be set up in advance according to the above
instructions.
The Fund will charge a $25.00 fee against a shareholder's account, in addition
to any loss
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sustained by the Fund, for any payment check returned for insufficient funds.
Shareholders should contact the Fund at 1-800-625-7071 to obtain the latest wire
instructions for wiring funds to PFPC Inc. for the purchase of Fund shares and
to notify PFPC Inc. that a wire transfer is coming.
How to Purchase Shares
Method
Initial Purchase
Subsequent Investment
By Mail
Complete and sign the Application. Make your check payable to Needham Growth
Fund and send to: Needham Growth Fund c/o PFPC Inc., P.O. Box 8949, Wilmington,
DE 19899-8949.
Make your check payable to Needham Growth Fund and mail it to the address above.
Put your account name, address and Needham account number on your check.
Subsequent investment forms will be included with each shareholder statement for
your convenience. Alternatively, include a note giving your Needham account
number, your name and your address.
By Overnight Courier
Needham Growth Fund c/o PFPC Inc., 400 Bellevue Parkway, Suite 108, Wilmington,
DE 19809 (1-800-625-7071).
Follow above directions and forward to address at left.
By Telephone
Telephone transactions may not be used for initial purchases. If you want to
make subsequent telephone transactions, select this feature on your Application
or call 1-800- 625-7071 to request an authorization form to set up your account
for this feature.
Purchases currently must be made by wire.
Presently, all subsequent investments to be made by telephone must be paid by
wire transfer.
By Wire
First, call the Administrator at 1-800-625-7071 to notify it that you intend to
purchase shares by wire and to verify wire instructions. Then, wire funds care
of PNC Bank, N.A., ABA #: 031-000-053
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Credit: Needham Purchase Account
Bank Account #: 86-1108-2195
Further credit: Needham Growth
FBO: Account Name and Number
Please carefully follow instructions at left.
Automatic Investment Program
See description of Automatic Investment Program below.
This feature must be set up by you in advance.
Automatic Investment Program
An eligible shareholder may also participate in the Fund's Automatic Investment
Program, an investment plan that automatically debits money from the
shareholder's bank account and invests it in the Fund through the use of
electronic funds transfers or automatic bank drafts. Shareholders may elect to
make subsequent investments by transfers of a minimum of $50 on the fifth or
twentieth day of each month into their established Fund account. Contact the
Administrator for more information about the Fund's Automatic Investment
Program.
Certificates
In the interest of economy and convenience, physical stock certificates
representing the Fund's shares will not be issued unless requested in writing
directly to the Fund's Administrator or to an account representative of an
eligible broker-dealer or bank. Wire and telephone redemptions of shares held in
certificate form are not permitted and the shares represented thereby will not
be reported on brokerage or bank statements sent to clients. See "Redemption of
Shares" below.
How to Redeem Shares
Shareholders may redeem their shares at any time. Fund shareholders will be
entitled to redeem all or any portion of the shares credited to their accounts
by submitting a written request for redemption by regular mail to: Needham
Growth Fund, c/o PFPC Inc. at P.O. Box 8949, Wilmington, DE 19899-8949.
Redemption requests sent by overnight courier should be sent to PFPC Inc. at 400
Bellevue Parkway, Suite 108, Wilmington, DE 19809.
Upon the receipt of a redemption request, the shareholder will receive a check
based on the net asset value next determined after the redemption request has
been received, which may be more or less than the amount originally invested. If
the shares to be redeemed represent an investment made by check, the Fund
reserves the right to withhold the proceeds until the check clears. It will
normally take up to three days to clear local checks and up to seven days to
clear other checks, but may take longer under some circumstances. Shares
redeemed or exchanged within six months of purchase will be charged a redemption
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fee of 0.50%. The redemption fee currently is being waived by the Fund.
A written redemption request will be considered to have been received in "proper
order" if the following conditions are satisfied:
o the request is in writing, indicates the number of shares to be redeemed and
identifies the shareholder's account number;
o the request is signed by the shareholder(s) exactly as the shares are
registered;
o the request is accompanied by certificates, if any, issued representing the
shares, which have been endorsed for transfer (or are themselves accompanied by
an endorsed stock power) exactly as the shares are registered; and
o if the redemption proceeds are requested to be sent other than to the
address of record or if the proceeds of a requested redemption exceed $50,000,
the signature(s) on the request is/are guaranteed by an eligible signature
guarantor through a medallion program. A signature guarantee may be obtained
from a domestic bank or trust company, broker, dealer, clearing agency or
savings association who are participants in a medallion program recognized by
the Securities Transfer Association. The three recognized medallion programs are
Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges Medallion
Program (SEMP) and New York Stock Exchange, Inc. Medallion Signature Program
(MSP). Signature guarantees which are not a part of these programs will not
be accepted.
No written redemption request will become effective until all documents have
been received in "proper order" by PFPC Inc.
Telephone Redemptions
The Fund permits individual shareholders (once within a thirty day period) or a
representative of record for an account to redeem shares by telephone in amounts
up to $10,000 by calling 1-800-625-7071. In order to use this service, the
shareholder must have elected to do so in his or her Application or complete an
authorization form supplied by the Fund. Telephone redemptions must be in
amounts of $1,000 or more. Instructions must include the shareholder's account
number. Checks issued must be made payable to the owner of record and may only
be mailed to the address of record. The request cannot be honored if an address
change has been made for the account within 60 days of the telephone redemption
request.
If there are multiple account owners, PFPC Inc. may rely on the instructions of
only one owner. This account option is not available for retirement account
shares, or newly purchased (within the prior 15 days) shares. The Administrator
may record all calls.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Such procedures may include, among other
things, requiring some form of personal identification prior to acting upon
telephone instructions. The Fund
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reserves the right to refuse a telephone redemption if it believes it is
advisable to do so. Assuming the Fund's security procedures are followed,
neither the Fund nor PFPC Inc. will be responsible for the authenticity of
redemption instructions received by telephone and believed to be genuine and any
loss therefrom will be borne by the investor. During periods of substantial
economic or market change, telephone redemptions may be difficult to complete.
Shares may always be redeemed by mail if a shareholder is unable to contact the
Fund by telephone.
Additional Information on Redemptions
A shareholder who holds Fund shares in non-certificate form may elect to have
redemption proceeds of $5,000 or more wired to the shareholder's brokerage
account or a commercial bank account designated by the shareholder. The current
fee for this service is $10.00.
Shareholders who have an IRA or other retirement plan must indicate on their
redemption request whether or not to withhold Federal income tax. Redemption
requests failing to indicate an election not to have Federal tax withheld will
be subject to withholding.
Shareholders may also redeem Fund shares through broker-dealers holding such
shares who have made arrangements with the Fund permitting redemptions by
telephone or facsimile transmission. These broker-dealers may charge a fee for
this service.
If a shareholder's transactions at any time reduce the shareholder's account in
the Fund to below $500 in value, the Fund may notify the shareholder that,
unless the account is brought up to at least such minimum amount, the Fund may,
within a reasonable time, redeem all shares in the account and close it by
making payment to the shareholder.
Shareholder Services
The Fund offers certain tax-sheltered retirement plans through which shares may
be purchased, including IRAs (and "rollovers" from existing retirement plans)
for individuals and their spouses and SEP-IRAs. Shares of the Fund may also be
purchased by Qualified Retirement Plans such as profit-sharing and money
purchase plans, 401(k) Plans and other Defined Contribution Plans, and by
Defined Benefit Plans. Should you have questions on the purchase of shares by
retirement plans, please call 1-800-344-9028 for Shareholder Services.
These types of accounts may be established only upon receipt of a written
application form. See Statement of Additional Information.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless a shareholder elects to do otherwise, all dividends and capital gains
distributions from the Fund will be automatically reinvested in additional full
and fractional Fund shares. Shareholders who do not wish to have dividends and
distributions automatically reinvested in Fund shares, may choose between two
options:
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(1) automatic reinvestment of capital gains distributions in Fund shares and
payment of dividends in cash; or
(2) payment of all dividends and distributions in cash.
Shareholders may change this election at any time by notifying the Administrator
or their account representative if the account is maintained at an eligible
broker-dealer or bank. Dividends and distributions will be reinvested at the
Fund's per share net asset value on the reinvestment date established for the
dividend or distribution.
Dividends, Distributions and Taxes
The Fund has qualified and elected to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended. By so qualifying,
the Fund generally will not be subject to Federal income tax on that part of its
investment company taxable income (consisting generally of net investment
income, income from certain foreign currency transactions and any excess of net
short-term capital gains over net long-term capital loss) and net capital gain
that is annually distributed to its shareholders. The Fund will continue to
elect treatment as a regulated investment company so long as it remains in the
best interests of its shareholders to do so.
The Fund intends to make annual distributions to its shareholders of record of
substantially all of its realized net capital gains (the excess of realized net
long-term capital gains over realized net short-term capital losses), any
realized net gains from foreign currency transactions, net investment income and
the excess, if any, of realized net short-term capital gains over realized net
long-term capital losses. The Fund may make additional distributions, if
necessary, to avoid a 4% Federal excise tax on certain undistributed ordinary
income and capital gain net income. Certain distributions made to shareholders
of record as of a date in October, November or December of a given year which
are paid by the Fund in January of the immediately subsequent year will be
taxable to shareholders as if received on December 31 of such given year.
Dividends from the investment company's taxable income (whether paid in cash or
reinvested in additional Fund shares) are taxable to shareholders as ordinary
income. Distributions of net capital gain (the excess of net long-term capital
gain over net short- terms capital losses) are also taxable to shareholders. The
Taxpayer Relief Act of 1997 made substantial changes to the maximum effective
tax rates and holding periods applicable to capital gains realized by
noncorporate taxpayers. In general, a noncorporate shareholder's net capital
gains will be taxed either at a maximum rate of 20% for property held more than
18 months or 28% with respect to property held for more than one year but not
more than 18 months. To the extent the Fund has net capital gain for a taxable
year, the Fund may designate different classes of net capital gain (e.g., the
20% class or the 28% class) and will provide information relating to the
portions of any net capital gain distribution that may be treated by
noncorporate shareholders as eligible for such different capital gain rate
classes. Such capital gain rate classes will apply regardless of how long a
shareholder has held shares in the Fund. Distributions of net investment income
and
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capital gain net income are taxable whether received in cash or reinvested in
additional shares.
The Fund is required to withhold as "backup withholding" 31% of all dividends,
capital gain distributions and redemption proceeds payable to any individuals
and certain other non-corporate shareholders who do not provide the Fund with a
correct taxpayer identification number and certain required certifications or
who are otherwise subject to backup withholding. Upon a redemption of Fund
shares, a shareholder will ordinarily recognize a taxable gain or loss, subject
to certain Federal tax rules. The Fund anticipates that it will be subject to
foreign withholding taxes for which it may, in certain years, be able to pass
through as a credit or deduction to its shareholders.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and shareholders. See the Statement
of Additional Information for a further discussion including a discussion of tax
considerations for foreign shareholders.
In addition to those considerations, there may be other Federal, state, local,
or foreign tax considerations applicable to a particular investor. Prospective
shareholders are therefore urged to consult their tax advisers with respect to
the effects of the investment on their own tax situations.
Determination of Net Asset Value
The net asset value per share of the Fund will be determined on each day when
the New York Stock Exchange (the "Exchange") is open for business at the close
of the Exchange and will be computed by determining the aggregate market value
of all assets of the Fund less its liabilities, and then dividing by the total
number of shares outstanding. The determination of net asset value for a
particular day is applicable to all applications for the purchase of shares as
well as all requests for the redemption of shares received before the close of
trading on the Exchange on that day.
Portfolio securities and options positions for which market quotations are
readily available are stated at the last sale price reported by the principal
exchange for each such security as of the exchange's close of business.
Securities and options for which no sale has taken place during the day and
securities which are not listed on an exchange are valued at the mean of the
current closing bid and asked 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 by the Board of Directors, although the actual
calculations may be made by persons acting pursuant to the direction of the
Board of Directors. The assets of the Fund may also be valued on the basis of
valuations provided by a pricing service approved by or on behalf of the Board
of Directors.
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Performance Information
From time to time, in advertisements to prospective investors or reports to
shareholders, the Fund may compare its performance, in terms of its total return
to that of other mutual funds with similar investment objectives, and/or to
various published indices which are widely used as benchmarks. The Fund may also
compare its performance to rankings prepared by Lipper Analytical Services,
Inc., a widely recognized independent service which monitors and ranks the
performance of mutual funds, and to rankings prepared by other national
financial publications. The Fund's average annual total return is computed by
finding the average annual compounded rates of return for the most recently
completed fiscal year and the period since the commencement of operations
through the most recently completed quarter. It is based on a hypothetical
$1,000 initial payment less any applicable sales charge, while assuming
reinvestment of all dividends and distributions, and with recognition of all
recurring charges. The Fund may also use a total return computed in the same
manner but for differing periods, without annualizing the total return. For
purposes of the yield calculation, yield to maturity of each debt obligation in
the Fund's portfolio is determined based on a modified market value method of
amortization. In computing net investment income all recurring charges are
recognized. In calculating performance results, initial sales charges, if any,
are taken into account, but other non-recurring charges are not. Total return or
yield information may be useful in reviewing the Fund's performance and for
providing a basis for comparison with other investment alternatives. However,
since the performance of the Fund changes in response to fluctuations in market
conditions, interest rates, currency fluctuations and Fund expenses, no
performance quotation should be considered a representation as to the Fund's
performance for any future period.
Administrator, Shareholder Servicing Agent and Transfer Agent
The Fund employs PFPC Inc. as Administrator under an administration contract
dated January 2, 1996 (the "Administration Contract") to provide administrative
services to the Fund. The services provided by the Administrator under the
Administration Contract are subject to the supervision of the officers and
Directors of the Fund, and include day-to-day administration of matters related
to the corporate existence of the Fund, maintenance of its records and
preparation of reports. Subject to certain waivers for these services, the Fund
pays a monthly fee at the annual rate of 0.10% on the first $200 million of
average daily net assets of the Fund, subject to a minimum annual fee of
$100,000.
PFPC Inc. also provides various shareholder services made available to each
shareholder, including performance of transfer agency and registrar functions
and dividend paying agent. PFPC Inc., as Administrator, acts as the Fund's
shareholder servicing agent. The principal address of PFPC Inc. is 400 Bellevue
Parkway, Wilmington, Delaware 19809.
Custodian
PNC Bank, National Association acts as custodian for the Fund. Rules adopted
under the 1940 Act permit the Fund to maintain its non- U.S. securities and cash
in the custody of
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certain eligible banks and securities depositories. Pursuant to such rules, the
Fund's non-U.S. securities and cash are held by its sub-custodians who have
been approved by or under the delegated authority of the Board of Directors of
the Fund in accordance with the rules of the Commission. Selection of the
sub-custodians and any decision to invest in non-U.S. markets has been made
following a consideration of a number of factors, including, but not limited to,
the practices, procedures, internal controls and financial stability of the
institution, the ability of the institution to perform capable custodial
services for the Fund and provide reasonable care for Fund assets, the
reputation and standing of the institution in its national market, the political
and economic stability of the countries in which the sub-custodians will be
located, and risks of potential nationalization or expropriation of Fund assets.
In addition, the 1940 Act requires that non-U.S. sub-custodians, among other
requirements, have no lien on the assets of the Fund and maintain adequate
accessible records.
Legal Counsel and Independent Auditors
Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York, New York 10103, acts
as counsel to the Fund. Ernst & Young LLP, 787 Seventh Avenue, New York, New
York 10019 acts as independent auditors to the Fund.
Organization of the Fund
The Needham Funds, Inc. ("Needham Funds") was incorporated in Maryland on
October 12, 1995 and is registered with the Commission under the 1940 Act as
an open-end management investment company. Needham Funds may from time to time
issue shares of one or more of its portfolios. Only shares of one such
portfolio, the Fund, are being offered by this Prospectus. The business and
affairs of Needham Funds are managed under the direction of its Board of
Directors. Needham Funds is an affiliate of Needham & Company, Inc.
Needham Funds has an authorized capitalization of 1 billion shares of $0.001 par
value common stock. Each share of Needham Funds entitles the shareholder to
participate equally in dividends and distributions declared and in net assets
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities, except expenses related to the distribution of the shares will be
borne solely by Needham Funds. Shares issued are fully-paid and non-assessable
by Needham Funds. Additional portfolios may be created by the Board of
Directors, without further action by the shareholders, in the future and any one
or more of such portfolios may have multiple classes of shares.
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<PAGE>
Maryland law does not require annual meetings of shareholders, except under
certain specified circumstances, and it is anticipated that shareholder meetings
will be held only when required by Federal or Maryland law. Shareholders do have
the right under the Articles of Incorporation to call a vote for the removal of
directors. Needham Funds will be required to call a special meeting of
shareholders in accordance with the requirements of the 1940 Act to seek
approval of new management and advisory arrangements, of a material increase in
distribution or account maintenance fees, or of a change in fundamental
policies, objectives or restrictions.
Distribution and Services Agreement
Needham & Company, Inc., an affiliate of the Adviser, acts as a distributor for
the Fund. Rule 12b-1 adopted by the Securities and Exchange Commission under the
1940 Act permits an investment company to directly or indirectly finance any
activity associated with the distribution of its shares (the "distribution
expenses") in accordance with a plan adopted by the Fund's Board of Directors
("12b-1 Plan"). Pursuant to such rule, the Directors of the Fund have approved,
and the Fund has entered into, a Distribution and Services Agreement (the
"Distribution Agreement") with Needham & Company, Inc. under which the Fund may
pay a distribution services fee to Needham & Company, Inc. or others at an
annual rate of up to 0.25 of 1% of the aggregate average daily net assets of the
Fund which are attributable to Needham & Company, Inc. or the various other
distributors.
The Distribution Agreement provides that Needham & Company, Inc. will use the
distribution services fee received from the Fund, in part, for payments (i) to
compensate broker-dealers or other persons for providing distribution
assistance, (ii) to otherwise promote the sale of shares of the Fund such as by
paying for the preparation, printing and distribution of prospectuses for other
than current shareholders and sales literature or other promotional activities,
and (iii) to compensate banks and other qualified financial institutions for
providing administrative, accounting and shareholder liaison services with
respect to the Fund's shareholders. Some payments under the Distribution
Agreement are used to compensate broker-dealers based on assets maintained in
the Fund by their customers. Distribution services fees are accrued daily and
paid monthly, and are charged as expenses of the Fund as accrued. Distribution
services fees received from the Fund will not be used to pay any interest
expenses, carrying charges or other financial costs. In adopting the
Distribution Agreement, the Directors of the Fund determined that there was a
reasonable likelihood that the Distribution Agreement would benefit the Fund and
the shareholders.
The Fund and/or Needham & Company, Inc. may enter into related servicing
agreements appointing various firms, such as broker-dealers or banks, to provide
all or any portion of the foregoing services for their customers or clients
through the Fund. The Fund and/or Needham & Company, Inc. may enter into
servicing agreements with banks and others, including the Adviser or its
affiliates, to provide such services, except for certain underwriting or
distribution services which banks may be prohibited from providing under the
Glass-Steagall Act for their clients that desire to purchase any of the Fund's
shares. If the Glass-Steagall Act should prevent banks from acting in any
capacity or providing
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any of the described services, the Directors of the Fund will consider what
action, if any, is appropriate to provide efficient servicing for Fund
shareholders. It is not anticipated that the termination of any bank
relationship would result in a financial loss to shareholders or affect the
Fund's net asset value.
The administrative and accounting services provided by banks and other qualified
financial institutions may include, but are not limited to, establishing and
maintaining shareholder accounts, sub-accounting, processing of purchase and
redemption orders, sending confirmation of transactions, forwarding financial
reports and other communications to shareholders and responding to shareholder
inquiries regarding the Fund. PNC Bank, N.A. acts as custodian of the Fund's
portfolio. Its address is 200 Stevens Drive, Airport Business Center, Lester, PA
19113.
* * *
Year 2000 Risks - Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by Needham and the Fund's service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Y2K Problem." Needham is taking
steps to address the Y2K Problem with respect to the computer systems that it
uses and to obtain assurances that comparable steps are being taken by the
Fund's other major service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Fund.
-26-
<PAGE>
Investment Adviser
Needham Investment Management L.L.C.
445 Park Avenue
New York, NY 10022-2606
(800) 344-9028
Distributor
Needham & Company, Inc.
445 Park Avenue
New York, NY 10022-2606
(800) 344-9028
Administrator, Shareholder Servicing Agent and Transfer Agent
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 625-7071
Directors
George A. Needham
John C. Michaelson
Roger W. Johnson
James P. Poitras
F. Randall Smith
Executive Officers
John C. Michaelson, President
Peter J.R. Trapp, Executive Vice President
Legal 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
-27-
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Statement of
Additional Information incorporated herein by reference, in connection with the
offering made by this Prospectus and, if given, or made, such information or
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offering by the Fund or
by the Distributor in any jurisdiction in which such offering may not lawfully
be made.
Needham Funds
Needham Growth Fund
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Fund news & information
o subscriptions
o automated access to daily net asset value
via e-mail: [email protected]
Adviser
Needham Investment Management L.L.C.
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
-28-
<PAGE>
1933 Act File Number 33-98310
1940 Act File Number 811-9114
STATEMENT OF ADDITIONAL INFORMATION
NEEDHAM GROWTH FUND
445 Park Avenue
New York, New York 10022
A Portfolio of The Needham Funds, Inc.
April 29, 1998
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current Prospectus for Needham Growth Fund (the "Fund"),
dated April 29, 1998 (the "Prospectus"). Much of the information contained in
this Statement of Additional Information expands upon the subjects discussed in
the Prospectus. No investment in shares of the Fund (the "Shares") should be
made without first reading the Prospectus. A copy of the Prospectus for the Fund
may be obtained at no charge by writing the Fund's administrator, PFPC Inc. (the
"Administrator") or by calling the Administrator at 1-800-625-7071 or Needham &
Company, Inc. at 1-800-344-9028.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION..................................................... 1
INVESTMENT OBJECTIVE AND POLICIES....................................... 1
INVESTMENT RESTRICTIONS................................................. 10
INVESTMENT ADVISORY SERVICES............................................ 12
THE DISTRIBUTOR AND DISTRIBUTION OF THE SHARES.......................... 14
TRANSFER AGENCY, ADMINISTRATION SERVICES
AND FUND ACCOUNTING..................................................... 15
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................... 15
DIRECTORS AND OFFICERS.................................................. 18
DETERMINATION OF NET ASSET VALUE........................................ 20
TAX-SHELTERED RETIREMENT PLANS.......................................... 21
TAXES................................................................... 22
Taxation of the Fund -- In General............................. 22
Taxation of the Fund's Investments............................. 23
Taxation of the Shareholders................................... 25
PERFORMANCE INFORMATION................................................. 29
ADDITIONAL INFORMATION.................................................. 30
Custodian...................................................... 30
Independent Auditors........................................... 30
FINANCIAL STATEMENTS.................................................... 30
APPENDIX................................................................ 1
</TABLE>
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<PAGE>
GENERAL INFORMATION
The Needham Funds, Inc. is an open-end management investment company
organized as a corporation under the laws of the State of Maryland on October
12, 1995, which at present is comprised of one portfolio of securities, Needham
Growth Fund (the "Fund"). The Board of Directors has authority to create
additional portfolios, each of which may issue separate classes of shares. The
Fund is classified as a non-diversified fund under the Investment Company Act of
1940 (the "1940 Act") and is offered on a no-load basis.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are discussed in the
Prospectus. This portion of the Statement of Additional Information is designed
to supplement that discussion.
Under normal market conditions, the Fund invests at least 65% of its
total assets in equity securities of domestic issuers listed on a nationally
recognized securities exchange or traded on the Nasdaq System. The balance of
the Fund's assets may be held in cash or invested in other securities, including
preferred stock, common stock equivalents, options, futures and various
corporate debt instruments.
The Appendix to this Statement of Additional Information contains an
explanation of the rating categories of Moody's Investors Service and Standard &
Poor's Corporation relating to the fixed-income securities and preferred stocks
in which the Fund may invest, including a description of the risks associated
with each category.
Lower-Rated Debt Securities
The Fund may purchase lower-rated debt securities, sometimes referred
to as "junk" or "high yield bonds" (those rated BB or lower by Standard & Poor's
Corporation ("S&P") or Ba or lower by Moody's Investors Service, Inc.
("Moody's")). See Appendix A for a description of these ratings.
The lower ratings of certain securities held by the Fund reflect the
greater possibility that adverse changes in the financial condition of the
issuer, or in general economic conditions, or both may impair the ability of the
issuer to make payments of interest and principal. A number of factors,
including ability of the issuer to make timely payments, could lessen liquidity
and limit the Fund's ability to sell at prices approximating the values the Fund
placed on such securities. In the absence of a liquid trading market for
securities held by the Fund, it may be difficult to establish the fair market
value of these securities. The rating assigned to a security by Moody's or S&P
does not reflect an assessment of the volatility of the security's market value
or of the liquidity of an investment in the security.
<PAGE>
Changes by recognized rating services in their ratings of any
fixed-income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of these investments.
Issuers of lower-rated securities are often highly leveraged and,
consequently, their ability to service their debt during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may be unable to repay debt at maturity by refinancing. The risk of
loss due to default is significantly greater because such securities frequently
are unsecured and subordinated to senior indebtedness. Certain of the
lower-rated securities in which the Fund invests are issued to raise funds in
connection with the acquisition of a company. The highly leveraged capital
structure of such issuers may make them especially vulnerable to adverse changes
in economic conditions.
In order to enforce its rights in the event of a default under such
securities, the Fund may be required to take possession of and manage assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the Fund's net asset value. A
Fund may also be limited in its ability to enforce its rights and may incur
greater costs in enforcing its rights in the event an issuer becomes the subject
of bankruptcy proceedings.
Other Debt Securities
Zero-coupon securities are debt securities which are usually issued at
a deep discount and do not provide for payment of interest prior to maturity.
Even though zero-coupon securities do not pay current interest in cash, the Fund
is nonetheless required to accrue interest income on them and to distribute the
amount of that interest at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to satisfy its
distribution requirement.
When other debt obligations are stripped of their unmatured interest
coupons by the holder, the stripped coupons are sometimes sold separately. The
principal or corpus is then sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does not
receive any rights to periodic cash interest payments. Purchasers of stripped
principal obligations acquire, in effect, discount obligations that are
economically identical to zero-coupon bonds.
Investing in Convertible Securities
The Fund may invest in convertible securities: that is, bonds, notes,
debentures, preferred stocks and other securities which are convertible into
common stocks. Investments in convertible securities may provide incidental
income through interest and dividend payments and/or an opportunity for capital
appreciation by virtue of their conversion or exchange features.
Convertible debt securities and convertible preferred stocks, until
converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market value of convertible securities
2
<PAGE>
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. As the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock, although typically not as much as the underlying common stock. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which
provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Investing in Foreign Securities
Certain of the Fund's investments may be of securities in issuers
located in countries having repatriation restrictions. Investment in securities
subject to repatriation restrictions of more than seven days will be considered
illiquid securities and will be subject to the Fund's overall 15% limitation on
investment in illiquid securities.
Individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. Further, a Fund investing in foreign securities may encounter
greater difficulties or be unable to pursue legal remedies or obtain judgments
in foreign courts.
Because foreign securities typically will be denominated in foreign
currencies, the value of such securities to the Fund will be affected by changes
in currency exchange rates and in exchange control regulations, and costs will
be incurred in connection with conversions between currencies. A change in the
value of a foreign currency against the U.S. dollar will result in a
corresponding change in the U.S. dollar value of the Fund's securities
denominated in the currency. Such changes will also affect the Fund's income and
distributions to shareholders. The Fund may be affected either favorably or
unfavorably by fluctuations in the relative rates of exchange between the
3
<PAGE>
currencies of different nations, and the Fund therefore may engage in certain
foreign currency hedging strategies. Such hedging strategies may include the
purchase and sale of foreign currencies on a spot or forward basis, or the
purchase and sale of options or futures contracts with respect to foreign
currencies. Such strategies involve certain investment risks and transaction
costs to which the Fund might not otherwise be subject. These risks include
dependence on the Adviser's ability to predict movements in exchange rates, as
well as the difficulty of predicting, and the imperfect movements between,
exchange rates and currency hedges.
Investments may be made from time to time in companies in developing
countries as well as in developed countries. Although there is no universally
accepted definition, a developing country is generally considered by the Adviser
to be a country which is in the initial state of industrialization. Shareholders
should be aware that investing in the equity and fixed income markets of
developing countries involves exposure to unstable governments, economies based
on only a few industries and securities markets which trade a small number of
securities. Securities markets of developing countries tend to be more volatile
than the markets of developed countries; however, such markets have in the past
provided the opportunity for higher rates of return to investors. There are
substantial risks involved in investing in securities issued by developing
country companies which are in addition to the usual risks inherent in foreign
investments. Some countries in which the Fund may invest may have fixed or
managed currencies. Further, certain currencies may not be traded
internationally. Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a U.S. instrument and foreign entities may not be subject
to accounting, auditing, and financial reporting standards and requirements
comparable to those of the U.S. There is generally less government supervision
and regulation for exchanges, financial institutions and issuers in foreign
countries than there is in the U.S. Moreover, certain foreign investments may be
subject to foreign withholding taxes. Foreign markets have different clearance
and settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended securities purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of Fund
securities due to settlement problems could also result either in losses to the
Fund due to subsequent declines in value of the Fund security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser.
Foreign securities such as those purchased by the Fund may be subject
to foreign government taxes, higher custodian fees and dividend collection fees
which could reduce
4
<PAGE>
the yield on such securities. Trading in futures contracts traded on foreign
commodity exchanges may be subject to the same or similar risks as trading in
foreign securities.
Foreign Currency Transactions
Under normal circumstances, consideration of the prospects for currency
exchange rates will be incorporated into the long-term investment decisions made
for the Fund with regard to overall diversification strategies. Although the
Fund values its assets daily in terms of U.S. dollars, it does not intend
physically to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund may do so from time to time and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. The Fund may use forward contracts, along
with futures contracts and put and call options, to "lock in" the U.S. dollar
price of a security bought or sold and as part of its overall hedging strategy.
The Fund will conduct its foreign currency exchange transactions, either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through purchasing put and call options on, or by entering
into futures contracts or forward contracts to purchase or sell foreign
currencies. See "-- Forward Foreign Currency Exchange Contracts" and "-- Futures
and Options Transactions."
It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security is less than
the amount of foreign currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward currency contract prices. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward contracts as a hedge against future
fluctuations in foreign exchange rates. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell a fixed
amount of U.S. dollars or foreign currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at the price set at the time of the contract. Unlike foreign currency futures
contracts, which are standardized exchange-traded contracts, forward currency
contracts are usually traded in the
5
<PAGE>
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers.
The Fund may enter into forward contracts under various circumstances.
For example, the Fund may enter into a forward contract for the purchase or sale
of a security denominated in a foreign currency in order to lock in the price of
the security in U.S. dollars or some other foreign currency which the Fund is
holding. By entering into a forward contract for the purchase or sale of a fixed
amount of U.S. dollars or other currency for the amount of foreign currency
involved in the underlying security transactions, the Fund will be able to
protect itself against any adverse movements in exchange rates between the time
the security is purchased or sold and the date on which payment is made or
received. The Fund may also purchase a forward contract to hedge against an
anticipated rise in a currency versus the U.S. dollar or other currency, pending
investment in a security denominated in that currency.
The Fund may enter into a forward contract to sell or purchase, for a
fixed amount of U.S. dollars or other currency, an amount of foreign currency
other than the currency in which the securities to be hedged or purchased are
denominated approximating the value of some or all of the portfolio securities
to be hedged or purchased. This method of hedging, called cross-hedging, will be
used when it is determined that the foreign currency in which the portfolio
securities are denominated has insufficient liquidity or is trading at a
discount as compared with some other foreign currency with which it tends to
move in tandem. The Fund is permitted to enter into forward contracts with
respect to currencies in which certain of its portfolio securities are
denominated and on which options have been written.
In certain of the above circumstances the Fund may have realized fewer
gains than had the Fund not entered into the forward contracts. Moreover, the
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible, since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
The Fund's Custodian will place cash or liquid equity or debt
securities into a segregated account of the Fund in an amount equal to the value
of the Fund's total assets committed to the consummation of forward foreign
currency contracts. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts. At maturity of a forward
currency contract, the Fund may either sell the portfolio security and make
delivery of the foreign currency, or it may retain the security and terminate
its contractual obligation to deliver the foreign currency prior to maturity by
purchasing an "offsetting" contract with the same currency trade obligating it
to purchase, on the same maturity date, the same amount of the foreign currency.
There can be no assurance, however, that the Fund will be able to effect such a
closing purchase transaction.
6
<PAGE>
Futures and Options Transactions
The use of financial futures contracts and options on such futures
contracts may reduce the Fund's exposure to fluctuations in the prices of
portfolio securities and may prevent losses if the prices of such securities
decline. Similarly, such investments may protect the Fund against fluctuation in
the value of securities in which the Fund is about to invest.
The use of financial futures contracts and options on such futures
contracts as hedging instruments involves several risks. First, there can be no
assurance that the prices of the futures contracts or options and the hedged
security will move as anticipated. If prices do not move as anticipated, the
Fund may incur a loss on its investment. Second, investments in options, futures
contracts and options on futures contracts may reduce the gains which would
otherwise be realized from the sale of the underlying securities which are being
hedged. Third, the effective use of options and futures contracts also depends
on the Fund's ability to terminate options and futures positions as desired.
There can be no assurance there will be a sufficiently liquid market for the
Fund to effect closing transactions at any particular time or at an acceptable
price. If the Fund cannot close a futures position, or if limitations imposed by
an exchange or board of trade on which futures contracts are traded prevent the
Fund from closing out a contract, the Fund may incur a loss or may be forced to
make or take delivery of the underlying securities or currencies at a
disadvantageous time.
In addition, the purchase or sale of futures contracts or sale of
options on futures contracts involve the risk that the Fund could lose more than
the original margin deposit required to initiate the transaction. The purchase
of options on futures contracts involves less potential risk than the purchase
or sale of futures contracts because the maximum amount at risk is the premium
paid for the options plus transaction costs. Although the maximum amount at risk
when the Fund purchases an option on a security, currency, index or futures
contract is the premium paid for the option plus transaction costs, there may be
circumstances when the purchase of an option would result in a loss to the Fund,
whereas the purchase of the underlying security, currency or futures contract
would not, such as when there is no movement in the level of the underlying
security, currency or futures contract. The value of an options or futures
position relating to a non-U.S. currency may vary with changes in the value of
either the currency involved or the U.S. dollar or both and has no relationship
to the investment merits of individual non-U.S. securities held in a hedged
investment portfolio.
The Fund may write covered call options on its underlying portfolio
securities, whether equity or debt, on stock or bond indexes and on currencies
in which the Fund invests. Covered call writing may be used for hedging purposes
and for closing long call positions and for achieving incremental income. A call
option will be considered covered if the Fund (a) owns the security or currency
underlying the written option, (b) holds a call option on the underlying
security, currency or index with a similar exercise price or (c) maintains
sufficient cash, cash equivalents or liquid high grade securities sufficient to
cover the exercise price of the option.
7
<PAGE>
The Fund may also write covered put options. This technique will be
used when the Fund seeks to purchase a security, or group of securities in the
case of an index option, at a price equal to or less than the prevailing market
price at the time of the put sale. The Fund may also sell covered puts for
achieving incremental income. A put will be considered covered if a Fund (a)
maintains cash, cash equivalents or liquid, high grade debt obligations
sufficient to cover the exercise price of the option, (b) holds a put option on
the underlying security with an exercise price equal to or greater than the
exercise price of the written put or (c) where the exercise price of the
purchased put is lower than that of the written put, the Fund maintains
sufficient cash, cash equivalents or liquid high grade debt obligations equal to
the difference. Puts may also be written in order to close long put positions.
In calculating the 5% limitation on options, futures and forward transactions,
other than for hedging purposes, the Fund shall include the premiums paid on
options and options on futures (excluding in-the-money amounts on such options)
and the initial margin deposits on the Fund's futures positions.
In order to fix the cost of future purchases, the Fund may purchase
calls on equity and debt securities that the Adviser intends to include in the
Fund's portfolio. Calls may also be used to participate in an anticipated price
increase of a security without taking on the full risk associated with actually
purchasing the underlying security. The Fund may purchase puts to hedge against
a decline in the market value of portfolio securities.
Repurchase Agreements and Reverse Repurchase Agreements
The Fund will only enter into a repurchase agreement where (i) the
underlying securities are of the type which the Fund's investment policies would
allow it to purchase directly, (ii) the market value of the underlying security,
including accrued interest, will be at all times equal to or exceed the value of
the repurchase agreement, and (iii) payment for the underlying securities is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. The Fund will not enter into
a repurchase agreement with a maturity of more than seven business days if, as a
result, more than 15% of the value of the Fund's net assets would then be
invested in such repurchase agreements and other illiquid securities.
The Fund may enter into reverse repurchase agreements in which the Fund
sells securities and agrees to repurchase them at a mutually agreed date and
price. Generally, the Fund will be able to keep the interest income associated
with those portfolio securities while the securities reside with the other party
to the agreement. Such transactions are advantageous if the interest cost to the
fund of the reverse repurchase transaction is less than the cost of otherwise
obtaining the cash raised through the transaction.
Reverse repurchase agreements involve the risk that the market value of
the securities that the Fund is obligated to repurchase under the agreement may
decline below the repurchase price. In the event the other party under reverse
repurchase agreement becomes bankrupt or insolvent, the Fund's use of the
proceeds of the
8
<PAGE>
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Fund's obligation to repurchase the
securities.
Securities Lending
The Fund may lend its portfolio securities, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have a market value at least equal
to the current market value of the securities loaned; (2) the Fund may at any
time call the loan and regain the securities loaned; (3) the Fund will receive
any interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed such percentage of
the total assets of the Fund as the Directors may establish, but not to exceed
20%, including repurchase agreements. In addition, it is anticipated that the
Fund may share with the borrower some of the income received on the collateral
for the loan or that it will be paid a premium for the loan.
Before the Fund enters into a loan, the Adviser considers the relevant
facts including the creditworthiness of the borrower. The risks in lending
portfolio securities consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
Indexed Securities
The Fund may purchase securities whose prices are indexed to the prices
of other securities, securities indices, currencies, commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. The performance of indexed
securities largely depends on the performance of the security, currency,
commodity or other instrument to which they are indexed, as well as general
economic factors in the U.S. or abroad. At the same time, indexed securities are
subject to the credit risks associated with the issuer of the security and their
values may decline substantially if the issuer's creditworthiness deteriorates.
Indexed securities may be more volatile than the underlying instrument itself.
Short Sales
The Fund does not intend to engage in short sales against the box for
investment purposes. The Fund may, however, make such a sale as a hedge, when it
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund (or a security convertible or exchangeable
for such security). The Fund also may use such technique when it wants to sell
the security at an attractive current price but also wishes to defer recognition
of gain or loss for U.S. Federal income tax purposes and for purposes of
satisfying certain tests applicable to regulated investment companies under the
Internal Revenue Code of 1986, as amended (the "Code"). In either case, any
future losses in the Fund's long position should be offset by a gain in the
short position and, conversely, any gain in the long position should be reduced
by a loss in the short position. The extent to which such gains or losses are
reduced will
9
<PAGE>
depend upon the amount of the security sold short relative to the amount the
Fund owns. See also "Taxes" below for a discussion of the constructive sale
rules.
Additional Risks Associated with Hedging Instruments
The Fund's ability to hedge effectively all or a portion of its
securities depends upon the ability of the Adviser to predict correctly the
degree to which price movements of securities held in the Fund's portfolio
correlate to the price movements of the relevant hedging instruments. In
addition, the effectiveness of any hedging strategy using index options, index
futures, interest rate options or interest rate futures depends upon the
correlation between the components of the underlying index and the securities
held by the Fund.
INVESTMENT RESTRICTIONS
As matters of fundamental policy, the Fund may not:
1. Make investments for the purpose of exercising control or
management;
2. Purchase or sell real estate or real estate mortgage loans (provided
that such restriction shall not apply to securities secured by real estate or an
interest therein or issued by companies which invest in real estate or interests
therein), commodities or commodity contracts (except that the Fund may deal in
forward foreign exchange between currencies and the Fund may purchase and sell
interest rate and currency options, futures contracts and related options and
indexed notes and commercial paper), or interests or leases in oil, gas or other
mineral exploration or development programs (provided that such restriction
shall not apply to securities issued by companies which invest in oil, gas or
other mineral exploration or development programs);
3. Except as described in the Prospectus, purchase any securities on
margin, except for use of short-term credit necessary for clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of initial
or variation margin in connection with futures contracts or options transactions
is not considered the purchase of a security on margin);
4. Borrow amounts and pledge assets in connection therewith in excess
of 25% of its total assets taken at market value (including the amount
borrowed), and then only from banks as a temporary measure, including to meet
redemptions or to settle securities transactions and provided further that no
additional investments shall be made while borrowings exceed 5% of total assets;
5. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from making any
otherwise permissible borrowings, mortgages or pledges, short sales, or entering
into permissible reverse repurchase agreements, and options and futures
transactions;
10
<PAGE>
6. Underwrite any issue of securities (except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 in the disposition of restricted securities);
7. Make loans of its securities exceeding 20% of its total assets; and
8. Invest 25% or more of its net assets in one or more issuers
conducting their principal business in the same industry.
The foregoing restrictions are fundamental policies which may only be
changed by vote of a majority of the Fund's outstanding shares. The term
"majority of the Fund's outstanding shares" means the vote of (i) 67% or more of
the Fund's shares present at a meeting, if more than 50% of the outstanding
shares of the Fund are present or represented by proxy, or (ii) more than 50% of
the Fund's outstanding shares, whichever is less.
As matters of non-fundamental policy, the Fund may not:
1. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or if
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of any one such company is owned by the Fund, (ii) 5% of the Fund's total
assets, taken at market value, would be invested in any one such company, or
(iii) 10% of the Fund's total assets, taken at market value, would be invested
in such companies' securities. Any purchase by the Fund of securities of other
investment companies, except in connection with a merger, consolidation,
acquisition or reorganization, shall be made in the open market where no
commission results other than customary brokerage commissions;
2. With respect to 50% of the value of its total assets, invest more
than 25% of the value of its total assets in the securities of one issuer, and
with respect to the other 50% of the value of its total assets, invest more than
5% of the value of its total assets in the securities of one issuer or acquire
more than 10% of the outstanding voting securities of a single issuer. This
restriction shall not apply to U.S. Government securities;
3. With respect to 75% of the value of its total assets, purchase more
than 10% of the outstanding voting securities of any issuer;
4. Invest in oil, gas or mineral exploration or development programs or
leases;
5. Purchase or sell real estate or make real estate mortgage loans or
invest in real estate limited partnerships not traded on a national securities
exchange, except that the Fund may purchase or sell securities issued by
entities engaged in the real estate industry or instruments backed by real
estate; and
6. Invest in warrants (other than warrants acquired by the Fund as a
part of a unit or attached to securities at the time of purchase) if, as a
result, such
11
<PAGE>
investment (valued at the lower of cost or market value) would exceed 5% of the
value of the Fund's net assets, provided that any warrants in which the Fund is
short "against the box" will be netted for purposes of this 5% limitation.
These restrictions are not fundamental policies and may be changed by
the Board of Directors without a shareholder vote, to the extent permitted by
applicable law including rules of the Commission. Except as otherwise may be
specifically stated herein, the Fund's other investment policies stated in this
Statement of Additional Information and in the Prospectus are not considered
fundamental and may be changed by the Board of Directors at any time without a
shareholder vote if and to the extent any such changes are consistent with the
requirements of the 1940 Act.
If a percentage restriction is adhered to at the time of the
investment, a later increase or decrease in percentage resulting from a change
in values of portfolio securities or amount of net assets will not be considered
a violation of any of the foregoing restrictions. The Fund shall, however,
reduce its holdings of illiquid securities in an orderly fashion in order to
maintain adequate liquidity.
INVESTMENT ADVISORY SERVICES
The investment adviser of the Fund is Needham Investment Management
L.L.C. (the "Adviser"), a Delaware limited liability company, pursuant to an
Investment Advisory Agreement with the Fund dated as of January 1, 1996 (the
"Advisory Agreement"). The Adviser furnishes an investment program for the Fund
and determines, subject to the overall supervision and review of the Board of
Directors, what investments should be purchased, sold and held.
Under the terms of the Advisory Agreement, and at the direction of the
Board of directors, the Adviser maintains records and furnishes or causes to be
furnished all required reports or other information concerning the Fund to the
extent such records, reports and other information are not maintained by the
Administrator, Shareholder Servicing Agent, Custodian or other agents.
The Adviser provides the Fund with office space, facilities and certain
business equipment and provides the services of consultants, executive and
clerical personnel for administering the affairs of the Fund. The Adviser
compensates all executive and clerical personnel and Directors of the Fund if
such persons are employees or affiliates of the Adviser or its affiliates. The
advisory fee is computed daily and paid monthly.
The expenses borne by the Fund include: the charges and expenses of the
shareholder servicing and dividend disbursing agent; custodian fees and
expenses; legal, auditors' fees and expenses; brokerage commissions for
portfolio transactions; taxes, if any; the advisory fee; extraordinary expenses
(as determined by the Directors of the Fund); expenses of shareholder and
Director meetings, and of preparing, printing and mailing proxy statements,
reports and other communications to shareholders; expenses of preparing and
setting in type prospectuses and periodic reports and expenses of mailing them
to current shareholders; expenses of registering and qualifying shares for
12
<PAGE>
sale (including compensation of the Adviser's employees in relation to the time
spent on such matters); expenses relating to the Plan of Distribution (Rule
12b-1 Plan); fees of Directors who are not "interested persons" of the Adviser;
membership dues of the Investment Company Institute; fidelity bond and errors
and omissions insurance premiums; the cost of maintaining the books and records
of the Fund; and any other charges and fees not specifically enumerated as an
obligation of the Distributor (as hereinafter defined) or Adviser.
The Advisory Agreement provides that the fee payable to the Adviser
will be reduced to the extent expenses of the Fund exceed certain limits as
specified in the Prospectus and those expenses are in excess of certain expense
limitations if and as required by state regulation, and further that the Adviser
will make any other necessary arrangements to limit expenses in accordance with
applicable expense limitations unless the Fund has obtained an appropriate
waiver of such expense limitations or expense items from a particular state
authority. Under the Advisory Agreement, the maximum annual expenses which the
Fund may be required to bear, inclusive of the advisory fee but exclusive of
interest, taxes, brokerage fees, Rule 12b-1 Plan distribution payments and
extraordinary items, may not exceed the lowest expense limitation imposed by any
state in which the Fund is registered or the specified Prospectus expense limit,
whichever is lower. The amount of the advisory fee to be paid to the Adviser
each month will be reduced by the amount, if any, by which the annualized
expenses of the Fund for that month exceed the foregoing limitations. For the
fiscal year ended December 31, 1997, the Fund accrued advisory fees of $290,440
and has reimbursed or waived other expenses in the amount of $182,591. For the
1998 fiscal year, if the aggregate annual expenses of the Fund exceed the amount
permissible under the foregoing limitations, then the Adviser has agreed after
the end of the 1998 fiscal year to promptly return such advisory fees previously
received during such fiscal year equal to the total amount by which expenses
exceed the amount of the limitations, and, if necessary, make any other
arrangements necessary to maintain the Fund's expenses within such limitations.
If aggregate annual expenses are within the limitations during fiscal 1998,
however, any excess amount previously withheld will be paid by the Adviser.
The Advisory Agreement has been approved by the Board of Directors of
the Fund, including a majority of the Directors who are not parties to the
Advisory Agreement or interested persons of any such party, and by the initial
shareholder on December 21, 1995. The Advisory Agreement provides that it shall
have an initial two year term and shall continue in effect from year to year
with respect to the Fund as long as it is approved at least annually (i) by a
vote of a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act or (ii) by a vote of a majority of the Directors of the Fund
including a vote of a majority of the Directors who are not parties to the
Advisory Agreement or "interested persons" of any party thereto, cast in person
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated on 60 days' written notice by either party and will
terminate automatically if it is assigned within the meaning of the Act.
13
<PAGE>
John C. Michaelson is President of the Adviser as well as President of
the Fund; Peter J.R. Trapp is Executive Vice President of the Adviser as well as
Executive Vice President of the Fund.
THE DISTRIBUTOR AND DISTRIBUTION OF THE SHARES
Shares of the Fund are offered on a continuous basis and are currently
distributed through Needham & Company, Inc., 445 Park Avenue, New York, New York
10022 (the "Distributor"). The Board of Directors of the Fund has approved a
Distribution and Services Agreement (the "Distribution Agreement") appointing
the Distributor as a distributor of shares of the Fund.
The Distribution Agreement provides that the Distributor will bear the
cost and expense of printing and distributing any materials not prepared by the
Fund and other materials used by the Distributor in connection with its offering
shares of the Fund. The Fund will pay all fees and expenses in connection with
registering and qualifying its shares under federal and state securities laws.
To compensate the Distributor for the services which it provides and
for the expenses it bears under the Distribution Agreement, the Fund has adopted
a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. Fees
paid by the Fund under the Plan will be used for promotional and distribution
expenses incurred only during the applicable year. Pursuant to the Plan, the
Distributor provides the Fund at least quarterly with a written report of the
amounts expended under the Plan and the purpose for which such expenditures were
made. The Board of Directors reviews such reports on a quarterly basis. For the
year ended December 31, 1997, the Fund accrued distribution expenses of $58,219.
The entire amount for the period was spent on the printing and mailing of
prospectuses to other than current shareholders and fees to other broker-dealers
and qualified financial institutions for distribution services expenses
incurred.
The Plan has most recently been approved by the Board of Directors of
the Fund, including a majority of the Directors who are not "interested persons"
of the Fund and who have no direct or indirect financial interest in the
operation of the Plan, on October 16, 1997. The Plan continues in effect as to
the Fund, provided such continuance is approved annually by a vote of the
Directors in accordance with the Act. Information with respect to distribution
revenues and expenses will be presented to the Directors each year for their
consideration in connection with their deliberations as to the continuance of
the Plan. In the review of the Plan, the Directors will be asked to take into
consideration expenses incurred in connection with the distribution of shares.
The Plan may not be amended to increase materially the amount to be spent for
the services described therein without approval of the shareholders of the Fund,
and all material amendments of the Plan must also be approved by the Directors
in the manner described above. The Plan may be terminated at any time, without
payment of any penalty, by vote of a majority of the Directors who are not
"interested persons" of the Fund and who have no direct or indirect financial
interest in the operation of the Plan, or by a vote of a majority of the
outstanding voting securities of the Fund (as defined
14
<PAGE>
in the Act) on not more than 30 days' written notice to any other party to the
Plan. The Plan will automatically terminate in the event of its assignment (as
defined in the Act). So long as the Plan is in effect, the election and
nomination of Directors who are not "interested persons" of the Fund shall be
committed to the discretion of the Directors who are not "interested persons."
The Directors have determined that, in their judgment, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders. The Fund
will preserve copies of the Plan and any agreement or report made pursuant to
Rule 12b-1 under the Act, for a period of not less than six years from the date
of the Plan or such agreement or report, the first two years in an easily
accessible place.
TRANSFER AGENCY, ADMINISTRATION SERVICES
AND FUND ACCOUNTING
PFPC Inc. has been retained by the Fund to perform shareholder
servicing, registrar and transfer agent functions for the Fund pursuant to an
agreement with the Fund. PFPC Inc. has also been retained pursuant to a separate
agreement to perform certain Fund and shareholder accounting and administrative
functions. For the fiscal year ended December 31, 1997, the Fund accrued
$117,250 in transfer agency, administration and accounting fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities and
other investments for the Fund, the selection of brokers and dealers to effect
the transactions and the negotiation of brokerage commissions, if any. In
transactions on stock and commodity exchanges in the U.S., these commissions are
negotiated, whereas on foreign stock and commodity exchanges these commissions
are generally fixed and are generally higher than brokerage commissions in the
U.S. In the case of securities traded on the over-the-counter markets, there are
generally no stated commissions, but the price usually includes an undisclosed
commission or markup. In underwritten offerings, the price includes a disclosed,
fixed commission or discount. The Fund may invest in obligations which are
normally traded on a "principal" rather than agency basis. This may be done
through a dealer (e.g., securities firm or bank) who buys or sells for its own
account rather than as an agent for another client, or directly with the issuer.
A dealer's profit, if any, is the difference, or spread, between the dealer's
purchase and sale price for the obligation.
In purchasing and selling the Fund's portfolio investments, it is the
Adviser's policy to obtain quality execution at the most favorable prices
through responsible broker-dealers. In selecting broker-dealers, the Adviser
will consider various relevant factors, including, but not limited to: the size
and type of the transaction; the nature and character of the markets for the
security or asset to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the broker-dealer's firm; the
broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions.
15
<PAGE>
The Adviser may cause the Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission that is in excess of the
commission another broker-dealer would have received for executing the
transaction if it is determined that such commission is reasonable in relation
to the value of the brokerage and/or research services as defined in Section
28(e) of the Securities Exchange Act of 1934 which have been provided. Such
research services may include, among other things, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
portfolio strategy. Any such research and other information provided by brokers
to the Adviser is considered to be in addition to and not in lieu of services
required to be performed by the Adviser under its Advisory Agreement with the
Fund. The research services provided by broker-dealers can be useful to the
Adviser in serving its other clients or clients of the Adviser's affiliates. For
each of the years ended December 31, 1996 and 1997, under 1% of the Fund's total
brokerage commissions were paid to brokers under arrangements covering research
services of the type contemplated by Section 28(e).
The Board of Directors periodically reviews the Adviser's performance
of its responsibilities in connection with the placement of portfolio
transactions on behalf of the Fund and reviews the commissions paid by the Fund
over representative periods of time to determine if they are reasonable in
relation to the benefits to the Fund.
Investment decisions for the Fund are made independently from those of
the other investment accounts managed by the Adviser or affiliated companies.
Occasions may arise, however, when the same investment decision is made for more
than one client's account. It is the practice of the Adviser to allocate such
purchases or sales insofar as feasible among its several clients or the clients
of its affiliates in a manner it deems equitable. The principal factors which
the Adviser considers in making such allocations are the relative investment
objectives of the clients, the relative size of the portfolio holdings of the
same or comparable securities and the then availability in the particular
account of funds for investment. Portfolio securities held by one client of the
Adviser may also be held by one or more of its other clients or by clients of
its affiliates. When two or more of its clients or clients of its affiliates are
engaged in the simultaneous sale or purchase of securities, transactions are
allocated as to amount in accordance with formulae deemed to be equitable as to
each client. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Board may determine, the
Adviser may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund. For the fiscal
year ended December 31, 1997, the Fund paid brokerage commissions of $315,668.
None of that amount was paid to the Distributor. For the fiscal year ended
December 31, 1996, the Fund paid brokerage commissions of $84,226, none of which
was paid to the Distributor.
While it is the policy of the Fund generally not to engage in trading
for short-term gains, the Fund will effect portfolio transactions without regard
to the holding
16
<PAGE>
period (subject to compliance with certain tax requirements for qualification as
a regulated investment company) if, in the judgment of the Adviser, such
transactions are advisable in light of a change in circumstances of a particular
company, within a particular industry or country, or in general market, economic
or political conditions. The Fund anticipates that in 1998 its annual portfolio
turnover rate may be between 200% and 300%. For the fiscal years ended December
31, 1996 and 1997, the Fund's portfolio turnover rates were 569% and 724%,
respectively. While the Adviser believes it to be not unusual that a fund may
have a very high portfolio turnover rate early in its life, the Adviser expects
the Fund's turnover rate in 1998 and thereafter to be significantly lower than
it was in 1996 and 1997. The Fund may pay a greater amount in brokerage
commissions than similar size funds with a lower turnover rate. In addition,
since the Fund may have a high rate of portfolio turnover, the Fund may realize
capital gains or losses. Capital gains will be distributed annually to the
shareholders. Capital losses cannot be distributed to shareholders but may be
used to offset capital gains at the Fund level and carried forward for up to
eight years to the extent there are no gains to offset for a particular year.
See "Taxes" both in the Prospectus and in this Statement of Additional
Information. The portfolio turnover rate of the Fund may vary significantly from
year to year.
17
<PAGE>
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their addresses, ages,
positions with the Fund and principal occupations during the past five years are
set forth below.
<TABLE>
<CAPTION>
Position with Registrant and
Name and Address Age Occupation(s) During Past 5 Years
- ---------------- --- ---------------------------------
<S> <C> <C>
GEORGE A. NEEDHAM* 55 Chairman and Director of the Fund;
445 Park Avenue Chairman of the Board and Chief
New York, NY 10022 Executive Officer of Needham &
Company, Inc.
JOHN C. MICHAELSON* 41 President and Director of the Fund and
445 Park Avenue President of the Adviser since January
New York, NY 10022 1997; Managing Director of Needham &
Company, Inc.
ROGER W. JOHNSON 63 Director of the Fund; Administrator of
600 Anton Blvd. Suite 1260 the U.S. General Services Administration
Costa Mesa, CA 92626 from 1993 to June 1996; President, Chief
Executive Officer and Chairman of the
Board of Western Digital Corporation
from 1984 to 1993; Director of Group
Technologies Inc. and J.T.S. Corp.
JAMES POITRAS 55 Director of the Fund; Chairman,
21 Gulfshore Boulevard President and Chief Executive Officer of
North Integrated Silicon Systems (a computer
Naples, FL 33940 software company) since 1985.
F. RANDALL SMITH 59 Director of the Fund; Co-Founder and
174 East 75th Street Managing Partner of Train, Smith
New York, NY 10021 Counsel (a registered investment adviser)
since 1975.
PETER J.R. TRAPP* 52 Executive Vice President of the Adviser
445 Park Avenue and the Fund since January 1998;
New York, NY 10022 Managing Director of Needham &
Company, Inc.; Senior Vice President of
Gerard Klauer Mattison from January
1990 through August 1994.
</TABLE>
- --------
* An "interested person" as defined in the 1940 Act.
18
<PAGE>
<TABLE>
<S> <C> <C>
ROGER C. COTTA* 59 Treasurer of the Fund; Managing Director
445 Park Avenue of Needham & Company, Inc. since 1992.
New York, NY 10022
ELIZABETH DICKERSON* 40 Secretary of the Fund; Compliance Officer
445 Park Avenue of Needham & Company, Inc. since April
New York, NY 10022 1997; Compliance Manager, Assistant Vice
President at Warburg Pincus Counsellors,
Inc. from September 1994 to April 1997;
Assistant Vice President, Compliance
Department at Kidder Peabody Asset
Management from September 1993 to
September 1994; Senior Compliance
Analyst at Morgan Stanley & Co., Inc.
from June 1991 to September 1993.
</TABLE>
The fees for non-interested directors, $5,500 per year and $500 for
each meeting attended in person or by telephone, are paid by the Fund. The Board
of Directors has established an audit committee, comprised of the Fund's
non-interested directors, which will review the audits of the Fund and recommend
firms to serve as independent auditors of the Fund. As of April 15, 1998, the
directors and officers of the Fund as a group owned 109,567.699 shares of the
Fund.
* An "interested person" as defined in the 1940 Act.
19
<PAGE>
For the fiscal year ending December 31, 1997, the Directors earned from
the Fund the following compensation:
COMPENSATION TABLE
(for the fiscal year ended December 31, 1997)
<TABLE>
<CAPTION>
Aggregate Pension or Estimated Total
Compensation Retirement Benefits Annual Compensation
from Accrued as Part of Benefits upon from Registrant &
Name of Director Registrant Fund Expenses Retirement Fund Complex
<S> <C> <C> <C> <C>
George A. Needham $0 $0 $0 $0
John C. Michaelson 0 0 0 0
George Gould(1) $8,000 0 0 $8,000
Roger W. Johnson $8,000 0 0 $8,000
James Poitras $8,000 0 0 $8,000
F. Randall Smith $8,000 0 0 $8,000
</TABLE>
(1) Since resigned.
Directors and employees of the Fund and the Adviser are permitted to
engage in personal securities transactions subject to the restrictions and
procedures contained in the Fund's Code of Ethics, which was approved by the
Boards of Directors of the Fund and the Adviser.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund will be determined on each
day when the New York Stock Exchange (the "Exchange") is open for business at
the close of the Exchange and will be computed by determining the aggregate
market value of all assets of the Fund less its liabilities, and then dividing
by the total number of shares outstanding. The determination of net asset value
for a particular day is applicable to all applications for the purchase of
shares as well as all requests for the redemption of shares received before the
close of trading on the Exchange on that day. Shares of the Fund are sold at the
public offering price which is determined once each day the Fund is open for
business and is the net asset value per share.
Portfolio securities positions for which market quotations are readily
available are stated at the last sale price reported by the principal exchange
for each such security as of the exchange's close of business. Securities for
which no sale has taken place during the day and securities which are not listed
on an exchange are valued at the mean of the current closing bid and asked
prices. Foreign market closing prices are translated into U.S. dollar values at
the mean of the bid and asked prices for the particular foreign currency as
quoted on the valuation date. The value of a financial futures contract equals
the unrealized gain or loss on the contract that is determined
20
<PAGE>
by marking it to the current settlement price for a like contract acquired on
the day on which the commodity futures contract is being valued. A settlement
price may not be used if the market makes a limit move with respect to the
financial futures contract. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange designated by or under
the authority of the Board of Directors as the primary market.
Short-term investments denominated in U.S. dollars that will mature in
60 days or less are stated at amortized cost; short-term investments denominated
in foreign currencies are stated at amortized cost as determined in the foreign
currency, translated to U.S. dollars at the current day's exchange rate. All
other securities and assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors, although the actual calculations may be made by persons
acting pursuant to the direction of the Board of Directors. The assets of the
Fund may also be valued on the basis of valuations provided by a pricing service
approved by the Board of Directors.
Generally, trading in foreign securities and futures contracts, as well
as corporate bonds, United States Government securities and money market
instruments, is substantially completed each day at various times prior to the
close of the Exchange. The values of such securities used in determining the net
asset value of the shares of the Fund may be computed as of such times. Foreign
currency exchange rates are also generally determined prior to the close of the
Exchange. Occasionally, events affecting the value of such securities and such
exchange rates may occur between such times and the close of the Exchange which
will not be reflected in the computation of the Fund's net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair market value as
determined in good faith by the Directors.
TAX-SHELTERED RETIREMENT PLANS
The Fund offers certain tax-sheltered retirement plans through which
shares may be purchased, including IRAs (and "rollovers" from existing
retirement plans) for individuals and their spouses and SEP-IRAs. Shares of the
Fund may also be purchased by Qualified Retirement Plans such as profit-sharing
and money purchase plans, 401(k) Plans and other Defined Contribution Plans, and
by Defined Benefit Plans. Persons who wish to establish a tax-sheltered
retirement plan should consult their own tax advisers or attorneys regarding
their eligibility to do so and the laws applicable thereto, such as the
fiduciary responsibility provisions and diversification requirements and the
reporting and disclosure obligations under the Employee Retirement Income
Security Act of 1974. The Fund is not responsible for compliance with such laws.
Further information regarding the retirement plans, including applications and
fee schedules, may be obtained upon request to the Fund.
21
<PAGE>
TAXES
Taxation of the Fund -- In General
The Fund is a separate entity for federal income tax purposes and the
Fund has qualified and elected to be treated for each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended. The Fund intends to continue to so qualify and elect to be
treated as a regulated investment company so long as to do so is in the best
interests of its shareholders. To so qualify, the Fund, among other things, must
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stock, securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b)(i) have at least 50%
of the market value of the Fund's assets represented by cash, government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not have more than 25% of the value
of its assets invested in the securities of any one issuer (other than
government securities).
In addition, the Fund must satisfy the distribution requirements of the
Code, including the requirement that it distribute at least 90% of its
"investment company taxable income" annually. By qualifying (and electing to be
treated) as a regulated investment company, the Fund will not be subject to
federal income tax on its investment company taxable income and net capital gain
that it distributes to shareholders. However, if for any taxable year the Fund
does not satisfy the requirements of Subchapter M of the Code, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to shareholders as ordinary dividend income to the extent of that Fund's
current or accumulated earnings or profits.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute (i) at least 98% of its ordinary income realized during such
calendar year, (ii) at least 98% of its capital gain net income for the twelve
month period ending on October 31 (or December 31, if the Fund so elects), and
(iii) any income or gain from the prior year that was neither distributed to
shareholders nor taxed to the Fund for such year. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.
As long as the Fund qualifies as a regulated investment company for
U.S. federal income tax purposes and distributes all of its investment company
taxable income and net capital gain, it will not be subject to any corporate
income or excise taxes in the State of Maryland.
22
<PAGE>
Taxation of the Fund's Investments
Ordinarily, gains and losses realized from portfolio transactions are
treated as capital gain or loss. However, all or a portion of the gain or loss
from the disposition of non-U.S. dollar denominated securities (including debt
instruments, certain financial forward, futures and option contracts, and
certain preferred stock) may be treated as ordinary income or loss under Section
988 of the Code. In addition, all or a portion of the gain realized from the
disposition of market discount bonds is treated as ordinary income under Section
1276 of the Code. Generally, a market discount bond is defined as any bond
bought by the Fund after its original issuance, at a price below its principal
amount. Finally, all or a portion of the gain realized from engaging in
"conversion transactions" is treated as ordinary income under Section 1258 of
the Code. "Conversion transactions" are defined to include certain forward,
futures, option and straddle transactions, transactions marketed or sold to
produce capital gains, or transactions described in applicable Treasury
regulations.
Under Section 1256 of the Code, any gain or loss the Fund realizes from
certain futures or forward contracts and options transactions is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. Absent
an election to the contrary, gain or loss arises upon exercise or lapse of such
contracts and options as well as from closing transactions. In addition, any
such contracts or options remaining unexercised at the end of the Fund's taxable
year are treated as sold for their then fair market value, resulting in
additional gain or loss to the Fund characterized in the manner described above.
Offsetting positions held by the Fund involving certain financial
forward, futures or options contracts (including certain foreign currency
forward contracts or options) may constitute "straddles." "Straddles" are
defined to include "offsetting positions" in actively traded personal property.
The tax treatment of "straddles" is governed by Sections 1092 and 1258 of the
Code, which, in certain circumstances, override or modify the provisions of
Sections 1256 and 988. If the Fund were treated as entering into "straddles" by
reason of its engaging in certain forward contracts or options transactions,
such "straddles" generally would be characterized as "mixed straddles" if the
forward contracts or options transactions comprising a part of such "straddles"
were governed by Section 1256. However, the Fund may make one or more elections
with respect to "mixed straddles." Depending on which election is made, if any,
the results to the Fund may differ. If no election is made, to the extent the
"straddle" rules apply to positions established by the Fund, losses realized by
the Fund will be deferred to the extent of unrealized gain in the offsetting
position. Moreover, as a result of the "straddle" rules, short-term capital loss
on "straddle" positions may be recharacterized as long-term capital loss, and
long-term capital gains may be treated as short-term capital gains.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), if the Fund
makes a "constructive sale" of an "appreciated financial position," the Fund
will recognize gain as if the position were sold at fair market value on the
date of such constructive sale. Constructive sales include short sales of
substantially identical property, offsetting notional principal contracts with
respect to substantially identical property and futures
23
<PAGE>
and forward contracts to deliver substantially identical property. However,
transactions that otherwise would be treated as constructive sales are
disregarded if closed within 30 days after the close of the taxable year and the
Fund holds the position and does not hedge such position for 60 days thereafter.
In addition, to the extent provided in regulations (which have not yet been
promulgated), a constructive sale also occurs if a taxpayer enters into one or
more other transactions (or acquires one or more positions) that have
"substantially the same effect" as the transactions described above. Appreciated
financial positions include positions with respect to stock, debt, instruments
or partnership interests if gain would be recognized on a disposition at fair
market value. If the constructive sale rules apply, adjustments are made to the
basis and holding period of the affected financial position. If the constructive
sale provisions apply, the Fund would recognize gain but would not have cash
available to make distributions. Accordingly, the gain realized under the
constructive sale provisions would impact on the amount of distributions
required by the Fund so as to avoid the imposition of the 4% excise tax.
If the Fund invests in any non-U.S. corporation that either satisfies
(i) the "passive income test" (e.g., receives at least 75% of its annual gross
income from passive sources, such as interest, dividend, rental, royalty or
capital gain income) or (ii) the "passive asset test" (e.g., at least 50% of its
assets on average consist of assets which produce or are held for the production
of passive income) ("passive foreign investment company" or "PFIC") and that
does not distribute its income on a regular basis, the Fund could be subject to
federal income tax and additional interest charges on "excess distributions"
received from such company or gain from the sale of stock in such company, even
if all income or gain actually received by the Fund is timely distributed to its
shareholders. In addition, any gain on sale of PFIC stock would be treated as
ordinary income. The Fund would not be able to pass through to its shareholders
any credit or deduction for such a tax. If the Fund were to invest in the stock
of a passive foreign investment company and elect to treat such company as a
"qualified electing fund" under the Code (and the company agreed to adhere to
certain information reporting requirements), in lieu of the foregoing
requirements, the Fund would be required to include in income each year a
portion of the ordinary earnings and net capital gains of the qualified electing
fund, even if not distributed to the Fund, and such amounts would be subject to
the 90% and calendar year distribution requirements described above even if the
Fund received no money to distribute. To satisfy those distribution
requirements, the Fund would have to use cash from other sources, including
proceeds from the disposition of its assets. As an alternative to a qualified
electing fund election, the Fund generally could elect to mark-to-market shares
of a publicly traded PFIC and thereby avoid the application of the excess
distribution rules. However, the gain realized under such approach would impact
upon the amount of distributions required by the Fund so as to avoid the
imposition of the 4% excise tax (because no cash would be available from such
mark-to-market transaction with which to make any such distribution).
Accordingly, the Fund will limit its investments in such passive foreign
investment companies and will undertake appropriate actions to limit its tax
liability, if any, with respect to such investments.
24
<PAGE>
Taxation of the Shareholders
Distributions of net investment income and the excess of net short-term
capital gain over net long-term capital loss are taxable as ordinary income to
shareholders. The Fund may also make distributions of net capital gain (the
excess of net long-term capital gain over net short-term capital loss). The 1997
Act made substantial changes to the maximum effective tax rates and holding
periods applicable to capital gains realized by noncorporate taxpayers. In
general, for transactions taken into account during taxable years ending on or
after May 7, 1997, a noncorporate shareholder's net capital gains will be taxed
either at a maximum rate of 20% for property held more than 18 months or 28%
with respect to property held for more than one year but not more than 18
months. To the extent the Fund has net capital gain for a taxable year, the Fund
may designate different classes of net capital gain (e.g., 20% rate gain
distribution or 28% rate gain distribution). The Fund will provide information
relating to the portions of any net capital gain distribution that may be
treated by noncorporate shareholders as eligible for the maximum 20% rate and
the maximum 28% rate. Such treatment would apply regardless of the length of
time the shares of the Fund have been held by such shareholders. Any loss
realized upon a taxable disposition of shares within six months from the date of
their purchase is treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by shareholders during such
period.
Distributions of net investment income and capital gain net income are
taxable as described above whether received in cash or reinvested in additional
shares. A shareholder's tax basis in each share received from the Fund is equal
to the fair market value of such share on the payment date.
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's tax basis, such distribution nevertheless is taxable to the
shareholder as ordinary income or long-term capital gain as described above,
even though, from an investment standpoint, it may constitute a partial return
of capital. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a distribution receive a return
of investment upon such distribution which is nevertheless taxable to them.
A redemption of Fund shares by a shareholder will result in the
recognition of taxable gain or loss depending upon the difference between the
amount realized and his tax basis in his Fund shares. Such gain or loss is
treated as a capital gain or loss if the shares are held as capital assets.
Under the 1997 Act, in the case of a noncorporate shareholder, if such shares
were held for more than 18 months at the time of disposition such gain will be
long-term capital gain and will be taxed at a maximum effective rate of 20%; if
such shares were held for more than one year but not more than 18 months at the
time of disposition, such gain will be taxed at a maximum effective rate of 28%;
and if such shares were held for one year or less at the time of disposition,
such gain will be short-term capital gain and will be taxed at a maximum
effective rate of 39.6%. Capital gains of corporate shareholders will be
long-term or
25
<PAGE>
short-term depending upon whether the shareholder's holding period exceeds one
year, and are not subject to varying effective tax rates. In addition, any loss
realized upon a taxable disposition of shares within six months from the date of
their purchase is treated as a long-term capital loss to the extent of long-term
capital gain distributions received from the Fund during such six-month period.
Finally, all or a portion of any loss realized upon a taxable disposition of
Fund shares may be disallowed if other shares of the same Fund are purchased
(including a purchase by automatic reinvestment) within 30 days before or after
such disposition. In such a case, the tax basis of the shares acquired is
adjusted to reflect the disallowed loss.
Dividends from domestic corporations may comprise some portion of the
Fund's gross income. To the extent that such dividends constitute a portion of
the Fund's gross income, a portion of the income distributions received by
corporations from the Fund may be eligible for the 70% deduction for dividends
received. Taxable corporate shareholders will be informed of the portion of
dividends which so qualify. Receipt of qualifying dividends may result in the
reduction of a corporate shareholder's tax basis in its shares by the untaxed
portion of such dividends if they are treated as "extraordinary dividends" under
Section 1059 of the Code. The dividends-received deduction is reduced to the
extent the shares of the Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law and is eliminated if
the shares are deemed to have been held for less than 46 days (91 days for
preferred stock) during the 90-day (180 days for preferred stock) period
beginning on the date which is 45 days (90 days for preferred stock) before the
ex-dividend date (for this purpose, holding periods are reduced for periods
where the risk of loss with respect to shares is diminished). The same
restrictions apply to the Fund with respect to its ownership of the
dividend-paying stock. In addition, the deducted amount is included in the
calculation of the federal alternative minimum tax, if any, applicable to such
corporate shareholders. In contrast, distributions of net capital gains are not
eligible for the dividends-received deduction for corporate shareholders.
Income received by the Fund may give rise to withholding and other
taxes imposed by foreign countries. If more than 50% of the value of the Fund's
assets at the close of a taxable year consists of securities of foreign
corporations, the Fund may make an election that will permit shareholders to
take a credit (or, if more advantageous, a deduction) for foreign income taxes
paid by the Fund, subject to limitations contained in the Code. Investors would
then include in gross income both dividends paid to the shareholders and the
foreign taxes paid by the Fund on its foreign investments. The Fund cannot
assure investors that they will be eligible for the foreign tax credit. The Fund
will advise the shareholders annually of their share of any creditable foreign
taxes paid by the Fund.
Taxation of a shareholder who, as to the U.S., is a nonresident alien
individual, foreign trust or estate, foreign corporation or foreign partnership
(a "Foreign Shareholder"), as defined in the Code, depends, in part, on whether
the Foreign Shareholder's income from the Fund is "effectively connected" with a
U.S. trade or business carried on by such shareholder.
26
<PAGE>
If the Foreign Shareholder is a nonresident alien and the income from
the Fund is not effectively connected with a U.S. trade or business carried on
by the Foreign Shareholder, Fund distributions other than net capital gains
distributions and distributions not out of earnings and profits are subject to a
30% (or lower treaty rate) U.S. withholding tax. Furthermore, such Foreign
Shareholders are subject to an increased U.S. tax on their income if the Fund
elects (as described above) to "pass through" amounts of foreign taxes paid by
the Fund due to the fact that such Foreign Shareholders are not able to claim a
credit or deduction with respect to the foreign taxes treated as having been
paid by them. Net capital gain distributions to, and capital gains realized by,
such a Foreign Shareholder upon the sale of shares or receipt of distributions
which are in excess of its tax basis and not made from earnings and profits are
not subject to U.S. tax unless the Foreign Shareholder is an individual and is
present in the U.S. for 183 days or more during the taxable year in which the
gain was realized, and certain other conditions are satisfied. Foreign
Shareholders may also be subject to 31% backup withholding unless appropriate
certification is provided.
If a shareholder is a resident alien or if dividends or distributions
from the Fund are effectively connected with a U.S. trade or business carried on
by the shareholder, then Fund distributions and any gains realized with respect
to the shares are subject to U.S. federal income tax at the rates applicable to
U.S. citizens or residents or domestic corporations, as appropriate.
The value of shares held by an individual Foreign Shareholder, even
though he is a nonresident at his death, is includible in his gross estate for
U.S. federal estate tax purposes.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
above. Such shareholders may be required to provide appropriate documentation to
establish their entitlement to the benefits of such a treaty. Foreign
Shareholders are advised to consult their own tax advisers with respect to (a)
whether their income from the Fund is or is not effectively connected with a
U.S. trade or business carried on by them, (b) whether they may claim the
benefits of an applicable tax treaty, and (c) any other tax consequences to them
of an investment in the Fund.
The foregoing discussion is a general summary of certain of the
material U.S. federal income tax consequences of owning and disposing of shares
in the Fund. This summary is based on the provisions of the Code, final,
temporary and proposed U.S. Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect on the
date hereof, and all of which are subject to change, possibly with retroactive
effect. Moreover, shareholders should note that the recently enacted 1997 Act
contains provisions which are subject to varying interpretations, the full
impact and significance of which will remain unclear until they have been
definitively interpreted by the Internal Revenue Service and the courts.
The foregoing discussion is a general summary of certain of the current
federal income tax laws affecting the Fund and investors in the shares. The
discussion does not purport to deal with all of the federal income tax
consequences applicable to the
27
<PAGE>
Fund, or to all categories of investors, some of which may be subject to special
rules. Investors should consult their own advisors regarding the tax
consequences, including state and local tax consequences to them of investment
in the Fund. Foreign shareholders should also consult their tax advisers with
respect to the applicability of a 30% withholding tax (which may be reduced or
eliminated under certain income tax treaties) upon Fund distributions of
ordinary income.
This summary does not deal with all aspects of U.S. federal income
taxation that may be relevant to particular shareholders in light of their
particular circumstances. Accordingly, shareholders should consult their tax
advisers about the application of the provisions of tax law described in this
Statement of Additional Information in light of their particular tax situations.
28
<PAGE>
PERFORMANCE INFORMATION
The Fund may advertise its performance in terms of average annual total
return for 1, 5 and 10 year periods, or for such lesser periods as the Fund has
been in existence. Average annual total return is computed by finding the
average annual compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the
end of the year or period.
The calculation assumes an initial $1,000 payment and assumes all
dividends and distributions by the Fund are reinvested at the price stated in
the Prospectus on the reinvestment dates during the period, and includes all
recurring fees that are charged to all shareholder accounts.
The Fund may also advertise performance in terms of aggregate total
return. Aggregate total return for a specified period of time is determined by
ascertaining the percentage change in the net asset value of shares of the Fund
initially acquired assuming reinvestment of dividends and distributions and
without giving effect to the length of time of the investment according to the
following formula:
100 [(B-A)/A] = ATR
Where: A = initial investment
B = value at end of specified period
ATR = aggregate total return.
The calculation assumes all distributions by the Fund are reinvested at
the price stated in the Prospectus on the reinvestment dates during the period,
and includes all recurring fees that are charged to all shareholder accounts.
29
<PAGE>
ADDITIONAL INFORMATION
Custodian
PNC Bank, National Association is the custodian of the Fund's portfolio
securities, cash, coins and bullion. The Custodian is authorized, upon the
approval of the Fund, to establish credits or debits in dollars or foreign
currencies with, and to cause portfolio securities of the Fund to be held by,
its overseas branches or subsidiaries, and foreign banks and foreign securities
depositories which qualify as eligible foreign custodians under the rules
adopted by the Securities and Exchange Commission.
Independent Auditors
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves
as the Fund's independent auditors.
FINANCIAL STATEMENTS
The Fund's financial statements for the years ended December 31, 1997
and December 31, 1996, including the independent auditors report, are attached
hereto.
30
<PAGE>
APPENDIX
Corporate Bond Ratings
Moody's Investors Service, Inc. Corporate Bond Ratings:
Aaa -- Bonds which are rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be greater or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
1
<PAGE>
Ca -- Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic
rating classification from Aa through B. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
Standard & Poor's Corporate Bond Ratings:
AAA -- Bonds rated AAA have the highest rating assigned by S&P to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B -- Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB rating.
CCC -- Bonds rated CCC have a currently identifiable vulnerability to
default and are dependent upon favorable business, financial and economic
conditions to meet
2
<PAGE>
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
CC -- Bonds rated CC are typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC bond rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC bond rating.
The C rating may be used to cover a situation where a bankruptcy
petition has been filed but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Bonds rated D are in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating will also be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
S&P modifies ratings AA to CCC by the addition of a plus or minus to
show relative standing within the major rating categories.
Fitch Corporate Bond Ratings
AAA -- Bonds and notes rated AAA are regarded as being of the highest
quality, with the obligor having an extraordinary ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds and notes rated AA are regarded as high quality
obligations. The obligor's ability to pay interest and repay principal, while
very strong, is somewhat less than for AAA rated securities and more subject to
possible change over the term of the issue.
A -- Bonds and notes rated A are regarded as being of good quality. The
obligor's ability to pay interest and repay principal is strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds and notes with higher ratings.
BBB -- Bonds and notes rated BBB are regarded as being of satisfactory
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to weaken this ability than bonds and notes with higher
ratings.
3
<PAGE>
BB -- Bonds and notes rated BB are considered speculative. The
obligor's ability to pay interest and repay principal may be affected over time
by adverse economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt service
requirements.
B -- Bonds and notes rated B are considered highly speculative. While
bonds and notes in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and interest reflects
the obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue.
CCC -- Bonds and notes rated CCC have certain identifiable
characteristics which, if not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic environment.
CC -- Bonds and notes rated CC are minimally protected. Default in
payment of interest and/or principal seems probable over time.
C -- Bonds and notes rated C are in imminent default in payment of
interest or principal.
DDD, DD and D -- Bonds and notes rated DDD, DD and D are in default on
interest and/or principal payments. Such bonds and notes are extremely
speculative and should be valued on the basis of their ultimately recovery value
in liquidation or reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds and notes, and "D" represents the lowest
potential for recovery.
Note: Fitch ratings (other than the AAA, DDD, DD or D categories) may
be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories. These are refinements more closely
reflecting strengths and weaknesses, and are not to be used as trend indicators.
Commercial Paper Ratings
Standard & Poor's Commercial Paper Ratings:
A is the highest commercial paper rating category utilized by S&P,
which uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
4
<PAGE>
Moody's Investors Service, Inc. Commercial Paper Ratings:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions.
Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Fitch-1, Fitch-2, Duff 1 and Duff 2 Commercial Paper Ratings:
Commercial paper rated "Fitch-1" is considered to be the highest grade
paper and is regarded as having the strongest degree of assurance for timely
payment. "Fitch-2" is considered very good grade paper and reflects an assurance
of timely payment only slightly less in degree than the strongest issue.
Commercial paper issues rated "Duff 1" by Duff & Phelps, Inc. have the
following characteristics: very high certainty of timely payment; excellent
liquidity factors supported by strong fundamental protection factors; and risk
factors which are very small. Issues rated "Duff 2" have a good certainty of
timely payment, sound liquidity factors and company fundamentals, small risk
factors and good access to capital markets.
Preferred Stock Ratings
Moody's Investors Service, Inc. Preferred Stock Ratings:
aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of convertible preferred stocks.
5
<PAGE>
aa -- An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a -- An issue which is rated a is considered to be an upper
medium-grade preferred stock. While risks are judged to be somewhat greater than
in the aaa and aa classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be medium-grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
ba -- An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b -- An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on
dividend payments. This rating classification does not purport to indicate the
future status of payment.
ca -- An issue which is rated ca is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
c -- This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
6
<PAGE>
Standard & Poor's Preferred Stock Ratings:
AAA -- This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A -- An issue rated A is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effect of changes in circumstances and economic conditions.
BBB -- An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B, CCC -- Preferred stocks rated BB, B and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
7
<PAGE>
Needham Growth Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - (73.0%)
- -------------------------------------------------------------------------------------------------------------------------
APPAREL MANUFACTURERS - (4.1%)
Nautica Enterprises, Inc.*+ 10,000 $ 232,500
The North Face, Inc.* 5,000 110,000
Polo Ralph Lauren Corp.* 5,000 121,563
Stride Rite Corp. 5,000 60,000
Tommy Hilfiger Corp.* 5,000 175,625
Vans, Inc.* 5,000 75,625
Wolverine World Wide, Inc. 5,000 113,125
- -------------------------------------------------------------------------------------------------------------------------
888,438
- -------------------------------------------------------------------------------------------------------------------------
BEVERAGES - (0.8%)
Coca-Cola Enterprises, Inc. 5,000 177,813
- -------------------------------------------------------------------------------------------------------------------------
BROADCASTING/MEDIA - (4.9%)
CBS Corp.+ 5,000 147,188
Comcast Corp., Class A+ 13,000 410,313
Hart-Hanks Communications, Inc. 5,000 185,625
Sinclair Broadcast Group, Inc.* 2,500 116,563
Viacom, Inc., Class B* 5,000 207,188
- -------------------------------------------------------------------------------------------------------------------------
1,066,877
- -------------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES - (1.1%)
Cendant Corp.* 5,007 172,116
Corestaff, Inc.* 2,300 60,950
- -------------------------------------------------------------------------------------------------------------------------
233,066
- -------------------------------------------------------------------------------------------------------------------------
COMPUTERS & RELATED - (8.1%)
Dell Computer Corp.*+ 10,000 840,000
Industri-Matematik International Corp.* 4,000 118,000
SCI Systems, Inc.* 5,000 217,813
Sun Microsystems, Inc.*+ 5,000 199,375
Tier Technologies, Inc.* 5,000 53,750
Trimble Navigation, Ltd.* 5,000 109,063
Unisys Corp.* 10,000 138,750
Western Digital Corp.*+ 5,000 80,313
- -------------------------------------------------------------------------------------------------------------------------
1,757,064
- -------------------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE - (4.5%)
Electronic Arts, Inc.* 3,000 113,438
Real Networks, Inc.* 500 6,938
Rogue Wave Software* 5,000 55,313
Symantec Corp.* 12,000 263,250
Transactions Systems Architects, Inc.* 2,500 95,000
Unova, Inc.*+ 5,000 82,188
Western Atlas, Inc.*+ 5,000 370,000
- -------------------------------------------------------------------------------------------------------------------------
986,127
- -------------------------------------------------------------------------------------------------------------------------
CONTRACTOR MANUFACTURING - (6.7%)
DII Group, Inc. *+ 22,600 615,850
Solectron Corp.*+ 20,000 831,250
- -------------------------------------------------------------------------------------------------------------------------
1,447,100
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
ANNUAL REPORT 1997
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COSMETICS & TOILETRIES - (0.8%)
Helen of Troy, Ltd.* 10,500 $ 169,313
- -------------------------------------------------------------------------------------------------------------------------
ELECTRONIC DESIGN AUTOMATION - (0.5%)
Coltec Industries, Inc.* 5,000 115,938
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES - (2.2%)
Capital One Financial Corp. 5,000 270,938
Schwab, Charles Corp. 5,000 209,688
- -------------------------------------------------------------------------------------------------------------------------
480,626
- -------------------------------------------------------------------------------------------------------------------------
FOODS - (1.3%)
Hershey Foods Corp. 2,500 154,844
Michael Foods, Inc. 5,000 121,875
- -------------------------------------------------------------------------------------------------------------------------
276,719
- -------------------------------------------------------------------------------------------------------------------------
HOSPITAL & PHYSICIAN MANAGEMENT - (2.5%)
Access Health, Inc.+ 2,500 73,438
Mariner Health Group, Inc.* 5,000 81,250
Phycor, Inc.* 7,000 189,000
ProMedCo Management Co.* 10,000 101,250
Wellpoint Health Networks, Inc.*+ 2,500 105,625
- -------------------------------------------------------------------------------------------------------------------------
550,563
- -------------------------------------------------------------------------------------------------------------------------
INSURANCE - (2.8%)
Ace, Ltd.+ 5,000 482,500
ESG Re, Ltd.* 5,000 117,500
- -------------------------------------------------------------------------------------------------------------------------
600,000
- -------------------------------------------------------------------------------------------------------------------------
LEISURE & ENTERTAINMENT - (0.7%)
Alliance Gaming Corp.* 5,000 24,375
Vail Resorts, Inc.* 5,000 129,688
- -------------------------------------------------------------------------------------------------------------------------
154,063
- -------------------------------------------------------------------------------------------------------------------------
MEDICAL DEVICES - (1.4%)
Cambridge Heart, Inc.* 5,000 45,625
Endosonics Corp.* 10,200 109,650
Hologic, Inc.* 5,000 103,438
Young Innovations, Inc.* 3,000 54,000
- -------------------------------------------------------------------------------------------------------------------------
312,713
- -------------------------------------------------------------------------------------------------------------------------
NETWORKING & TELECOMMUNICATIONS - (5.7%)
3Com Corp.*+ 3,000 104,813
Ascend Communications, Inc.*+ 7,500 183,750
Cisco Systems, Inc.*+ 3,750 209,063
Galileo International, Inc. 5,000 138,125
Lucent Technologies, Inc. 2,500 199,688
MCI Communications Corp. 2,500 107,031
MMC Networks, Inc.* 3,500 59,500
RMH Teleservices, Inc.* 5,000 31,875
Smallworldwide PLC* 2,000 43,750
Tel-Save Holdings, Inc.* 5,000 99,375
Viasat, Inc.* 5,000 68,125
- -------------------------------------------------------------------------------------------------------------------------
1,245,095
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
Needham Growth Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS - (3.6%)
Biochem Pharmaceutical, Inc.* 5,000 $ 104,375
Bristol-Meyers Squibb Co. 2,500 236,563
Magainin Pharmaceuticals, Inc.* 10,000 80,625
Pfizer, Inc. 2,500 186,406
Pharmacia & Upjohn, Inc. 5,000 183,125
- -------------------------------------------------------------------------------------------------------------------------
791,094
- -------------------------------------------------------------------------------------------------------------------------
RETAILING - (11.3%)
Bed, Bath & Beyond, Inc.* 5,000 192,500
Books-A-Million, Inc.* 5,000 29,063
Borders Group, Inc.* 5,000 156,563
Central Garden & Pet Co.* 5,000 131,250
Chico's Fas, Inc.* 5,000 33,750
Dayton-Hudson Corp. 2,500 168,750
DM Management Co.* 5,000 78,125
Gap, Inc. 7,500 265,781
General Nutrition Companies, Inc.* 5,000 170,000
Gymboree Corp.* 10,000 273,750
Intimate Brands, Inc. 2,500 60,156
Papa John's International, Inc.* 5,000 174,375
PCA International, Inc. 4,000 84,000
Pet Smart, Inc.* 6,700 48,575
Petco Animal Supplies, Inc.* 5,000 120,000
TJX Companies, Inc. 5,000 171,875
Wal-Mart Stores, Inc. 5,000 197,188
Williams-Sonoma, Inc.* 2,500 104,674
- -------------------------------------------------------------------------------------------------------------------------
2,460,375
- -------------------------------------------------------------------------------------------------------------------------
SEMI-CONDUCTOR PRODUCERS - (2.0%)
Intel Corp.+ 2,500 175,625
Rockwell International Corp. 5,000 261,250
- -------------------------------------------------------------------------------------------------------------------------
436,875
- -------------------------------------------------------------------------------------------------------------------------
SEMI-CONDUCTORS CAPITAL EQUIPMENT/ELECTRONICS - (6.7%)
Applied Materials, Inc.* 1,600 48,200
Cadence Design Systems, Inc.* 10,000 245,000
FSI International, Inc.* 25,000 293,750
KLA-Tencor Corp.*+ 5,000 193,125
Kronos, Inc.* 3,200 98,600
LAM Research Corp.*+ 4,000 117,000
LTX Corp.* 10,000 44,375
Park Electrochemical Corp. 2,600 73,775
Sanmina Corp.*+ 2,000 135,500
Teradyne, Inc.* 6,500 208,000
- -------------------------------------------------------------------------------------------------------------------------
1,457,325
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ANNUAL REPORT 1997
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOYS - (0.7%)
Hasbro, Inc. 5,000 $ 157,500
- -------------------------------------------------------------------------------------------------------------------------
TRUCKING - (0.6%)
Yellow Corp.* 5,000 125,625
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $14,586,030) 15,890,309
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Par
(000)
- -------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - (27.1%)
TIME DEPOSITS
PNC Bank N.A. (Time Deposits)
5.25%, Due 01/02/98 (Cost $5,898,000) $5,898 5,898,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Needham Growth Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Number
Name/Expiration Date/Strike Price of Contracts Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PUT OPTIONS PURCHASED - (1.8%)
- -------------------------------------------------------------------------------------------------------------------------
Applied Materials, Inc., January $50 5 $10,031
Bed, Bath & Beyond, Inc., January $32.50 50 1,250
Biochem Pharmaceutical, Inc., January $25 50 21,563
Cadence Design Systems, Inc., February $27.50 100 45,000
Capital One Financial Corp., January $50 50 2,344
Cendant Corp., January $27.50 40 500
Central Garden & Pet Co., January $25 50 4,219
Coca-Cola Enterprises, Inc., January $32.50 50 2,188
Comcast Corp., January $30 50 1,250
Dayton-Hudson Corp., January $70 25 8,437
Digital Equipment Corp., January $35 50 3,750
DII Group, Inc., January $25 50 2,969
Electronic Arts, Inc., January $30 30 1,313
Endosonics Corp., January $12.50 100 20,000
Galileo International, Inc., January $25 50 1,094
Gap, Inc., January $36.625 75 13,125
General Nutrition Companies, Inc., January $30 50 1,407
Gymboree Corp., January $25 100 4,375
Hasbro, Inc., January $30 50 2,500
Helen of Troy, Ltd., February $12.50 105 1,969
HFS, Inc., January $70 50# 2,626
Hologic, Inc., January $25 50 21,562
Interactive Week Internet Index, January $245 10 3,313
Lucent Technologies, Inc., January $75 25 2,500
Morgan Stanley High Tech Index, January $420 25 11,719
Nautica Enterprises, Inc., January $25 50 9,219
Papa John's International, Inc., January $30 50 313
Petco Animal Supplies, Inc., January $25 50 7,500
Pharmacia & Upjohn, Inc., January $35 50 1,250
Philadelphia Semi-Conductor Index, January $235 25 6,094
Philadelphia Semi-Conductor Index, January $265 20 21,750
Phycor, Inc., January $25 70 4,375
Polo Ralph Lauren Corp., January $25 50 7,500
Rockwell International Corp., January $50 50 3,438
Schwab, Charles Corp., January $40 50 3,125
Sinclair Broadcast Group, Inc., January $35 25 469
Solectron Corp., January $25 50 1,875
Solectron Corp., January $32.50 50 1,563
Symantec Corp., January $22.50 115 16,531
Teradyne, Inc., January $37.50 50 29,375
Teradyne, Inc., January $50 4 7,400
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ANNUAL REPORT 1997
<TABLE>
<CAPTION>
Number
of Contracts Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PUT OPTIONS PURCHASED - (1.8%) (continued)
- -------------------------------------------------------------------------------------------------------------------------
TJX Companies, Inc., January $27.50 50 $ 938
TJX Companies, Inc., January $35 50 6,563
Tommy Hilfiger Corp., January $40 50 25,313
Transaction Systems Architects, Inc., January $35 50 938
Trimble Navigation, Ltd., January $22.50 50 6,875
Unisys Corp., January $15 100 14,991
Viacom, Inc., Class B, January $30 50 938
Viacom, Inc., Class B, January $35 50 938
Wal-Mart Stores, Inc., January $37.50 50 1,875
Williams-Sonoma, Inc., January $40 25 3,594
Wolverine World Wide, Inc., January $22.50 50 4,688
Yellow Corp., January $22.50 50 1,407
SCI Systems, Inc., January $37.50 50 938
Speedfam International, Inc., January $22.50 25 1,250
- -------------------------------------------------------------------------------------------------------------------------
TOTAL PUT OPTIONS PURCHASED (Cost $485,803) 384,027
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
CALL OPTIONS PURCHASED - (0.0%)
Applied Materials, Inc. January $52.50 50 313
Philadelphia Semi-Conductor Index, January $320 10 125
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CALL OPTIONS PURCHASED (Cost $18,555) 438
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS - (101.9%) (Cost $20,988,388) 22,172,774
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES IN EXCESS OF ASSETS - (-1.9%)
- -------------------------------------------------------------------------------------------------------------------------
Receivable from Brokers for Securities Sold Short 4,526,021
Receivable for Investment Securities Sold 69,698
Other Assets 114,062
Net Amounts due to Affiliates (151,105)
Securities Sold Short at Value (proceeds - $4,526,021) (4,763,475)
Organization Costs Payable to Distributor (78,907)
Other Liabilities (120,032)
- -------------------------------------------------------------------------------------------------------------------------
(403,738)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS - (100.0%), (Applicable to 1,509,685 shares outstanding,
$.001 par value, 1,000,000,000 shares authorized) $21,769,036
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 14.42
- -------------------------------------------------------------------------------------------------------------------------
</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 240 shares for each contract held.
See accompanying notes to financial statements.
F-6
<PAGE>
Needham Growth Fund
Schedule of Securities Sold Short
December 31, 1997
<TABLE>
<CAPTION>
Name of Issuer Shares Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3Com Corp. 3,000 $ 104,810
Access Health, Inc. 2,500 73,438
Ace, Ltd. 5,000 482,500
Ascend Communications, Inc. 7,500 183,750
CBS Corp. 5,000 147,188
Cisco Systems, Inc. 3,750 209,063
Comcast Corp., Class A 8,000 252,500
Dell Computer Corp. 10,000 840,000
DII Group, Inc. 17,600 479,600
Intel Corp. 2,500 175,625
KLA-Tencor Corp. 5,000 193,125
LAM Research Corp. 4,000 117,000
Nautica Enterprises, Inc. 5,000 116,250
Sanmina Corp. 2,000 135,500
Solectron Corp. 10,000 415,625
Sun Microsystems, Inc. 5,000 199,375
Unova, Inc. 5,000 82,188
Wellpoint Health Networks, Inc. 2,500 105,625
Western Atlas, Inc. 5,000 370,000
Western Digital Corp. 5,000 80,313
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT (Proceeds $4,526,021) $4,763,475
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
ANNUAL REPORT 1997
Statement of Operations
For the year ended December 31, 1997
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------------------------
Dividends $460,461
Interest 206,538
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 666,999
- -------------------------------------------------------------------------------------------------------------------------
EXPENSES
- -------------------------------------------------------------------------------------------------------------------------
Investment Advisory fee 290,440
Administration and Accounting fee 85,000
Distribution fees 58,219
Custodian fee 55,983
Transfer Agent fee 32,250
Legal fee 61,000
Directors' fees 42,200
Audit fee 27,000
Organization expenses 26,468
Shareholders' reports 20,055
Other expenses 64,857
- -------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 763,472
- -------------------------------------------------------------------------------------------------------------------------
Expenses Waived and Reimbursable (182,591)
- -------------------------------------------------------------------------------------------------------------------------
NET EXPENSES 580,881
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 86,118
- -------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Investment Securities 5,483,523
Net Realized Loss on Option Contracts (2,314,395)
Change in Unrealized Appreciation of Investment Securities (267,995)
- -------------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 2,901,133
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,987,251
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
Needham Growth Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
- -------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) $ 86,118 $ (111,272)
Net Realized Gain on Investment Securities 5,483,523 1,319,364
Net Realized Loss on Option Contracts (2,314,395) (333,389)
Change in Unrealized Appreciation (Depreciation) of
Investment Securities (267,995) 1,214,927
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,987,251 2,089,630
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
- -------------------------------------------------------------------------------------------------------------------------
Net Investment Income (76,131) --
Net Realized Gains (3,428,667) (615,164)
In Excess of Net Realized Gains (37,925) --
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (3,542,723) (615,164)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1):
- -------------------------------------------------------------------------------------------------------------------------
Shares Issued 23,293,242 14,236,574
Shares Issued in Reinvestment of Distributions 3,271,954 576,920
Shares Redeemed (18,620,014) (2,448,634)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 7,945,182 12,364,860
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 7,389,710 13,839,326
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
Beginning of Year 14,379,326 540,000
End of Year $ 21,769,036 $14,379,326
- -------------------------------------------------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED:
- -------------------------------------------------------------------------------------------------------------------------
Shares Issued 1,459,181 1,066,793
Shares Reinvested 218,994 39,569
Shares Redeemed (1,160,681) (168,171)
- -------------------------------------------------------------------------------------------------------------------------
517,494 938,191
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Fund commenced operations on January 1, 1996.
See accompanying notes to financial statements.
F-9
<PAGE>
ANNUAL REPORT 1997
Financial Highlights
<TABLE>
<CAPTION>
Year ended Year ended
For a share outstanding throughout each year December 31, 1997 December 31, 1996*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Year $ 14.49 $ 10.00
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.06 (0.11)
Net Gain on Securities (Realized and Unrealized) 2.26 5.27
- -------------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 2.32 5.16
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
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 YEAR $ 14.42 $ 14.49
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 15.66% 51.56%
- -------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (thousands) $21,769 $14,379
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.50%a 2.50%a
Ratio of Net Investment Income (Loss) to Average Net Assets 0.37%a (1.27)%a
Portfolio Turnover Rate 724.08% 568.93%
Average Commission Rate Paid(1) $0.0359 $0.0511
</TABLE>
a Had certain waivers and reimbursements not been in effect, the ratio of
expenses to average net assets, for the years ended December 31, 1997 and
1996, would have been 3.29% and 4.60%, respectively and the ratio of net
investment income (loss) to average net assets, for the years ended
December 31, 1997 and 1996, would have been (0.42%) 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 years
for which commissions were charged.
* Fund commenced operations on January 1, 1996.
See accompanying notes to financial statements.
F-10
<PAGE>
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.
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, 1997 to not more than 2.50% of average
daily net assets. For the year ended December 31, 1997, the Advisor waived
$182,591 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 year ended December 31, 1997, the Fund incurred $58,219 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, 1997.
Purchases Sales
- ------------------------------------------------------------------------------
Long transactions $131,859,472 $133,149,166
Short sale transactions 17,155,958 16,542,123
- ------------------------------------------------------------------------------
Total $149,015,430 $149,691,289
- ------------------------------------------------------------------------------
At December 31, 1997, net unrealized appreciation of $946,932 was comprised of
gross unrealized appreciation and depreciation for financial reporting and
federal income tax purposes of $2,637,757 and $1,690,825, respectively.
F-11
<PAGE>
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 year ended December 31,
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
December 31, 1997 0 $ 0
- ------------------------------------------------------------------------------
7. SHORT SALE TRANSACTIONS
The Fund may sell securities short for hedging purposes. During the year ended
December 31, 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 December
31, 1997, the market value of securities separately segregated to cover short
positions was $4,763,475. 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, 1997 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, 1997 net assets consisted of:
Paid-in Capital $20,850,042
Accumulated Net Investment Income 9,987
Distributions in Excess of Net
Realized Gains (37,925)
Net Unrealized Appreciation
(Depreciation) of Investment
Securities 946,932
- --------------------------------------------------------------------------
Total Net Assets $21,769,036
- --------------------------------------------------------------------------
F-12
<PAGE>
Needham Growth Fund
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, 1997, and the related statements of operations
and changes in net assets and the financial highlights for the year then ended
and the statement of 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 audits.
We conducted our audits 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, 1997 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 audits provide 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, 1997, and the results of its operations for
the year then ended, the changes in its net assets and the financial highlights
for the year then ended and the changes in its net assets and the financial
highlights for the period from January 1, 1996 through December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
New York, New York
February 23, 1998
F-13
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statement and Exhibits
(a) Financial Statements:
Included in Prospectus:
Financial Highlights for the year ended December 31, 1997
Included in the Statement of Additional Information:
(1) Statement of Net Assets dated December 31, 1997
(2) Schedule of Securities Sold Short dated December 31, 1997
(3) Statement of Operations for the year ended December 31, 1997
(4) Statement of Changes in Net Assets for the years ended
December 31, 1997 and December 31, 1996
(5) Financial Highlights
(6) Notes to Financial Statements
(7) Report of Independent Auditors dated February 23, 1998
(b) Exhibits:
Exhibit
Number Description
------- -----------
1 -- Articles of Incorporation of Registrant. (Previously filed as
Exhibit 1 to the Registration Statement.)
2 -- By-Laws of Registrant. (Previously filed as Exhibit 2 to the
Registration Statement.)
3 -- Not applicable.
4 -- Form of Specimen Certificate of Shares of Needham Growth
Fund. (Previously filed as Exhibit 4 to Pre-Effective
Amendment No. 1 to the Registration Statement.)
5(a) -- Form of Investment Advisory Agreement between Registrant and
Needham Investment Management L.L.C. (Previously filed as
Exhibit 5(a) to the Registration Statement.)
<PAGE>
5(b) -- Form of Investment Advisory Agreement Supplement between
Needham Growth Fund and Needham Investment Management L.L.C.
(Previously filed as Exhibit 5(b) to the Registration
Statement.)
6 -- Distribution and Services Agreement between Registrant and
Needham & Company, Inc. (Previously filed as Exhibit 6 to
Pre-Effective Amendment No. 1 to the Registration Statement.)
7 -- Not applicable.
8 -- Form of Custodian Services Agreement between Registrant
and PNC Bank, National Association. (Previously filed as
Exhibit 8 to Pre-Effective Amendment No. 1 to the Registration
Statement.)
9(a) -- Form of Administration and Accounting Services Agreement
between Registrant and PFPC Inc. (Previously filed as Exhibit
9(a) to Pre-Effective Amendment No. 1 to the Registration
Statement.)
9(b) -- Form of Transfer Agency Services Agreement between
Registrant and PFPC Inc. (Previously filed as Exhibit 9(b) to
Pre-Effective Amendment No. 1 to the Registration Statement.)
10 -- Opinion and consent of Fulbright & Jaworski L.L.P.,
Counsel to Registrant.
11 -- Consent of Ernst & Young LLP, Independent Auditors.
12 -- Not applicable.
13 -- Form of Initial Subscription Agreement between the Fund
and Needham Investment Management L.L.C. (Previously filed as
Exhibit 13 to Pre-Effective Amendment No. 1 to the
Registration Statement.)
14 -- Prototype of Individual Retirement Account Plan (IRA).
(Previously filed as Exhibit 14 to Post-Effective Amendment
No. 3 to the Registration Statement.)
15 -- Plan of Distribution Pursuant to Rule 12b-1. (Previously
filed as Exhibit 15 to Pre-Effective Amendment No. 1 to the
Registration Statement.)
16 -- Not applicable.
17 -- Financial Data Schedule.
18 -- Not applicable.
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
The Registrant and Needham Investment Management L.L.C. (the
"Adviser"), a Delaware limited liability company, may be deemed to be under the
common control of Needham & Company, Inc. a Delaware corporation.
Item 26. Number of Holders of Securities
671 as of April 15, 1998.
Item 27. Indemnification
Section 2-418 of the General Corporation Law of the State of Maryland,
the state in which the Registrant was organized, empowers a corporation, subject
to certain limitations, to indemnify its directors, officers, employees and
agents against expenses (including attorneys' fees, judgments, penalties, fines
and settlements) actually and reasonably incurred by them in connection with any
suit or proceeding to which they are a party so long as they acted in good faith
or without active and deliberate dishonesty, or they received no actual improper
personal benefit in money, property or services, if, with respect to any
criminal proceeding, so long as they had no reasonable cause to believe their
conduct to have been unlawful.
Article Eight of the Fund's Articles of Incorporation and Article X of
the Fund's Bylaws provide for indemnification.
The Fund's directors and officers are insured against losses arising
from any claim against them as such for wrongful acts or omissions, subject to
certain limitations.
The Registrant will comply with applicable indemnification requirements
as set forth in releases under the Investment Company Act.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
The investment adviser to the Fund is Needham Investment Management
L.L.C., 445 Park Avenue, New York, New York 10022, a registered investment
adviser under the Investment Advisers Act of 1940. Additional information
regarding the Adviser is included in its Form ADV filed with the Securities and
Exchange Commission (SEC File No. 801-50449).
<PAGE>
The following information is provided with respect to each executive
officer of the Adviser:
John C. Michaelson, President of the Adviser and the Fund, and a
Managing Director of Needham & Company, Inc., 445 Park Avenue, New
York, New York, a registered broker-dealer engaged in a variety of
investment banking and institutional brokerage activities.
Peter J.R. Trapp, Executive Vice President of the Adviser and the Fund,
and Managing Director of Needham & Company, Inc., 445 Park Avenue, New
York, New York, a registered broker-dealer engaged in a variety of
investment banking and institutional brokerage activities.
Item 29. Principal Underwriter
(a) Not applicable.
(b) Officers and Directors:
<TABLE>
<CAPTION>
Positions and Positions and
Name and Principal Offices with Offices with
Business Address Underwriter Registrant
------------------ ------------- -------------
<S> <C> <C>
George A. Needham Chief Executive Officer Chairman
and Chairman of the
Board
John C. Michaelson Managing Director President
Edgar F. Heizer, Jr. Director None
Joseph H. Reich Director None
Eugene R. White Director None
Roger C. Cotta Managing Director Treasurer
Chad W. Keck Managing Director None
Bernard Lirola Managing Director None
Stuart W. Sanderson Managing Director None
John Barr Managing Director None
Matthew Buten Managing Director None
Peter Dale Managing Director None
Vincent Gallagher Managing Director None
Craig Gilkes Managing Director None
John Guarino Managing Director None
Margaret Johns Managing Director None
Susan Kazanas Managing Director None
Vincent Kenney Managing Director None
John McManus Managing Director None
John Prior Managing Director None
Janice Robertson Managing Director None
David Townes Managing Director None
Peter J.R. Trapp Managing Director Executive Vice
President
</TABLE>
The principal business address for all such persons is 445 Park Avenue,
New York, New York 10022.
(c) Not applicable.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder are maintained
at the offices of PFPC Inc.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant hereby undertakes
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to provide each person to whom a
copy of the prospectus is given with a copy of the Fund's
Annual Report, which contains the information required by Item
5A of Form N-1A, upon request by such person and free of charge.
(d) The Registrant undertakes to call a meeting of shareholders
for the purpose of voting upon the question of removal of a
director or directors when requested in writing to do so by
the holders of at least 10% of the Registrant's outstanding
shares and in connection with such meeting to comply with the
provisions of Section 16(c) of the Investment Company Act of
1940 relating to shareholder communications.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of New York, State of New York, on the 28th
day of April, 1998.
THE NEEDHAM FUNDS, INC.
By: /s/ John C. Michaelson
----------------------
John C. Michaelson
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ George A. Needham Director and Chairman April 28, 1998
- --------------------------------- (Principal Executive
George A. Needham Officer)
/s/ John C. Michaelson Director and President April 28, 1998
- --------------------------------- (Principal Financial
John C. Michaelson and Accounting Officer)
/s/ Roger W. Johnson Director April 28, 1998
- ---------------------------------
Roger W. Johnson
/s/ James Poitras Director April 28, 1998
- ---------------------------------
James Poitras
/s/ F. Randall Smith Director April 28, 1998
- ---------------------------------
F. Randall Smith
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ----
<S> <C> <C>
1 -- Articles of Incorporation of Registrant.*
2 -- By-Laws of Registrant.*
3 -- Not applicable.
4 -- Form of Specimen Certificate of Shares of Needham Growth Fund.*
5(a) -- Form of Investment Advisory Agreement between Registrant and Needham
Investment Management L.L.C.*
5(b) -- Form of Investment Advisory Agreement Supplement between Needham
Growth Fund and Needham Investment Management L.L.C.*
6 -- Distribution and Services Agreement between Registrant
Needham & Company, Inc.*
7 -- Not applicable.
8 -- Form of Custodian Services Agreement between Registrant
and PNC Bank, National Association.*
9(a) -- Form of Administration and Accounting Services Agreement between
Registrant and PFPC Inc.*
9(b) -- Form of Transfer Agency Agreement between Registrant
and PFPC Inc.*
10 -- Opinion and consent of Fulbright & Jaworski L.L.P.,
counsel to Registrant.
11 -- Consent of Ernst & Young LLP, Independent Auditors.
12 -- Not applicable.
13 -- Form of Initial Subscription Agreement between the Fund and
Needham Investment Management L.L.C.*
14 -- Prototype of Individual Retirement Account Plan (IRA).*
15 -- Plan of Distribution Pursuant to Rule 12b-1.*
16 -- Not applicable.
17 -- Financial Data Schedule.
18 -- Not applicable.
</TABLE>
- ---------------------
* Previously filed.
<PAGE>
Exhibit 10
[FULBRIGHT & JAWORSKI L.L.P. LETTERHEAD]
April 27, 1998
The Needham Funds, Inc.
445 Park Avenue
New York, New York 10022
Re: Registration Statement on Form N-1A
Securities Act File No. 33-98310
Investment Company Act File No. 811-9114
Gentlemen:
This will refer to the Registration Statement under the Securities Act
of 1933 (File No. 33-98310) and Investment Company Act of 1940 (File No.
811-9114), filed by The Needham Funds, Inc. (the "Fund"), a Maryland
corporation, with the Securities and Exchange Commission and the further
amendments thereto (the "Registration Statement"), covering the registration
under the Securities Act of 1933 of an indefinite number of shares of beneficial
interest of the Fund (the "Shares").
As counsel to the Fund, we have examined such documents and reviewed
such questions of law as we deem appropriate. On the basis of such examination
and review, it is our opinion that the Shares have been duly authorized and,
when issued, sold and paid for in the manner contemplated by the Registration
Statement, will be legally issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the heading "Legal Counsel and
Independent Auditors" in the Prospectus filed as part of the Registration
Statement. This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the provisions of the Securities Act of 1933.
Very truly yours,
/s/ Fulbright & Jaworski L.L.P.
-------------------------------
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Legal Counsel and Independent Auditors" in the Prospectus and
"Additional Information - Independent Auditors" in the Statement of Additional
Information and to the use of our report on Needham Growth Fund dated February
23, 1998, in this Registration Statement (Form N-1A 33-98310) of The Needham
Funds, Inc.
/s/ ERNST & YOUNG LLP
---------------------
New York, New York
April 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001002537
<NAME> THE NEEDHAM FUNDS, INC.
<SERIES>
<NUMBER> 01
<NAME> THE NEEDHAM GROWTH FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 16462367
<INVESTMENTS-AT-VALUE> 17409299
<RECEIVABLES> 4804979
<ASSETS-OTHER> 87394
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 27065147
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5296111
<TOTAL-LIABILITIES> 5296111
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20850042
<SHARES-COMMON-STOCK> 1509685
<SHARES-COMMON-PRIOR> 992191
<ACCUMULATED-NII-CURRENT> 9987
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (37925)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 946932
<NET-ASSETS> 21769036
<DIVIDEND-INCOME> 460461
<INTEREST-INCOME> 206538
<OTHER-INCOME> 0
<EXPENSES-NET> 580881
<NET-INVESTMENT-INCOME> 86118
<REALIZED-GAINS-CURRENT> 3169128
<APPREC-INCREASE-CURRENT> (267995)
<NET-CHANGE-FROM-OPS> 2987251
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (76131)
<DISTRIBUTIONS-OF-GAINS> (3466592)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23293242
<NUMBER-OF-SHARES-REDEEMED> (18620014)
<SHARES-REINVESTED> 3271954
<NET-CHANGE-IN-ASSETS> 7389710
<ACCUMULATED-NII-PRIOR> (111272)
<ACCUMULATED-GAINS-PRIOR> 370811
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 290440
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 763472
<AVERAGE-NET-ASSETS> 23235231
<PER-SHARE-NAV-BEGIN> 14.49
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 2.26
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> (2.34)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.42
<EXPENSE-RATIO> 2.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
