Annual
Report
Needham Growth Fund
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Year ended December 31, 1997
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[LOGO]
Needham Growth Fund
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Annual Report
for the year ended December 31, 1997
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ANNUAL REPORT 1997
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The Needham Growth Fund -- seeking to build
wealth for long-term investors.
CONTENTS
Letter from the Adviser 2
Statement of Net Assets 6
Schedule of Securities Sold Short 12
Statement of Operations 13
Statements of Changes in Net Assets 14
Financial Highlights 15
Notes to Financial Statements 16
Report of Independent Auditors 18
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Needham Growth Fund
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YEAR END RESULTS
DECEMBER 1997
Dear Shareholder,
THE NEEDHAM GROWTH FUND IS A NO-LOAD, PUBLICLY LISTED MUTUAL FUND. The Needham
Growth Fund makes long-term investments in publicly owned growth businesses and
is suitable for investors seeking long-term capital appreciation who understand
the considerable risks associated with investing in smaller companies. The Fund
focuses on the fundamental prospects for the businesses in which we are
investors. The Fund's investments fall into four categories: (1) stocks that
have significant growth prospects that can be purchased at attractive prices
("growth, but at a reasonable price"); (2) smaller companies that have strong
business fundamentals but have disappointed investors with short-term results
below expectations ("orphans"); (3) spin-offs, where a lack of investor
awareness and Wall Street interest or support create opportunities to purchase
strong companies at discount prices; and (4) overvalued stocks that are sold
short in the expectation of a price decline. The Needham Growth Fund is listed
on the NASDAQ market under the symbol NEEGX and is managed by Needham Asset
Management, LLC, an affiliate of Needham & Company, Inc., a research centered
investment bank specializing in growth companies. The Needham Growth Fund is the
sole portfolio of The Needham Funds, Inc., a Maryland corporation which began
investment operations on January 1, 1996.
NEEDHAM GROWTH FUND
COMPARATIVE INVESTMENT RETURNS
An initial investment of $10,000 as of January 1, 1996 (inception) would be
worth $17,529 as of December 31, 1997.
[CHART]
In the printed version of the document, a line graph appears which depicts the
following plot points:
Needham Russell
Growth Nasdaq 2000 S&P 500
Fund Composite Index Index
1/2/96 $10,000.00 $10,000.00 $10,000.00 $10,000.00
1/31/96 $10,850.00 $10,072.71 $9,981.33 $10,326.17
2/29/96 $12,160.00 $10,455.36 $10,283.57 $10,397.77
3/29/96 $12,570.00 $10,468.00 $10,468.40 $10,480.09
4/30/96 $13,530.00 $11,315.79 $11,022.57 $10,620.85
5/31/96 $14,430.00 $11,818.20 $11,452.04 $10,863.57
6/28/96 $14,150.00 $11,262.95 $10,969.71 $10,888.09
7/31/96 $13,800.00 $10,270.50 $10,000.95 $10,389.98
8/30/96 $14,320.00 $10,849.32 $10,566.83 $10,585.46
9/30/96 $15,070.00 $11,661.09 $10,962.75 $11,158.90
10/31/96 $15,000.00 $11,609.77 $10,778.55 $11,450.49
11/29/96 $15,281.37 $12,285.53 $11,207.08 $12,290.68
12/31/96 $15,155.86 $12,270.52 $11,476.09 $12,026.37
1/31/97 $15,752.05 $13,114.70 $11,692.57 $12,763.79
2/28/97 $15,835.73 $12,441.31 $11,395.07 $12,839.45
3/31/97 $15,908.95 $11,611.57 $10,841.54 $12,292.31
4/30/97 $15,950.78 $11,982.82 $10,855.46 $13,010.24
5/30/97 $16,662.03 $13,309.26 $12,050.51 $13,772.34
6/30/97 $16,923.52 $13,706.07 $12,544.55 $14,370.79
7/31/97 $17,885.80 $15,148.27 $13,117.70 $15,493.48
8/29/97 $18,063.61 $15,086.59 $13,400.96 $14,603.45
9/30/97 $18,600.60 $16,021.54 $14,362.76 $15,379.67
10/31/97 $17,944.24 $15,146.37 $13,712.06 $14,849.41
11/28/97 $17,753.68 $15,499.08 $13,606.36 $15,511.50
12/31/97 $17,528.75 $14,925.30 $13,831.06 $15,755.52
The above illustration compares a $10,000 investment in the Needham Growth Fund
on January 1, 1996 to a $10,000 investment in the noted benchmarks on that date.
All dividends and capital gain distributions are reinvested.
The Fund's performance takes into account all applicable fees and expenses. The
benchmarks are widely accepted unmanaged indices of overall market performance
and do not take into account charges, fees and other expenses.
Past performance is not predictive of future performance. The Fund's share price
and return will vary so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
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ANNUAL REPORT 1997
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INVESTMENT STRATEGY
WE RELY ON FUNDAMENTAL RESEARCH. Investment decisions at The Needham Growth Fund
are based upon our 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 Needham Growth Fund focuses,
above all, on the quality of the management because we believe that management
is the most critical element in determining the success of a business. We choose
to invest in people, not just in technology or products. The employees of
Needham Asset Management, LLC, including Peter Trapp, the portfolio manager of
The Needham Growth Fund, George A. Needham and John C. Michaelson, have
experienced quite a few market cycles. The Needham Growth Fund also has access
to the excellent analytical resources of Needham & Company, Inc., including its
experienced head of research, Peter Dale, and its senior equity research
analysts: John J. McManus (industrial), Bernard H. Lirola (healthcare) and John
O. Barr (software) as well as its nine other equity research analysts in
technology, industrial, business services and healthcare. These resources offer
the Fund a significant competitive advantage in studying, understanding and
analyzing businesses and their management.
WE ARE NOT SHORT-TERM TRADERS. The Needham Growth Fund is not a short-term
trader of stocks. The Needham Growth Fund does not rely upon so-called
"technical" investing (based upon computer-based stock selection, technical
analysis and charts) or so called "momentum" investing. We invest for the long
term. Once we qualitatively identify great businesses and managements in which
we would like to invest, we then value those businesses to assess a reasonable
price at which to purchase the stock. The Needham Growth Fund seeks to purchase
securities at prices which offer our shareholders the potential to earn a return
of at least 50% over a two-year period. We believe that 1998 will likely be a
market that rewards fundamental analysis and experience over formula approaches.
WE FOCUS 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. We believe 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 short opportunities as, in the
long-term, real underlying values do eventually come through.
WE INVEST IN COMPANIES IN GROWTH INDUSTRIES. We invest in companies in
industries that are likely to be the beneficiaries of long-lasting economic
trends created by technological change and/or changing demographics. The Needham
Growth Fund currently has significant investments in technology, health care,
communications, media and outsourcing of services. Most of our areas of
investment focus benefit from the POWER OF INFORMATION TECHNOLOGY.
"We are now living in the midst of the third great revolution in history. Today,
the marriage of computers and telecommunications has ushered in the information
age, which is as different from the Industrial Age as that period was from the
Agricultural Age. The marriage of computers and telecommunications has ushered
in the Information Age. When Johann Gutenberg pioneered movable type in Europe
in 1436 and when Intel designed the integrated circuit in the 1970s, the way we
record, store, access and peruse knowledge made quantum leaps forward and
affected not only how we do our jobs but what we do." (Walter B. Wriston,
Foreign Affairs September/October 1997.)
It took over thirty years before the automobile fundamentally changed the way we
live, as against making more convenient an already existing pattern of life. The
automobile became a mass produced consumer good in the first decades of this
century. However, it did not fundamentally change the way we live and work until
the 1950s. Equally important, there was no way to foresee the full impact of the
automobile early in its adoption cycle. Most uses of information technology to
date are similar to that of the automobile early in its adoption cycle; they
make easier existing patterns of work and living. The predominance of the impact
of information technology in changing the way we live and work is still ahead
and unforeseeable. 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
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Needham Growth Fund
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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 its own right. Some of these companies have strong
proprietary positions and form core long-term holdings for the Fund. However,
most 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 the largest industry
in America is only beginning.
3. THE APPLICATION OF INFORMATION TECHNOLOGY TO OIL & 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. In the
past, companies tried to do all possible jobs internally, many only tangential
to their main business, from legal work to managing buildings. 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. Just as a top young athlete considering a professional career must now
choose a specific sport on which to concentrate, companies increasingly focus on
the few things that they do outstandingly well and leave the rest to others; two
areas of particular interest are the outsourcing of manufactured products and 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 services has a history dating back to the
1960s and the early days of EDS. It is a rapidly growing industry with the
contracting out of data services ranging from electronic payments to inbound and
outbound telephone sales and fulfillment to brokerage firms' clearing
operations.
5. RESTRUCTURINGS AND SPIN-OFFS. We also look for investment opportunities in
restructurings and spin-offs, primarily in the information technology
industries. American 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. We are now
seeing the spin-off to shareholders and the divestiture of good operations, but
in unrelated businesses, to assist companies to 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 Wall Street 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
supported by Wall Street.
1997 WAS AN EVENTFUL YEAR FOR THE NEEDHAM GROWTH FUND
Assets under management in The Needham Growth Fund increased substantially
during the year. We attribute increased shareholders' interest in The Needham
Growth Fund to our strong performance since inception, increasing interest by
financial planners and the ability of investors to conveniently purchase The
Needham Growth Fund without any fees through mutual fund marketplaces (most
importantly Charles Schwab's Mutual Fund OneSource and Fidelity's FundNetwork).
However, the performance of the Fund in 1997 neither lived up to our
expectations nor your expectations. The portfolio of the Fund
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ANNUAL REPORT 1997
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included significant hedged positions to protect against a down market. Turmoil
in Asia and the slowing U.S. economy did not have the anticipated impact on the
market; the market shrugged off all clouds and continued to rise. As with any
hedged strategy in an up market, performance suffered heavily as a consequence.
At year-end 1997, the portfolio manager, Howard S. Schachter, resigned, and we
appointed a new portfolio manager, Peter J.R. Trapp. Peter is an experienced and
seasoned investment professional. We expect excellent results with Peter at the
helm. The fundamental strategy of the Fund will continue under Peter. The
primary changes will be a smaller list of portfolio investments than in the past
and a hedging strategy more focused on the use of index puts and short positions
and less on puts on individual stocks.
OUTLOOK FOR 1998
In the long term, prices of securities mirror the value of their underlying
businesses. While the U.S. economy is currently growing only moderately, we
expect most of the companies in which we invest to achieve strong profit growth
in 1998. We are therefore optimistic that 1998 could be another favorable year
for The Needham Growth Fund. Of course, investing in small cap stocks is
inherently risky. Please see pages 7 to 8 of the prospectus for a discussion of
the investment risks. Our past performance should not be considered a predictor
of future results.
THANK YOU FOR INVESTING IN THE NEEDHAM GROWTH FUND
Thank you very much for choosing to join us as fellow shareholders in The
Needham Growth Fund. We realize that there are now thousands of mutual funds for
you to choose among to entrust your savings, whether your purpose is to invest
to fund your retirement, a child's education, travel, a new business or a new
home. We will continue to work hard to justify your confidence. Please feel free
to write or call if you have any questions or comments.
The Needham Growth Fund is a no-load fund. It sells and redeems its shares at
net asset value without any sales charges or redemption fees. The minimum
initial investment for individuals, corporations, partnerships, IRA's or trusts
is $1,500. There is a $100 minimum for subsequent purchases. The minimum for
purchases made pursuant to The Needham Growth Fund's Automatic Investment Plan
is $1,500 with a $50 monthly minimum for subsequent purchases.
The Prospectus sets forth concisely the essential information a prospective
investor should know before investing. Investors are advised to read the
Prospectus and retain it for future reference. A Statement of Additional
Information containing additional and more detailed information about The
Needham Growth Fund has been filed with the Securities and Exchange Commission
and is incorporated by reference into the Prospectus. A copy of the Statement of
Additional Information may be obtained without charge by writing or calling The
Needham Growth Fund at the address and telephone number set forth above.
A copy of the Prospectus and the Statement of Additional Information is also
available through The Needham Growth Fund's website at http://www.needhamco.com.
The Securities and Exchange Commission maintains a web site (http://www.sec.gov)
that contains the Prospectus, the Statement of Additional Information, material
incorporated by reference, and other information regarding The Needham Growth
Fund.
Sincerely,
/s/ John C. Michaelson
- ----------------------
John C. Michaelson
PRESIDENT,
NEEDHAM ASSET MANAGEMENT L.L.C.
/s/ George A. Needham
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George A. Needham
CHAIRMAN,
NEEDHAM ASSET MANAGEMENT L.L.C.
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Needham Growth Fund
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Statement of Net Assets
December 31, 1997
Shares Value
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COMMON STOCKS - (73.0%)
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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
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888,438
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BEVERAGES - (0.8%)
Coca-Cola Enterprises, Inc. 5,000 177,813
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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
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1,066,877
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BUSINESS SERVICES - (1.1%)
Cendant Corp.* 5,007 172,116
Corestaff, Inc.* 2,300 60,950
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233,066
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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
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1,757,064
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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
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986,127
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CONTRACTOR MANUFACTURING - (6.7%)
DII Group, Inc. *+ 22,600 615,850
Solectron Corp.*+ 20,000 831,250
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1,447,100
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See accompanying notes to financial statements.
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ANNUAL REPORT 1997
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Shares Value
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COSMETICS & TOILETRIES - (0.8%)
Helen of Troy, Ltd.* 10,500 $ 169,313
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ELECTRONIC DESIGN AUTOMATION - (0.5%)
Coltec Industries, Inc.* 5,000 115,938
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FINANCIAL SERVICES - (2.2%)
Capital One Financial Corp. 5,000 270,938
Schwab, Charles Corp. 5,000 209,688
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480,626
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FOODS - (1.3%)
Hershey Foods Corp. 2,500 154,844
Michael Foods, Inc. 5,000 121,875
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276,719
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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
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550,563
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INSURANCE - (2.8%)
Ace, Ltd.+ 5,000 482,500
ESG Re, Ltd.* 5,000 117,500
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600,000
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LEISURE & ENTERTAINMENT - (0.7%)
Alliance Gaming Corp.* 5,000 24,375
Vail Resorts, Inc.* 5,000 129,688
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154,063
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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
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312,713
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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
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1,245,095
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See accompanying notes to financial statements.
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Needham Growth Fund
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Shares Value
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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
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791,094
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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
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2,460,375
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SEMI-CONDUCTOR PRODUCERS - (2.0%)
Intel Corp.+ 2,500 175,625
Rockwell International Corp. 5,000 261,250
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436,875
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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
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1,457,325
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See accompanying notes to financial statements.
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ANNUAL REPORT 1997
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Shares Value
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TOYS - (0.7%)
Hasbro, Inc. 5,000 $ 157,500
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TRUCKING - (0.6%)
Yellow Corp.* 5,000 125,625
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TOTAL COMMON STOCKS (Cost $14,586,030) 15,890,309
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Par
(000)
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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
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See accompanying notes to financial statements.
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Needham Growth Fund
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Statement of Net Assets
December 31, 1997
Number
Name/Expiration Date/Strike Price of Contracts Value
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PUT OPTIONS PURCHASED - (1.8%)
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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
See accompanying notes to financial statements.
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ANNUAL REPORT 1997
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Number
of Contracts Value
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PUT OPTIONS PURCHASED - (1.8%) (continued)
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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
- -------------------------------------------------------------------------------
* 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.
11
<PAGE>
Needham Growth Fund
- --------------------------------------------------------------------------------
Schedule of Securities Sold Short
December 31, 1997
Name of Issuer Shares Value
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
12
<PAGE>
ANNUAL REPORT 1997
- -------------------------------------------------------------------------------
Statement of Operations
For the year ended December 31, 1997
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
13
<PAGE>
Needham Growth Fund
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996*
- ---------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- ---------------------------------------------------------------------------------------------------
OPERATIONS:
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
14
<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.
15
<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.
16
<PAGE>
ANNUAL REPORT 1997
- --------------------------------------------------------------------------------
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
- --------------------------------------------------
17
<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.
ERNST & YOUNG LLP
New York, New York
February 23, 1998
18
<PAGE>
[LOGO]
Needham Growth Fund
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Investment Adviser:
Needham Investment Management L.L.C.
445 Park Avenue
New York, NY 10022-2606
President
- ---------
John C. Michaelson
Executive Vice President
and Portfolio Manager
- ------------------------
Peter J. R. Trapp
Directors
- ---------
George A. Nedham
John C. Michaelson
George D. Gould
Roger W. Johnson
James P. Poitras
F. Randall Smith
Distributor:
Needham & Company, Inc.
445 Park Avenue
New York, NY 10022-2606
212-371-8300
Administrator, Shareholder Servicing
Agent and Transfer Agent:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
1-800-625-7071
Custodian:
PNC Bank, N.A.
200 Stevens Drive
Airport Business Center
Lester, PA 19113
Counsel:
Fulbright & Jaworski L.L.P.
666 Firth Avenue
New York, NY 10103
Independent Auditors:
Ernst & Young LLP
787 Seventh Avenue
New York, NY 10019
