Annual
Report
Needham Growth Fund
- ----------------------------------------------------------------------
Year ended December 31, 1998
[NEEDHAM LOGO]
<PAGE>
[NEEDHAM 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, 1998
<PAGE>
Annual Report 1998
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Needham Growth Fund -- seeking
to build wealth for long-term
investors.
Contents
Letter from the Advisor 2
Statement of Net Assets 5
Schedule of Securities Sold Short 8
Statement of Operations 9
Statements of Changes in Net Assets 10
Financial Highlights 11
Notes to Financial Statements 12
Report of Independent Public Accountants 14
<PAGE>
Needham Growth Fund
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Year End Results
December 1998
Dear Shareholders, Friends of Needham and Prospective Shareholders,
We are pleased to report performance results for the Needham Growth Fund ("NGF")
for the quarter ended December 31, 1998 (4Q98), for the year ended December 31,
1998 (1998) and for the three year period ended December 31, 1998 (3 Years). Our
performance relative to the major indices for these periods is as follows:
<TABLE>
<CAPTION>
Benchmarks 4Q98 1998 3 Years(6)
---------- ---- ---- ----------
<S> <C> <C> <C>
Needham Growth Fund(1) 26.06% 19.85% 28.08%(7)
Dow Jones Industrial Average(2) 17.58% 18.15% 23.84%
S&P 500 Index(3) 21.28% 28.58% 28.13%
S&P 400 Midcap Index(4) 28.16% 19.09% 23.29%
Russell 2000 Index(5) 16.44% (2.24)% 11.64%
</TABLE>
1. Investment results calculated after reinvestment of dividends.
2. Dow Jones Industrial Average is a daily measure of selected stocks traded on
the NYSE.
3. S&P 500 stock index is a broad unmanaged measure of the U.S. stock market and
is not available for purchase.
4. S&P 400 Midcap stock index is a broad unmanaged measure of the U.S. stock
market and is not available for purchase.
5. Russell 2000 stock index is a broad unmanaged index comprised of the smallest
2000 NASDAQ companies and is not available for purchase.
6. Compound average annual growth rate. Assumes all dividends are reinvested in
shares of the Fund.
7. Total return for the 3 Years was 110.09%, assuming all dividends are
reinvested in shares of the Fund.
Note: The average annual returns shown above are historical and reflect changes
in share price, reinvested dividends and are net of expenses. Investment
results and the principal value of an investment will vary. Past
performance noted above does not guarantee future results. When shares are
redeemed, they may be worth more or less than their original cost. Since
inception, the Fund's Adviser has absorbed certain expenses of the Fund,
without which returns would have been lower.
Background
The fourth quarter 1998 for the Needham Growth Fund (the "Fund" or "NGF") was
the quarter of the "Comeback Kid". To the surprise of many and after a very
difficult third quarter owing to domestic earnings concerns, international
dislocations and some credit crises, the Federal Reserve, in a series of rapid
fire moves, lowered short term interest rates. Corporate third quarter earnings,
to the surprise of many, turned out to be better than expected, especially for
our technology companies.
Investment Strategy
NGF seeks to create long-term tax efficient capital appreciation for its
investors. To this end, NGF targets companies with products or services that are
selling or marketing into high growth markets. They normally have earnings
growth of at least 20%, product and market dominance, and the ability to
consolidate their market positions. They may have a competitive advantage by
acquiring and retaining more customers, driving costs down and profits up. NGF
also looks for seasoned and motivated management with "incentives" to win.
Companies with these characteristics sometimes find themselves in a temporary
earnings downturn or shortfall or may be in a product transition. This often
causes aggressive growth and momentum investors to sell. At this point, NGF may
deem the stock to be reasonably priced and purchase it for long-term capital
appreciation. Hence, the discipline called, "Growth At a Reasonable Price"
("GARP").
Investment Profile
At December 31, 1998, NGF's sector holdings consisted of the following:
In the printed version of the document, a line graph appears which depicts the
following plot points:
Retail & Business Services
8%
Short-Term Investments
2%
Technology & Telecommunications
49%
Healthcare
7%
Drugs & Biotechnology
6%
Media/Leisure
27%
Oil & Gas
1%
The market value of stocks sold short represented approximately 9.2% of the
total value of the long portfolio held by the Needham Growth Fund.
NGF's top ten holdings at quarter end (in descending order of market value) were
Tele-Communications, Inc. Series A Liberty Media Group, Sanmina Corp., Comcast
Corp., Class A, Envoy Corp., Cablevision Systems Corp., Class A, Aspen
Technology, Inc., Fore Systems, Inc., Analog Devices, Inc., Galileo Technology,
Ltd., and Park Electrochemical Corp.
2
<PAGE>
Annual Report 1998
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Investment Analysis
The technology sector, in general, continues to offer extremely attractive long
term growth opportunities. Early in the fourth quarter we were fortunate enough
to have had many technology stocks that we had wanted to buy earlier in the year
fall to a level consistent with our investment discipline of GARP. We therefore
took significant positions in high quality mid-cap names such as Actel Corp.,
Analog Devices, Inc., Fore Systems, Inc., Park Electrochemical Corp., and
Sanmina Corp. In general, the semiconductor manufacturing, semiconductor capital
equipment, contract manufacturing and networking equipment areas provided us
with excellent capital appreciation during the quarter. The enterprise software
area was generally disappointing and therefore this is the area where we have
concentrated many of our short positions. There are now some good values for the
long term investor in this area and we have raised our exposure accordingly.
Obviously the Internet, as a means of communication, entertainment and commerce,
is having a fundamental impact on the way we live our lives and transact our
business. It stands in importance on a level with the invention of radio,
television and the telephone. From an investment point of view, few of these
stocks fall within our GARP discipline and therefore we have chosen to focus on
indirect or derivative themes in e-commerce and the Internet.
The media, leisure, entertainment, cable and media content companies continue to
provide good capital appreciation and stability to the portfolio. The cable and
entertainment stocks in particular provided outstanding returns in 1998
following similar returns in 1997 and so we have begun to take some profits at
these prices. The media content and leisure stocks however still provide good
upside potential in our opinion, especially Tele-Communications, Inc. Series A
Liberty Media Group. Several Internet exposures are held through stocks in this
area, as alluded to in the previous paragraph.
In the healthcare, drugs and biotechnology areas, we focused our exposure in the
healthcare outsourcing area and reduced our exposure to Physicians Practice
Management (PPM) and Health Management Organization (HMO) companies. We have
maintained our investments in the drug and biotechnology areas. In early October
we initiated positions in Envoy Corp. in the outsourcing area and Conmed Corp.
in the medical devices area.
In retailing and business services, we continue to maintain a small exposure.
Our most significant exposure remains First Data Corp. and Harte-Hanks Inc.,
which both have Internet exposure. While the business services exposure remains
unchanged, we have reduced our direct retailing exposure.
Outlook
After the Fed easing, the better than expected corporate earnings last autumn
and continued low inflation, institutional and retail investors took heart and
the flow of funds into equities increased substantially. So far in 1999, that
trend has continued with an ever narrowing focus on the large-cap, liquid
stocks, led in technology by the "four horsemen", Intel Corp., Microsoft Corp.,
Cisco Systems Inc., and Dell Computer Corp. These are great companies, which we
would love to own but unfortunately they are not priced within the GARP
discipline at this time.
So the extraordinary "Goldilocks" economy continues with Gross Domestic Product
(GDP) growth for 1998 at a 14 year high of 4.1%, the lowest inflation level
since the late 50's and low interest rates. Institutions and retail investors
are still flush with cash (as defined by mutual funds inflows and outflows) and
the advent of electronic day trading has created a new category of "investors"
who do not subscribe to more traditional equity evaluation methods and
investment criteria. What can go wrong? We are concerned about the lack of
breadth of the market (the NASDAQ 100 - Russell 2000 spread is at an all time
high), the excessive focus on momentum rather than growth and value investing
and the torrid pace of new issuances of equity securities. The large-cap
"new-era nifty fifty" look expensive to us!
On balance though, we are constructive on the outlook for 1999 with productivity
gains and moderate wage gains benefiting the economy. In addition, expenditures
for productivity enhancing capital equipment are at a 15 year high and unit
labor costs should show very little upward pressure. We believe that we could be
looking at 3 - 4% GDP growth in 1999, inflation of 1% and continued productivity
gains. This bodes well for corporate profits and thus the equity market.
The Fund has decreased its holdings in the larger mid-cap stocks and increased
its holdings in the smaller spectrum of mid-cap stocks. We believe that these
smaller stocks are a "call-option" on the next leg of the economic cycle which
could come with the rejuvenation of the Asian economies, any accelerating growth
in the European economies and the continued strength in the U.S.
economy.
We are looking forward to a successful and prosperous 1999 in the markets and
for the Fund. In early January, we were awarded a 5 star overall rating by
Morningstar(TM) for our three year performance. This places us in the top 10
percent of all domestic equity funds(1). We received a similar rating from
Mutual Fund Magazine. It's gratifying to us that prominent rating services rank
the Fund so highly. This is independent confirmation of our outstanding
performance.
3
<PAGE>
Needham Growth Fund
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Your Investment in the Needham Growth Fund
We as fellow shareholders in the Needham Growth Fund realize that there are
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.
The Needham Growth Fund is a no-load fund. It sells and redeems its shares at
the net asset value without any sales charge or redemption fees. The minimum
initial investment for individuals, corporations and partnerships, IRA's or
trusts is $1500. There is a $100 minimum for subsequent purchases. The minimum
for purchases made pursuant to the Needham Growth Fund's Automatic Investment
Plan is $1500 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 in 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 web site at http://www.needhamco.com.
The Securities and Exhange 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.
The Needham Growth Fund thanks you for your investment, interest, support and
confidence. If you have any questions, thoughts or concerns, please do not
hesitate to call us at 212/705-0327.
Yours sincerely,
/s/ Peter J. R. Trapp
- ---------------------
Peter J. R. Trapp
Portfolio Manager
NEEDHAM GROWTH FUND
Comparative Investment Returns
An initial investment of $10,000 as of January 1, 1996 (inception) would be
worth $21,008 as of December 31, 1998
In the printed version of the document, a line graph appears which depicts the
following plot points:
<TABLE>
<CAPTION>
Needham S&P 400
Growth MIDCAP DJI S&P 500
2000 Index Fund Index AVERAGE Index Russell
- ---------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1/2/96 10000 10000 10000 10000 10000
1/31/96 10850.5 10134.043 10543.626 10326.173 9981.33
2/29/96 12160 10460.43 10720.132 10397.772 10283.57
3/29/96 12570 10571.979 10918.524 10480.087 10468.4
4/30/96 13530 10882.758 10883.231 10620.85 11022.57
5/31/96 14430 11012.211 11028.039 10863.572 11452.04
6/28/96 14150 10833.639 11050.415 10888.088 10969.71
7/31/96 13800 10089.974 10804.73 10389.979 10000.95
8/30/96 14320 10655.986 11053.503 10585.456 10566.83
9/30/96 15070 11105.858 11495.079 11158.898 10962.75
10/31/96 15000 11124.679 11782.761 11450.49 10778.55
11/29/96 15281.38 11733.841 12785.903 12290.682 11207.08
12/31/96 15155.86 11732.464 12601.366 12026.367 11476.09
1/31/97 15752.06 12159.842 13314.306 12763.788 11692.57
2/28/97 15835.73 12043.702 13440.646 12839.446 11395.07
3/31/97 15908.95 11514.873 12865.596 12292.306 10841.54
4/30/97 15950.79 11800.863 13697.138 13010.245 10855.46
5/30/97 16662.04 12814.91 14326.496 13772.344 12050.51
6/30/97 16923.53 13158.74 14994.352 14370.789 12544.55
7/31/97 17885.8 14444.546 16068.824 15493.481 13117.7
8/29/97 18063.61 14412.872 14895.918 14603.445 13400.96
9/30/97 18600.61 15224.936 15526.82 15379.67 14362.76
10/31/97 17944.24 14546.915 14543.493 14849.415 13712.06
11/28/97 17753.68 14747.062 15288.15 15511.503 13606.36
12/31/97 17526.67 15303.434 15454.494 15755.524 13831.06
1/30/98 17891.31 14997.246 15451.074 15915.445 13610.47
2/27/98 19374.15 16222.457 16700.253 17036.676 14616.26
3/31/98 18729.96 16939.038 17196.802 17887.585 15212.84
4/30/98 19276.91 17232.372 17711.857 18049.941 15282.78
5/29/98 18766.43 16440.966 17392.498 17710.129 14451.37
6/30/98 19460 17120 18380 19300 14990
7/30/98 18777 16460 19092 18248 13770
8/30/98 15607 13399 16335 15533 11001
9/30/98 16706 14649 17381 16183 11960
10/31/98 18547 15955 18794 17739 12450
11/30/98 18693 16752 19932 18869 13107
12/31/98 21008 18774 20957 18932 13926
</TABLE>
The above illustration compares a $10,000 investment in the Needham Growth
Fund on January 1, 1996 to a $10,000 investment in the noted benchmarks on that
date. All dividends and capital gain distributions are reinvested.
The Fund's performance takes into account all applicable fees and expenses. The
benchmarks are widely accepted unmanaged indices of overall market performance
and do not take into account charges, fees and other expenses.
Past performance is not predictive of future performance. The Fund's share price
and return will vary so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
- -------------------------------------------------------------------------------
(1) Morningstar proprietary ratings reflect risk-adjusted performance as of
December 31, 1998. The ratings are subject to change every month. Past
performance is no guarantee of future results. Morningstar ratings are
calculated from a fund's three year, five and ten year (if applicable)
average returns in excess of 90-day Treasury bill returns with appropriate
fee adjustments, and a risk factor that reflects fund performance below
90-day Treasury bill returns. The top 10% of the funds in an investment
class receive Five (5) Stars. The fund was rated among 2,802 funds in the
Domestic Equity class for the three year period.
4
<PAGE>
Annual Report 1998
- -------------------------------------------------------------------------------
Statement of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------------------------------------
Common Stocks - (97.0%)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Apparel/Footwear Manufacturers - (1.5%)
Wolverine World Wide, Inc. 20,000 $ 265,000
- ---------------------------------------------------------------------------------------
Broadcasting - (7.7%)
Tele-Communications, Inc., Series A Liberty Media Group* 30,000 1,381,875
- ---------------------------------------------------------------------------------------
Business Services - (5.7%)
Convergys Corp. * 20,000 447,500
Harte-Hanks, Inc. 20,000 570,000
- ---------------------------------------------------------------------------------------
1,017,500
- ---------------------------------------------------------------------------------------
Cable TV - (9.1%)
Cablevision Systems Corp., Class A * 15,000 752,813
Comcast Corp., Class A 15,000 880,313
- ---------------------------------------------------------------------------------------
1,633,126
- ---------------------------------------------------------------------------------------
Computer Software - ( 10.5%)
Aspen Technology, Inc. * 50,000 725,000
CBT Group Public Limited Co. 30,000 446,250
Hyperion Solutions Corp. * 10,000 180,000
Novell, Inc. * 30,000 543,750
- ---------------------------------------------------------------------------------------
1,895,000
- ---------------------------------------------------------------------------------------
Contract Manufacturing & Materials - (11.8%)
Hadco Corp. * 10,000 350,000
Park Electrochemical Corp. * 20,000 572,500
Sanmina Corp. * 19,090 1,193,125
- ---------------------------------------------------------------------------------------
2,115,625
- ---------------------------------------------------------------------------------------
Data Processing - (2.6%)
First Data Corp.* 15,000 475,313
- ---------------------------------------------------------------------------------------
Diversified Industries - (1.1%)
Varian Associates, Inc. * 5,000 189,375
- ---------------------------------------------------------------------------------------
Healthcare Outsourcing Services - (5.5%)
Envoy Corp. * 13,000 757,250
PSS World Medical, Inc. * 10,000 230,000
- ---------------------------------------------------------------------------------------
987,250
- ---------------------------------------------------------------------------------------
Hospital & Physician Management - (0.4%)
PhyCor, Inc. * 10,000 68,125
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Needham Growth Fund
- -------------------------------------------------------------------------------
Statement of Net Assets (continued)
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Leisure & Entertainment - (9.8%)
Hasbro, Inc. 10,000 $ 361,250
News Corp., Ltd. Sponsored ADR 20,000 528,750
USA Networks, Inc. 15,000 496,875
Viacom, Inc., Class B * 5,000 370,000
- ---------------------------------------------------------------------------------------
1,756,875
- ---------------------------------------------------------------------------------------
Medical Devices - (2.8%)
CONMED Corp. * 15,000 495,000
- ---------------------------------------------------------------------------------------
Networking & Communications - (10.0%)
3Com Corp. * 10,000 448,125
Ciena Corp. * 20,000 292,500
Fore Systems, Inc. * 35,000 640,935
Premisys Communications, Inc. * 20,000 183,750
Shiva Corp. * 40,000 226,250
- ---------------------------------------------------------------------------------------
1,791,560
- ---------------------------------------------------------------------------------------
Oil Equipment & Services - (1.3%)
Varco International, Inc. * 30,000 232,500
- ---------------------------------------------------------------------------------------
Pharmaceuticals - (3.1%)
Pharmacia & Upjohn, Inc. * 10,000 566,250
- ---------------------------------------------------------------------------------------
Retailing - (1.1%)
PETCO Animal Supplies, Inc. * 20,000 201,250
- ---------------------------------------------------------------------------------------
Semi-Conductor Manufacturers - (11.7%)
Actel Corp. * 20,000 400,000
Analog Devices, Inc. * 20,000 627,500
Atmel Corp. * 30,000 459,375
Galileo Technology, Ltd. * 22,500 607,500
- ---------------------------------------------------------------------------------------
2,094,375
- ---------------------------------------------------------------------------------------
Semi-Conductor Capital Equipment - (1.3%)
Photronics, Inc. * 10,000 239,688
- ---------------------------------------------------------------------------------------
Total Common Stocks (Cost $12,201,169) 17,405,687
- ---------------------------------------------------------------------------------------
Par
- ---------------------------------------------------------------------------------------
Short-Term Investments - (1.7%)
Commercial Paper
Burlington Resources 5.20%, Due 01/04/99
(Cost $299,870) $ 300,000 299,870
- ---------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------
Investment Companies - (1.5%)
H & Q Healthcare Investors Fund 10,249 149,892
H & Q Life Sciences Investors Fund 10,237 122,844
- ---------------------------------------------------------------------------------------
Total Investment Companies (Cost $314,807) 272,736
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
Annual Report 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Contracts Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name/Expiration Date/Strike Price
- ------------------------------------------------------------------------------------------------------------------------
Put Options Purchased - (0.1%)
Standard & Poor's 500 Index, Jan., $1,150 (Cost $155,150) 50 $ 13,750
- ------------------------------------------------------------------------------------------------------------------------
Total Investments - (100.3%) (Cost $12,970,996) 17,992,043
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Other Liabilities in Excess of Assets - (-0.3%)
- ------------------------------------------------------------------------------------------------------------------------
Receivable from Brokers for Securities Sold Short and Investment Securities Sold 1,755,557
Other Assets 114,000
Payable for Investment Securities Purchased (110,328)
Payable for Fund Shares Redeemed (66,048)
Net Amounts due to Affiliates (9,642)
Securities Sold Short, at Value (proceeds - $1,734,426) (1,650,875)
Other Liabilities (78,930)
- ------------------------------------------------------------------------------------------------------------------------
(46,266)
- ------------------------------------------------------------------------------------------------------------------------
Net Assets - (100.0%) (Applicable to 1,039,181 shares outstanding $.001 par value,
1,000,000,000 shares authorized) $ 17,945,777
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Offering and Redemption Price Per Share $ 17.27
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-Income producing security
ADR - American Depository Receipt
See accompanying notes to financial statements.
7
<PAGE>
Needham Growth Fund
- -------------------------------------------------------------------------------
Schedule of Securities Sold Short
December 31, 1998
Name of Issuer Shares Value
- -------------------------------------------------------------------------------
Common Stocks
Barra, Inc. 10,000 $ 236,250
May Department Stores Co. 5,000 301,875
ProBusiness Services, Inc. 7,500 341,250
SAP AG - Sponsored ADR 8,000 288,500
UBid, Inc. 2,000 213,250
Venator Group, Inc. 20,000 128,750
Wind River Systems, Inc. 3,000 141,000
- -------------------------------------------------------------------------------
Total Securities Sold Short (Proceeds $1,734,426) $ 1,650,875
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
8
<PAGE>
Annual Report 1998
- -------------------------------------------------------------------------------
Statement of Operations
For the year ended December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Investment Income
- --------------------------------------------------------------------------------------
<S> <C>
Interest $ 77,956
Dividends 66,861
- --------------------------------------------------------------------------------------
Total Investment Income 144,817
- --------------------------------------------------------------------------------------
Expenses
- --------------------------------------------------------------------------------------
Investment Advisory fee 230,585
Administration and Accounting fee 65,000
Distribution fees 46,685
Custodian fee 44,710
Legal fee 40,000
Directors' fees 33,000
Transfer Agent fee 30,000
Audit fee 27,000
Organization expenses 26,500
Shareholders' reports 20,055
Other expenses 70,397
- --------------------------------------------------------------------------------------
Total Expenses 633,932
- --------------------------------------------------------------------------------------
Expenses Waived and Reimbursable (172,712)
- --------------------------------------------------------------------------------------
Net Expenses 461,220
- --------------------------------------------------------------------------------------
Net Investment Loss (316,403)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investment Securities
- --------------------------------------------------------------------------------------
Net Realized Gain on Investment Securities 859,523
Net Realized Loss on Option Contracts (1,413,201)
Change in Unrealized Appreciation of Investment Securities 4,157,666
- --------------------------------------------------------------------------------------
Net Gain on Investment Securities 3,603,988
- --------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $3,287,585
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
Needham Growth Fund
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets
- -------------------------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) $ (316,403) $ 86,118
Net Realized Gain on Investment Securities 859,523 5,483,523
Net Realized Loss on Option Contracts (1,413,201) (2,314,395)
Change in Unrealized Appreciation (Depreciation)
of Investment Securities 4,157,666 (267,995)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 3,287,585 2,987,251
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Distributions From:
- -------------------------------------------------------------------------------------------------------------------------
Net Investment Income (6,838) (76,131)
Net Realized Gains (4,559) (3,428,667)
In Excess of Net Realized Gains -- (37,925)
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (11,397) (3,542,723)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions (1):
- -------------------------------------------------------------------------------------------------------------------------
Shares Issued 3,303,039 23,293,242
Shares Issued in Reinvestment of Distributions 10,402 3,271,954
Shares Redeemed (10,412,888) (18,620,014)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions (7,099,447) 7,945,182
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (3,823,259) 7,389,710
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net Assets
- -------------------------------------------------------------------------------------------------------------------------
Beginning of Year 21,769,036 14,379,326
End of Year $17,945,777 $21,769,036
- -------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed:
- -------------------------------------------------------------------------------------------------------------------------
Shares Issued 216,122 1,459,181
Shares Reinvested 768 218,994
Shares Redeemed (687,394) (1,160,681)
- -------------------------------------------------------------------------------------------------------------------------
(470,504) 517,494
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
Annual Report 1998
- --------------------------------------------------------------------------------
Financial Highlights
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
For a Share Outstanding Throughout each Year December 31, 1998 December 31, 1997 December 31, 1996(*)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $ 14.42 $ 14.49 $ 10.00
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Income From Investment Operations
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.30) 0.06 (0.11)
Net Gain on Securities (Realized and Unrealized) 3.16 2.26 5.27
- --------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 2.86 2.32 5.16
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Less Distributions
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.01) (0.05) --
Net Realized Gains -- (2.31) (0.67)
In Excess of Net Realized Gains -- (0.03) --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (0.01) (2.39) (0.67)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 17.27 $ 14.42 $ 14.49
- --------------------------------------------------------------------------------------------------------------------
Total Return 19.85% 15.66% 51.56%
- --------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (thousands) $ 17,946 $21,769 $14,379
- --------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.50%(a) 2.50%(a) 2.50%(a)
Ratio of Net Investment Income (Loss) to
Average Net Assets (1.72)%(a) 0.37%(a) (1.27)%(a)
Portfolio Turnover Rate 585.63% 724.08% 568.93%
</TABLE>
(a) Had certain waivers and reimbursements not been in effect, the ratio of
expenses to average net assets, for the years ended December 31, 1998, 1997
and 1996 would have been 3.44%, 3.29% and 4.60%, respectively and the ratio
of net investment income (loss) to average net assets, for the years ended
December 31, 1998, 1997 and 1996 would have been (2.66%), (0.42%) and
(3.37%), respectively.
(*) Fund commenced operations on January 1, 1996.
See accompanying notes to financial statements.
11
<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.
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. During the year ended December 31,
1998, the Fund reclassed $313,254 of accumulated net investment loss to
paid-in-capital. Net investment loss and net assets were not affected by this
reclassification. At December 31, 1998, the Fund had a capital loss carryforward
for federal income tax purposes of $838,712, which is available as a reduction
of future net capital gains realized before the year 2006.
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.
Use of Estimates: 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.
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 and to reimburse expenses of
the Fund in an amount that operates to limit annual operating expenses for the
year ended December 31, 1998 to not more than 2.50% of average daily net assets.
For the year ended December 31, 1998, the Advisor waived $172,712 of its fee.
Included in the Statement of Net Assets as of December 31, 1998, is net amounts
due to affiliates of $9,642, which represents investment advisory fee payable
net of amounts to be reimbursed to the Fund from the Advisor.
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., an affiliate of the Advisor, 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, 1998, the Fund incurred $46,685 of distribution fees, which were primarily
paid to Needham & Company, Inc.
12
<PAGE>
Annual Report 1998
- -------------------------------------------------------------------------------
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, 1998.
Purchases Sales
--------- -----
Long transactions $ 100,512,585 $103,864,205
Short sale transactions 36,799,189 34,007,594
- -----------------------------------------------------------
Total $137,311,774 $137,871,799
- -----------------------------------------------------------
At December 31, 1998, net unrealized appreciation of $5,104,598 was comprised of
gross unrealized appreciation and depreciation for financial reporting and
federal income tax purposes of $5,857,150 and $752,552, respectively.
6. Option Transactions
The Fund may write call options on securities it owns or has the right to
acquire, and may purchase put and call options on individual securities and
indices written by others. Put and call options give the holder the right to
sell or purchase, respectively, a specified amount of a security at a specified
price on a certain date.
Put and call options purchased are accounted for in the same manner as portfolio
securities. The cost of securities acquired through the exercise of call options
is increased by the premium paid. The proceeds from securities sold through the
exercise of put options are decreased by the premiums paid. Options on stock
indices differ from options on securities in that the exercise of an option on a
stock index does not involve delivery of the actual underlying security and is
settled in cash only.
When the Fund writes an option, the premium received by the Fund is recorded as
a liability and is subsequently adjusted to the current market value of the
option written. Premiums received from writing options which expire unexercised
are recorded by the Fund on the expiration date as realized gains from option
transactions. When the Fund enters into a closing purchase transaction, the Fund
realizes a gain or loss equal to the difference between the cost of a closing
purchase transaction and the premium received when the call option was written.
If a call option is exercised, the premium is added to the proceeds from the
sale of the underlying security in determining whether the Fund has a realized
gain or loss.
A summary of call options written by the Fund for the year ended December 31,
1998 is as follows:
Number of Premium
Options Written Contracts Received
- ------------------------------------------------------------
Options outstanding at
January 1, 1998 0 $0
Options written 250 110,496
Options expired (100) (58,448)
Options exercised (150) (52,048)
Options terminated in
closing transactions 0 0
- ------------------------------------------------------------
Options outstanding at
December 31, 1998 0 $0
- ------------------------------------------------------------
7. Short Sale Transactions
During the year ended December 31, 1998, the Fund sold securities short. An
equivalent amount of securities owned by the Fund are segregated as collateral
while the short sale is outstanding. At December 31, 1998, the market value of
securities separately segregated to cover short positions was $1,809,375. 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, 1998
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, 1998 net assets consisted of:
Paid-in-Capital $13,437,341
Accumulated Net
Realized Loss (596,162)
Net Unrealized Appreciation
of Investment Securities 5,104,598
- ----------------------------------------------------------
Total Net Assets $17,945,777
- ----------------------------------------------------------
13
<PAGE>
Needham Growth Fund
- -------------------------------------------------------------------------------
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of 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, 1998, and the related statements of operations,
changes in net assets and financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The financial
statements of Needham Growth Fund as of December 31, 1997, were audited by other
auditors whose report dated February 23, 1998, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1998, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Needham Growth Fund as of December 31, 1998, the results of its operations,
changes in its net assets and financial highlights for the year then ended, in
conformity with generally accepted accounting principles.
/s/ Arthur Anderson LLP
-----------------------
Arthur Anderson LLP
New York, New York
February 19, 1999
14
<PAGE>
Annual Report 1998
- -------------------------------------------------------------------------------
Tax Information (unaudited)
During 1998, the Fund made the following distribution which you may have
received depending on your ownership at the time of the distribution:
Long-Term
Record Payment Ordinary Capital
Date Date Total Income Gains
- -------------------------------------------------------
09/14/98 09/17/98 $0.010 $0.006 $0.004
- -------------------------------------------------------
The distribution of ordinary income paid to you in cash or reinvested in your
account during 1998 is taxable as ordinary income for Federal income tax
purposes.
Distributions of long-term capital gains are taxable as such whether paid to you
in cash or reinvested in your account during 1998, regardless of the length of
time shares were held by you. This distribution of long-term capital gains is
subject to a maximum tax rate of 20 percent; the Fund made no distributions
subject to a maximum tax rate of 28 percent.
15
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[NEEDHAM LOGO]
Needham Growth Fund
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Investment Advisor:
Needham Investment Management L.L.C.
445 Park Avenue
New York, NY 10022-2606
President
- ---------
John C. Michaelson
Executive Vice President
and Portfolio Manager
- ------------------------
Peter J. R. Trapp
Directors
- ---------
George A. Needham
John C. Michaelson
Roger W. Johnson
James P. Poitras
F. Randall Smith
Distributor:
Needham & Company, Inc.
445 Park Avenue
New York, NY 10022-2606
212-371-8300
Administrator, Shareholder Servicing
Agent and Transfer Agent:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
1-800-625-7071
Custodian:
PNC Bank, N.A.
200 Stevens Drive
Airport Business Center
Lester, PA 19113
Counsel:
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
Independent Accountants:
Arthur Andersen LLP
1345 Avenue of the Americas
New York, NY 10105
