SEMIANNUAL
REPORT
NEEDHAM GROWTH FUND
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SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
[GRAPHIC OMITTED]
<PAGE>
[GRAPHIC OMITTED]
Needham Growth Fund
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Semiannual Report
for the six months ended June 30, 1999
(unaudited)
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SEMIANNUAL REPORT 1999
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THE NEEDHAM GROWTH FUND -- SEEKING TO BUILD WEALTH
FOR LONG-TERM INVESTORS.
CONTENTS
Letter from the Advisor 2
Statement of Net Assets 6
Schedule of Securities Sold Short 9
Statement of Operations 10
Statements of Changes in Net Assets 11
Financial Highlights 12
Notes to Financial Statements 13
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NEEDHAM GROWTH FUND
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SIX MONTHS RESULTS
JUNE 30, 1999
Dear Shareholders, Friends of Needham, or Prospective Shareholders,
We are pleased to report performance results for the Needham Growth Fund
("NEEGX") for the quarter ended June 30, 1999 ("2Q99"), for the period ended
June 30, 1999 ("YTD"), the year ended June 30, 1999 ("1 Year"), the three-year
period ended June 30, 1999 ("3 Years") and since the inception of the Fund
through June 30, 1999 ("Life of Fund"). Our performance relative to the major
indices for these periods is as follows:
<TABLE>
<CAPTION>
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BENCHMARKS 2Q99 YTD 1 YEAR 3 YEARS (6) LIFE OF FUND (6)
---------------- ------ ------ ------ ----------- --------------------
<S> <C> <C> <C> <C> <C>
Needham Growth Fund (1) 21.23% 25.30% 35.27% 22.99% (7) 31.87% (8)
Dow Jones Industrial Average (2) 12.54% 19.49% 24.70% 27.01% 26.71%
S&P 500 Index (3) 7.05% 11.67% 22.76% 29.04% 27.91%
S&P 400 Midcap Index (4) 14.16% 6.22% 17.17% 22.43% 21.99%
Russell 2000 Index (5) 15.52% 8.47% 1.46% 11.23% 12.72%
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</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 IS A BROAD UNMANAGED INDEX COMPRISED OF THE SMALLEST 2000 NASDAQ
COMPANIES AND IS NOT AVAILABLE FOR PURCHASE.
6. COMPOUND ANNUAL GROWTH RATE. ASSUMES ALL DIVIDENDS ARE REINVESTED IN SHARES
OF THE FUND.
7. TOTAL RETURN FOR THE 3 YEARS WAS 86.04%, ASSUMING ALL DIVIDENDS WERE
REINVESTED IN SHARES OF THE FUND.
8. TOTAL RETURN SINCE INCEPTION WAS 163.25%, ASSUMING ALL DIVIDENDS WERE
REINVESTED IN SHARES OF THE FUND. THE INCEPTION DATE OF THE FUND WAS 1/1/96.
NOTE: THE RETURNS SHOWN ABOVE ARE HISTORICAL AND REFLECT CHANGES IN SHARE PRICE,
REINVESTED DIVIDENDS AND ARE NET OF EXPENSES. INVESTMENT RESULTS AND THE
PRINCIPAL VALUE OF AN INVESTMENT WILL VARY. PAST PERFORMANCE NOTED ABOVE
DOES NOT GUARANTEE FUTURE RESULTS. WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. SINCE INCEPTION, THE FUND'S
ADVISER HAS ABSORBED CERTAIN EXPENSES OF THE FUND, WITHOUT WHICH RETURNS
WOULD HAVE BEEN LOWER.
BACKGROUND
The second quarter of 1999 was characterized by a revival in the cyclical
stocks, a newly found interest in the micro and small cap stocks, and the first
reevaluation of the internet stocks. In this sector, the new issue market
struggled for about a month and some internet stocks had a 50% retracement from
their all time highs. As the market sought a balance between growth at any
price, growth at a reasonable price [GARP] and value, we lived through a cycle
of vicious rolling sector rotations and sell offs. Since that time, the new
issue market has become almost frenzied, as an ever increasing number of lower
quality issuers access the capital markets. The dichotomy for us is when will
the "new era" and the traditional valuation tools converge or will we continue
to live with a bifurcated evaluation process? My sense is that convergence will
happen soon!
The "Goldilocks Economy" scenario, about which we wrote in our January letter,
has continued and is now embraced by an ever increasing number of economists.
Real GDP growth continues at around 4%, productivity growth has surged again and
core inflation rates have moved lower; oil and some industrial commodity prices
have risen but agricultural commodity and gold prices continue to decline. The
dollar has strengthened (especially against the European currency) and bond
yields have backed up 100 basis points, leading the bond market experts to
become concerned about the tight labor statistics and the possibility of wage
inflation. The equity markets, however, are joining the "new era" outlook and
banking on strong second quarter earnings growth and continued strong prospects
in the second half.
2
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SEMIANNUAL REPORT 1999
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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. These companies normally have
earnings growth of at least 15-20%, 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 June 30, 1999, NGF's sector holdings consisted of the following:
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Technology/Telecommunications 69.77%
Retail/Small Business Services 6.3%
Short-Term Investments 0.01%
Media/Leisure 10.25%
Healthcare/Medical Devices/Pharmaceuticals 13.67%
The market value of stocks sold short represented approximately 10.63% 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
AT&T Corp.-Liberty Media Group, Series A, Hadco Corp., Quintiles Transnational
Corp., Analog Devices, Inc., Park Electrochemical Corp., Kronos, Inc., Galileo
Technology Ltd., Advanced Micro Devices, Inc., USA Networks, Inc., and Atmel
Corp.
INVESTMENT ANALYSIS
The "new age economy" sector, in general, continues to offer extremely
attractive long-term opportunities. As the quarter progressed, we have taken
some long-term profits in mid to large cap names and repositioned ourselves in
mid to small cap names, especially in technology. We have also focused on
quality companies that have been in transition, either product or management.
These types of stocks provide less downside risk and good upside potential. We
have also been active on the short side of the market, especially in internet
and software stocks.
In the technology arena, we have added to our contract manufacturing exposure
primarily in printed circuit board assembly and manufacturing, again focusing on
turnarounds and consolidations. In the software area we have favored
infrastructure software such as middleware over enterprise application software,
and together with the internet area, we have found this space especially
lucrative on the short-side. In the semiconductor manufacturing space, we have
added to our exposure in both programmable logic and other memory devices,
focusing on the secondary names where the leverage is greatest. In
communications semiconductors, we have maintained our exposure as indeed we have
in wireless communications equipment. In the semiconductor capital equipment
space, we have again increased our exposure to the small and mid cap names
focusing on wafer processing applications and photo lithography. We continue to
maintain significant positions in networking equipment and have significantly
increased our commitment to the data storage area. We ended the quarter with
69.77% of the portfolio in technology and communications, up from 56.6% at the
end of the first quarter of 1999.
The media, leisure, entertainment, cable and content stocks continued their
spectacular gains during the second quarter after consolidating their 1997/98
gains in the first quarter of 1999. The ATT/TCI Cable merger and Charter Cable
acquisitions, as well as the ATT and Comcast bidding war for Media One created
all time highs in total enterprise and cable subscriber valuations. With many of
our holdings becoming long term, we were able to take profits and scale back our
exposure to these lofty valuations. We also took some profits in Liberty Media,
our largest position, and have reinvested the proceeds in the international
cable area where evaluations are still modest. This is one sector where we have
maintained a consistent focus on the mid to large cap names. As I stated in our
last quarterly
3
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NEEDHAM GROWTH FUND
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letter, it is difficult for the Fund to have large internet holdings as they do
not fit our investment discipline. Nevertheless, we have continued to focus on
indirect internet themes and the large media and content companies that are
establishing joint-ventures or acquiring internet companies. We ended the
quarter with 10.25% of the portfolio in this area, down from 22.2% at the end of
the prior quarter.
In the healthcare, drugs, medical devices and biotechnology area, we continue to
focus on the healthcare outsourcing area, both through electronic data exchange
and information. We are consistently searching for undervalued and under
appreciated stocks in this area, but it has required patience! We ended the
quarter with a 13.67% exposure, up slightly from 11% at the end of the first
quarter.
In retailing and business services, we continue to maintain a small exposure,
mostly in business services companies with internet strategies. We have also
focused on small cap retailing ideas for Generation Y. Group exposure had risen
slightly from 5% to 6.3% at the end of the quarter.
OUTLOOK
As we survey the success of the economy, the stock market and the Needham Growth
Fund returns during the first half of 1999, it would be easy to become
complacent, look across the valley that could characterize the third quarter to
the grand finale for the 20th century. Let us pause and survey the economic and
corporate outlook: the financial market situation seems perfect -- a budget
surplus, no inflation and persistent profit growth; benign deflation -- falling
prices supported by technological innovation and economic growth; a muted
business cycle with low inventories again from low inflation and improved
information technology; an improving corporate profit picture and finally a
neutral Fed monetary stance. So what is wrong with this near perfect picture? It
is all already discounted in the financial markets and there is too much
complacency. The near term challenge will be to husband and retain our hard
earned gains as the market digests 2nd quarter earnings and responds to the
challenge of the next six months. So let us review those challenges as to be
"forewarned is forearmed".
Any unforeseen rise in the consumer or producer price indices in the United
States will lead to a reevaluation of interest rates by the Fed -- so would a
serious shortage of labor as this impacts not only economic output, but also
consumer demand. Another risk is a significant overseas economic revival that
would exert inflationary pressures, weaken the dollar, raise the cost of imports
and create competitive markets for the cheap capital available in the United
States. In addition, the continued speculative excesses in the equity market
could engender a serious market setback. On the technology side, we are
concerned about the impact of the "Free-PC", as well as the potential slow down
in spending on information technology, software and storage as we approach Y2K.
On the healthcare side, we note the continued uncertainty about medicare reforms
and election platforms promising politically expedient but economically onerous
solutions. On the cable side, demand for "open access" by local municipal and
county authorities may gather speed, forcing the Federal Communications
Committee (FCC) to intercede. Finally, no investment letter would be complete
without a comment on the new paradigm evaluations in the internet space. We have
already seen one healthy correction during the last quarter. The key is to focus
on the best business models. As we stated last quarter, a rising tide lifts all
ships, but currently there is a huge excess of leaky vessels! Patience and
discipline will be richly rewarded, so will the short sellers!
While we are optimistic and constructive on the market as we approach the new
millenium, we believe the market needs to consolidate its first half gains,
digest the second quarter earnings results and focus on the constructive
international outlook and the success of the domestic economic and business
environment before moving to new valuation levels. We are particularly pleased
by the broadening out of the market as investors have favored small to mid-cap
stocks (our primary focus) over large cap growth and momentum stocks and index
funds. We do best in a stock pickers' market! We look forward to a successful
and prosperous second half of 1999. We, as managers or prospective managers of
your money, are also your partners as investors. We thank you for your interest,
support, and confidence and for investing with us.
If you have any questions, thoughts or concerns, please do not hesitate to call
me at 212/705-0327 or e-mail me at [email protected].
Yours sincerely,
/S/ PETER J.R. TRAPP
Peter J. R. Trapp
Portfolio Manager
4
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SEMIANNUAL REPORT 1999
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NEEDHAM GROWTH FUND
COMPARATIVE INVESTMENT RETURNS
An initial investment of $10,000 as of January 1, 1996 (inception)
would be worth $26,325 as of June 30, 1999
[GRAPHIC OMITTED}
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Needham S&P 400 S&P 500 RUSSELL 2000
Growth Fund MIDCAP Index DJI AVERAGE Index Index
<S> <C> <C> <C> <C> <C>
1/2/96 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00
1/31/96 $10,850.50 $10,134.00 $10,543.60 $10,326.20 $ 9,981.33
2/29/96 $12,160.00 $10,460.40 $10,720.10 $10,397.80 $10,283.60
3/29/96 $12,570.00 $10,572.00 $10,918.50 $10,480.10 $10,468.40
4/30/96 $13,530.00 $10,882.80 $10,883.20 $10,620.90 $11,022.60
5/31/96 $14,430.00 $11,012.20 $11,028.00 $10,863.60 $11,452.00
6/28/96 $14,150.00 $10,833.60 $11,050.40 $10,888.10 $10,969.70
7/31/96 $13,800.00 $10,090.00 $10,804.70 $10,390.00 $10,001.00
8/30/96 $14,320.00 $10,656.00 $11,053.50 $10,585.50 $10,566.80
9/30/96 $15,070.00 $11,105.90 $11,495.10 $11,158.90 $10,962.80
10/31/96 $15,000.00 $11,124.70 $11,782.80 $11,450.50 $10,778.50
11/29/96 $15,281.40 $11,733.80 $12,785.90 $12,290.70 $11,207.10
12/31/96 $15,155.90 $11,732.50 $12,601.40 $12,026.40 $11,476.10
1/31/97 $15,752.10 $12,159.80 $13,314.30 $12,763.80 $11,692.60
2/28/97 $15,835.70 $12,043.70 $13,440.60 $12,839.40 $11,395.10
3/31/97 $15,909.00 $11,514.90 $12,865.60 $12,292.30 $10,841.50
4/30/97 $15,950.80 $11,800.90 $13,697.10 $13,010.20 $10,855.50
5/30/97 $16,662.00 $12,814.90 $14,326.50 $13,772.30 $12,050.50
6/30/97 $16,923.50 $13,158.70 $14,994.40 $14,370.80 $12,544.50
7/31/97 $17,885.80 $14,444.50 $16,068.80 $15,493.50 $13,117.70
8/29/97 $18,063.60 $14,412.90 $14,895.90 $14,603.40 $13,401.00
9/30/97 $18,600.60 $15,224.90 $15,526.80 $15,379.70 $14,362.80
10/31/97 $17,944.20 $14,546.90 $14,543.50 $14,849.40 $13,712.10
11/28/97 $17,753.70 $14,747.10 $15,288.10 $15,511.50 $13,606.40
12/31/97 $17,526.70 $15,303.40 $15,454.50 $15,755.50 $13,831.10
1/30/98 $17,891.30 $14,997.20 $15,451.10 $15,915.40 $13,610.50
2/27/98 $19,374.20 $16,222.50 $16,700.30 $17,036.70 $14,616.30
3/31/98 $18,730.00 $16,939.00 $17,196.80 $17,887.60 $15,212.80
4/30/98 $19,276.90 $17,232.40 $17,711.90 $18,049.90 $15,282.80
5/29/98 $18,766.40 $16,441.00 $17,392.50 $17,710.10 $14,451.40
6/30/98 $19,460.00 $16,529.60 $17,494.30 $18,408.60 $14,475.70
7/31/98 $18,732.20 $16,460.20 $18,247.80 $19,092.20 $13,769.80
8/31/98 $15,024.60 $13,398.70 $15,532.70 $16,334.70 $11,100.40
9/30/98 $16,665.80 $14,648.80 $16,183.10 $17,381.20 $11,959.20
10/31/98 $18,547.00 $15,955.00 $17,738.00 $18,794.00 $12,498.00
11/30/98 $18,693.00 $16,751.00 $18,868.00 $19,932.00 $13,107.00
12/31/98 $21,078.00 $18,688.00 $18,932.00 $20,957.00 $13,890.00
1/31/99 $21,998.00 $18,041.00 $19,402.00 $21,961.00 $14,106.00
2/28/99 $20,718.00 $17,098.00 $19,341.00 $21,279.00 $12,970.00
3/31/99 $21,714.00 $17,576.00 $20,364.00 $22,130.00 $13,610.00
4/30/99 $22,535.00 $18,962.00 $22,461.00 $22,987.00 $14,315.00
5/29/99 $24,059.00 $19,045.00 $22,035.00 $22,445.00 $14,560.00
6/30/99 $26,325.00 $20,065.00 $22,919.00 $23,690.00 $15,214.00
</TABLE>
The above illustration compares a $10,000 investment in the Needham Growth Fund
on January 1, 1996 to a $10,000 investment in the noted benchmarks on that date.
All dividends and capital gain distributions are reinvested.
The Fund's performance takes into account all applicable fees and expenses. The
benchmarks are widely accepted unmanaged indices of overall market performance
and do not take into account charges, fees and other expenses.
Past performance is not predictive of future performance. The Fund's share price
and return will vary so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
5
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NEEDHAM GROWTH FUND
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Statement of Net Assets (UNAUDITED)
JUNE 30, 1999
SHARES VALUE
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COMMON STOCKS - (104.1%)
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BROADCASTING & MEDIA - (10.8%)
AT&T Corp.-Liberty Media Group, Series A*(DAGGER) 40,000 $ 1,470,000
News Corp., Ltd., Sponsored ADR 20,000 706,250
USA Networks, Inc.* 20,000 802,500
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2,978,750
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BUSINESS SERVICES - (3.4%)
Convergys Corp.* 20,000 385,000
Harte-Hanks, Inc. 20,000 542,500
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927,500
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CABLE TV - (8.3%)
Cable and Wireless Public Limited Co.* 10,000 396,250
Cablevision Systems Corp., Class A 8,000 560,000
Jones Intercable, Inc. Class A* 10,000 490,000
United International Holdings, Class A* 7,000 473,375
United Pan Europe Communications* 7,000 386,750
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2,306,375
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COMPUTER HARDWARE - (0.8%)
Compaq Computer Corp. 10,000 236,875
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COMPUTER SOFTWARE - (8.4%)
Aspen Technology, Inc.*(DAGGER) 20,000 235,000
BEA Systems, Inc.* 20,000 571,250
CBT Group Public Limited Co.* 20,000 330,000
Kronos, Inc.*(DAGGER) 20,000 910,000
Novell, Inc.* 10,000 265,000
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2,311,250
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CONTRACT MANUFACTURING & MATERIALS - (13.6%)
Artesyn Technologies, Inc.* 10,000 221,875
CMC Industries, Inc.* 30,000 204,375
Hadco Corp.*(DAGGER) 30,000 1,192,500
Park Electrochemical Corp. 31,900 917,125
Sanmina Corp.* 10,000 758,750
SCI Systems, Inc.* 10,000 475,000
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3,769,625
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DATA PROCESSING - (1.8%)
First Data Corp.(DAGGER) 10,000 489,375
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ELECTRONIC DESIGN AUTOMATION - (0.7%)
Cadence Design Systems, Inc.* 15,000 191,250
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ELECTRONICS & INSTRUMENTATION - (1.9%)
EMS Technologies, Inc.* 20,000 290,000
Lecroy Corp.* 10,000 236,875
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526,875
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ELECTRONICS & STORAGE - (2.2%)
Data General Corp.* 20,000 291,250
Overland Data, Inc.* 50,000 318,750
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610,000
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HEALTH CARE - (7.4%)
First Health Group Corp.* 20,000 431,250
IDX Systems Corp.* 5,000 112,813
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
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SEMIANNUAL REPORT 1999
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SHARES VALUE
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IMS Health, Inc.* 10,000 $ 312,500
Quintiles Transnational Corp.*(DAGGER) 25,000 1,050,000
Women First Healthcare, Inc.* 10,000 132,500
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2,039,063
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HOSPITAL & PHYSICIAN MANAGEMENT - (1.2%)
Omnicare, Inc. 10,000 126,250
Phycor, Inc.* 27,500 203,672
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329,922
- --------------------------------------------------------------------------------
INTERNET - (0.0%)
Ask Jeeves, Inc.* 100 1,400
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MEDICAL DEVICES - (4.8%)
CONMED Corp.* 15,000 459,375
SeaMED Corp.* 20,000 235,000
Varian Medical Systems, Inc. 25,000 631,250
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1,325,625
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NETWORKING & TELECOMMUNICATIONS EQUIPMENT - (4.9%)
3Com Corp.* 20,000 533,750
Advanced Fibre Communications* 30,000 468,750
Premisys Communications, Inc.* 50,000 365,625
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1,368,125
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RETAILING - (3.3%)
Happy Kids, Inc.* 15,000 130,313
McNaughton Apparel Group, Inc.* 20,000 167,500
PETCO Animal Supplies, Inc.* 20,000 315,000
West Marine, Inc.* 20,000 291,250
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904,063
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SEMI-CONDUCTOR DEVICES - (19.4%)
Actel Corp.*(DAGGER) 50,000 737,500
Advanced Micro Devices, Inc.* 45,000 812,812
Analog Devices, Inc.*(DAGGER) 20,000 1,003,750
Atmel Corp.* 30,000 785,624
Cypress Semi-Conductor Corp.* 20,000 330,000
Exar Corp.* 10,000 247,500
Galileo Technology Ltd.* 20,000 906,250
Integrated Device Technology, Inc.* 50,000 543,750
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5,367,186
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SEMI-CONDUCTORS CAPITAL EQUIPMENT - (11.2%)
Applied Science and Technology, Inc.* 30,000 675,000
Cohu, Inc. 10,000 353,750
Electroglas, Inc.* 10,000 200,000
ETEC Systems, Inc.* 10,000 332,500
FSI International, Inc.* 20,000 166,250
Helix Technology Corp. 10,000 239,375
Mattson Technology, Inc.* 10,000 126,250
Photronics, Inc.* 10,000 245,000
Varian Semiconductor Equipment Associates, Inc.* 45,000 765,000
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3,103,125
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TOTAL COMMON STOCKS (Cost $20,404,015) 28,786,384
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
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NEEDHAM GROWTH FUND
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Statement of Net Assets (Continued)(UNAUDITED)
JUNE 30, 1999
SHARES VALUE
- --------------------------------------------------------------------------------
INVESTMENT COMPANIES - (1.0%)
H & Q Healthcare Investors Fund 10,249 $ 149,251
H & Q Life Sciences Investors Fund 10,237 127,963
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TOTAL INVESTMENT COMPANIES (Cost $314,807) 277,214
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NUMBER OF
CONTRACTS
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NAME/EXPIRATION DATE/STRIKE PRICE
- --------------------------------------------------------------------------------
CALL OPTIONS PURCHASED - (0.8%)
Natural Gas Index, July $140 50 52,500
Oil Service Sector Index, July $75 50 28,750
Russell 2000 Index, July $450 100 126,250
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TOTAL CALL OPTIONS PURCHASED (Cost $249,975) 207,500
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SHARES
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - (0.0%)
- --------------------------------------------------------------------------------
Provident Institutional Funds - TempCash Portfolio 2,166 2,166
The RBB Sansom Street Money Market Portfolio 2,166 2,166
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TOTAL SHORT-TERM INVESTMENTS (Cost $4,332) 4,332
- --------------------------------------------------------------------------------
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TOTAL INVESTMENTS - (105.9%)
(Cost $20,973,129)(DAGGER)(DAGGER) 29,275,430
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OTHER LIABILITIES IN EXCESS OF ASSETS - (-5.9%)
- --------------------------------------------------------------------------------
Receivable from Brokers for Securities Sold Short 2,691,683
Receivable for Investment Securities Sold 1,732,525
Other Assets 65,943
Securities Sold Short at Value (proceeds - $2,691,683) (3,482,719)
Payable for Investment Securities Purchased (1,595,873)
Payable for Fund Shares Redeemed (898,030)
Net Amounts due to Affiliates (92,055)
Other Liabilities (40,954)
- --------------------------------------------------------------------------------
(1,619,480)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSETS - (100.0%)(Applicable to 1,277,998 shares
outstanding, $.001 par value, 1,000,000,000
shares authorized) $27,655,950
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 21.64
*NON-INCOME PRODUCING SECURITY.
(DAGGER)SECURITY POSITION IS EITHER ENTIRELY OR PARTIALLY HELD IN A SEGREGATED
ACCOUNT AS COLLATERAL FOR SECURITIES SOLD SHORT.
(DAGGER)(DAGGER) APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES.
ADR - AMERICAN DEPOSITORY RECEIPT.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
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SEMIANNUAL REPORT 1999
- --------------------------------------------------------------------------------
Schedule of Securities Sold Short (UNAUDITED)
JUNE 30, 1999
NAME OF ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS
Applied Micro Circuits Corp. 3,000 $ 246,750
Brocade Communications Systems, Inc. 3,500 337,530
Critical Path, Inc. 3,000 165,938
Friedman, Billings, Ramsey Group, Inc. 10,000 118,750
Messagemedia, Inc. 20,000 380,000
Micron Technology, Inc. 10,000 403,125
Online Resources & Communications Corp. 15,000 203,438
Powerwave Technologies, Inc. 15,000 483,750
Rambus, Inc. 5,000 460,938
Wit Capital Group, Inc. 5,000 170,000
Worldgate Communications, Inc. 10,000 512,500
- --------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT (Proceeds $2,691,683) $ 3,482,719
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
NEEDHAM GROWTH FUND
- --------------------------------------------------------------------------------
Statement of Operations (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------------
Interest $ 43,043
Dividends 11,651
- --------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 54,694
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
Investment Advisory fee 131,984
Administration and Accounting fee 32,500
Distribution fees 26,397
Legal fee 22,684
Custodian fee 19,243
Transfer Agent fee 15,000
Audit fee 13,162
Organization expenses 13,141
Directors' fees 11,945
Shareholders' reports 9,776
Other expenses 22,578
- --------------------------------------------------------------------------------
TOTAL EXPENSES 318,410
- --------------------------------------------------------------------------------
Expenses Waived and Reimbursable (54,443)
- --------------------------------------------------------------------------------
NET EXPENSES 263,967
- --------------------------------------------------------------------------------
NET INVESTMENT LOSS (209,273)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Net Realized Gain on Investment Securities 3,743,987
Net Realized Loss on Option Contracts (936,979)
Change in Unrealized Appreciation (Depreciation)
of Investment Securities 2,406,667
- --------------------------------------------------------------------------------
NET GAIN ON INVESTMENT SECURITIES 5,213,675
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,004,402
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
SEMIANNUAL REPORT 1999
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- --------------------------------------------------------------------------------
OPERATIONS:
- --------------------------------------------------------------------------------
Net Investment Loss $ (209,273) $ (316,403)
Net Realized Gain on Investment Securities 3,743,987 859,523
Net Realized Loss on Option Contracts (936,979) (1,413,201)
Change in Unrealized Appreciation
(Depreciation) of Investment Securities 2,406,667 4,157,666
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 5,004,402 3,287,585
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
- --------------------------------------------------------------------------------
Net Investment Income -- (6,838)
Net Realized Gains -- (4,559)
- --------------------------------------------------------------------------------
Total Distributions -- (11,397)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1):
- --------------------------------------------------------------------------------
Shares Issued 8,883,073 3,303,039
Shares Issued in Reinvestment of Distributions -- 10,402
Shares Redeemed (4,177,302) (10,412,888)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 4,705,771 (7,099,447)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 9,710,173 (3,823,259)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of Period 17,945,777 21,769,036
End of Period $27,655,950 $17,945,777
- --------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED:
- --------------------------------------------------------------------------------
Shares Issued 446,410 216,122
Shares Reinvested -- 768
Shares Redeemed (207,593) (687,394)
- --------------------------------------------------------------------------------
238,817 (470,504)
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
NEEDHAM GROWTH FUND
- --------------------------------------------------------------------------------
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, DECEMBER 31, DECEMBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD (UNAUDITED) 1998 1997 1996(*)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.27 $ 14.42 $ 14.49 $ 10.00
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
Net Investment Loss (0.11) (0.30) 0.06 (0.11)
Net Gain on Securities (Realized and Unrealized) 4.48 3.16 2.26 5.27
- -------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 4.37 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 PERIOD $ 21.64 $ 17.27 $ 14.42 $ 14.49
- ----------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 25.30%(DAGGER)(DAGGER) 19.85% 15.66% 51.56%
- -------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $27,656 $17,946 $21,769 $14,379
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.50%(DAGGER) 2.50% 2.50% 2.50%
Ratio of Expenses to Average Net Assets
(Excluding Waivers and Reimbursements) 3.02%(DAGGER) 3.44% 3.29% 4.60%
Ratio of Net Investment Income (Loss) to
Average Net Assets (1.98)%(DAGGER) (1.72)% 0.37% (1.27)%
Ratio of Net Investment Income (Loss)
to Average Net Assets (Excluding Waivers
and Reimbursements) (2.50)%(DAGGER) (2.66)% (0.42)% (3.37)%
Portfolio Turnover Rate 77.69%(DAGGER)(DAGGER) 585.63% 724.08% 568.93%
</TABLE>
(DAGGER) ANNUALIZED
(DAGGER)(DAGGER) NON-ANNUALIZED
* FUND COMMENCED OPERATIONS ON JANUARY 1, 1996.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
SEMIANNUAL REPORT 1999
- --------------------------------------------------------------------------------
Notes to Financial Statements (UNAUDITED)
1. ORGANIZATION
Needham Growth Fund (the "Fund") is a portfolio of The Needham Funds, Inc.,
which is registered under the Investment Company Act of 1940 as a
non-diversified, open-end management investment company. The Needham Funds, Inc.
was organized as a Maryland corporation on October 12, 1995 and commenced
operations on January 1, 1996.
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 the 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
six months ended June 30, 1999 to not more than 2.50% of average daily net
assets. For the six months ended June 30, 1999, the Advisor waived $54,443 of
its fee. Included in the Statement of Net Assets as of June 30, 1999, is net
amounts due to affiliates of $92,055, which represents investment advisory and
distribution fees 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 six months ended June
30, 1999, the Fund incurred $26,397 of distribution fees, which were primarily
paid to Needham & Company, Inc.
13
<PAGE>
NEEDHAM GROWTH FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued) (UNAUDITED)
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 six months ended June 30, 1999.
Purchases Sales
- --------------------------------------------------------------------------------
Long transactions $ 16,867,015 $16,278,593
Short sale transactions 20,534,820 21,492,077
- --------------------------------------------------------------------------------
Total $37,401,835 $37,770,670
- --------------------------------------------------------------------------------
At June 30, 1999, net unrealized appreciation of $7,511,265 was comprised of
gross unrealized appreciation and depreciation for financial reporting and
federal income tax purposes of $8,812,311 and $1,301,046, 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.
No options were written by the Fund for the six months ended June 30, 1999.
7. SHORT SALE TRANSACTIONS
During the six months ended June 30, 1999, 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 June 30, 1999, the market value of
securities separately segregated to cover short positions was $6,442,261. For
financial statement purposes, an amount equal to the settlement amount is
included in the Statement of Net Assets as an asset and an equivalent liability.
The amount of the liability is subsequently marked-to-market to reflect the
current value of the short position. Securities sold short at June 30, 1999 and
their related market values and proceeds are set forth in the Schedule of
Securities Sold Short.
8. COMPONENTS OF NET ASSETS
At June 30, 1999 net assets consisted of:
Paid-in-Capital $18,456,366
Accumulated Net
Realized Loss (522,527)
Undistributed Net Realized Gains 2,210,846
Net Unrealized Appreciation
of Investment Securities 7,511,265
- --------------------------------------------------------------------------------
Total Net Assets $27,655,950
- --------------------------------------------------------------------------------
14
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[GRAPHIC OMITTED]
NEEDHAM GROWTH FUND
445 PARK AVENUE
NEW YORK, NEW YORK 10022-2606
1-800-625-7071
INVESTMENT ADVISER:
NEEDHAM INVESTMENT MANAGEMENT L.L.C.
445 PARK AVENUE
NEW YORK, NY 10022-2606
PRESIDENT
----------
JOHN C. MICHAELSON
EXECUTIVE VICE PRESIDENT
AND PORTFOLIO MANAGER
-------------------------
PETER J. R. TRAPP
DIRECTORS
-------------------
GEORGE A. NEEDHAM
JOHN C. MICHAELSON
ROGER W. JOHNSON
JAMES P. POITRAS
F. RANDALL SMITH
DISTRIBUTOR:
NEEDHAM & COMPANY, INC.
445 PARK AVENUE
NEW YORK, NY 10022-2606
212-371-8300
ADMINISTRATOR, SHAREHOLDER SERVICING
AGENT AND TRANSFER AGENT:
PFPC INC.
400 BELLEVUE PARKWAY
WILMINGTON, DE 19809
1-800-625-7071
CUSTODIAN:
PFPC TRUST COMPANY
400 BELLEVUE PARKWAY
WILMINGTON, DE 19809
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
