ANNUAL
REPORT
NEEDHAM GROWTH FUND
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SEEKING TO BUILD WEALTH FOR LONG-TERM INVESTORS.
YEAR ENDED DECEMBER 31, 1999
[NEEDHAM FUNDS LOGO OMITTED]
WWW.NEEDHAMCO.COM
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[NEEDHAM FUNDS LOGO OMITTED]
Needham Growth Fund
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
WWW.NEEDHAMCO.COM
Annual Report
for the year ended December 31, 1999
CONTENTS
LETTER FROM THE ADVISOR 1
STATEMENT OF NET ASSETS 7
SCHEDULE OF SECURITIES SOLD SHORT 10
STATEMENT OF OPERATIONS 11
STATEMENTS OF CHANGES IN NET ASSETS 12
FINANCIAL HIGHLIGHTS 13
NOTES TO FINANCIAL STATEMENTS 14
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Performance
One year ended
December 31, 1999
[BAR GRAPH OMITTED]
plot points as follows:
NEEDHAM GROWTH FUND 79.72%
S&P 500 (1) INDEX 21.04%
S&P MIDCAP (2) INDEX 14.70%
RUSSELL 2000 (3) INDEX 21.35%
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Performance since Inception(4)
through
December 31, 1999
Cumulative
[BAR GRAPH OMITTED]
plot points as follows:
NEEDHAM GROWTH FUND 278.00%
S&P 500 (1)INDEX 155.20%
S&P MIDCAP (2) INDEX 115.37%
RUSSELL 2000 (3) INDEX 69.04%
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Performance since Inception(4)
through
December 31, 1999
Annualized
[BAR GRAPH OMITTED]
plot points as follows:
NEEDHAM GROWTH FUND 39.36%
S&P 500 (1) INDEX 26.33%
S&P MIDCAP (2) INDEX 21.10%
RUSSELL 2000 (3) INDEX 13.99%
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1. S&P 500 STOCK INDEX IS A BROAD UNMANAGED MEASURE OF THE U.S. STOCK MARKET.
2. S&P 400 MIDCAP STOCK INDEX IS A BROAD UNMANAGED MEASURE OF THE U.S. STOCK
MARKET.
3. RUSSELL 2000 IS A BROAD UNMANAGED INDEX COMPRISED OF THE SMALLEST 2000 NASDAQ
COMPANIES.
4. THE INCEPTION DATE OF THE FUND WAS 1/1/96.
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ANNUAL REPORT 1999
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Dear Shareholders:
Did the third and fourth quarters of 1999 really occur in the same year, let
alone sequentially? While the equity markets struggled in the third quarter in
the face of rising interest rates, the fourth quarter was characterized by a
virtual "melt-up" in the equity markets led primarily by the technology sector.
(It is important not to confuse the performance of large cap technology stocks
[NASDAQ 100 Index; Morgan Stanley High Tech Index] with the performance in the
broader averages [Dow Jones Industrial Average; S&P 500 Index]). This happened
for a variety of reasons, but probably the most important ones were: the
continued focus on indexing and momentum investing; the massive and accelerating
flow of funds into mutual funds, especially technology funds; an accommodating
Fed keeping interest rates low and money supply plentiful; the day trading
phenomenon; and the never-ending and unprecedented success of the equity new
issue market.
This is a brave NEW world! New inventions -- the Internet (day traders), new
investment criteria (multiples of revenue, eye balls and click throughs), new
issues featuring 100% plus first day trading gains for IPO's, and new investment
styles (indexing and aggressive growth). Nobody knows if or when this will end,
but change is a constant in this formula. Rather than "raining on the parade"
and deprecating investors' good fortunes, let us suggest some signals of change
and precautionary measures. After all, investing is about capital preservation
as well as capital appreciation. Before doing that, let us review some
statistics and basic tenets of the Needham Growth Fund (the "Fund").
The Fund seeks to create long term, tax-efficient capital appreciation for its
investors. To this end, the Fund 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, or driving costs down and
profits up. The Fund 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, the Fund 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").
As you will note on the following page, the Fund's NAV increased approximately
80% in 1999, handily beating our benchmarks roughly fourfold. For the life of
the Fund, the NAV is up 278% (including dividend reinvestments), or
approximately 39% compounded
[BAR GRAPH OMITTED]
plot points as follows:
3rd Quarter* 4th Quarter*
RUSSELL (1) 2000 INDEX -6.34% 18.60%
S&P (2) 500 INDEX -6.24% 14.88%
NASDAQ (3) COMPOSITE INDEX 2.30% 48.28%
MORGAN STANLEY (4) HIGH TECH INDEX 6.28% 49.56%
S&P (5) HEALTH CARE INDEX -10.20% 2.07%
BLOOMBERG/ (6) BROADCAST & CABLE STOCK INDEX 4.11% 26.24%
S&P (7) RETAIL INDEX -11.07% 24.00%
1. THE RUSSELL 2000 IS A BROAD UNMANAGED INDEX COMPRISED OF THE SMALLEST 2000
NASDAQ COMPANIES.
2. THE S&P 500 STOCK INDEX IS A BROAD UNMANAGED MEASURE OF THE U.S. STOCK
MARKET.
3. THE NASDAQ COMPOSITE INDEX IS A BROAD-BASED CAPITALIZATION-WEIGHTED INDEX OF
ALL NASDAQ NATIONAL MARKET & SMALLCAP STOCKS.
4. THE MORGAN STANLEY HIGH TECH INDEX IS AN EQUAL DOLLAR-WEIGHTED INDEX OF 35
STOCKS FROM 9 TECHNOLOGY SUBSECTORS.
5. THE S&P HEALTH CARE INDEX IS A CAPITALIZATION-WEIGHTED INDEX OF ALL STOCKS IN
THE S&P 500 THAT ARE IN THE BUSINESS OF HEALTH CARE RELATED PRODUCTS OR
SERVICES.
6. THE BLOOMBERG/BROADCASTING & CABLE STOCK INDEX IS A PRICE-WEIGHTED INDEX THAT
MEASURES THE PERFORMANCE OF THE U.S. BROADCASTING AND CABLE INDUSTRIES.
7. THE S&P RETAIL INDEX IS A CAPITALIZATION-WEIGHTED INDEX OF ALL STOCKS IN THE
S&P 500 THAT ARE IN THE RETAIL INDUSTRY.
1
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NEEDHAM GROWTH FUND
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annually over the four years, again beating our benchmarks. The Fund's assets
have increased commensurately and topped $50 million in January/February of this
year. We have welcomed many new shareholders, as we have marketed throughout the
country and presented at investment symposiums.
The Fund has always had a heavy weighting in technology (our specialty) and we
have also maintained (with minor changes) our holdings in Healthcare, Media and
Retailing (other areas of expertise). A breakdown of sector weightings as well
as a further description of these sectors are shown on page 5. We have also
included on page 4 our top ten holdings with relative concentration of the
portfolio.
On November 9, 1999, the Fund paid a distribution of $3.32. The U.S. tax code
requires us to pay out practically all gains taken during the fiscal year. Our
goal is to strive for maximum tax efficiency and we are particularly pleased to
report that all distributions paid represent long-term gains and are therefore
generally taxed at the maximum rate of 20%. This obviously applies only to
taxable accounts. We are also happy to report that approximately 95% of all
distributions paid were reinvested in the Fund. We appreciate greatly the
confidence shown in our long-term investment strategy. The distribution
reinvestment occurred at the closing price of $19.24 on November 8, 1999. The
closing price the previous day was $22.51. We are happy to report that we
"earned back" the distribution within one month, surpassing the $22.51 on
December 3, 1999. A history of distributions during the life of the Fund is
included on page 3.
Twenty-five years of experience in the business has made us students of history
and we are at present experiencing unusual times especially regarding equity
valuations. Several factors seem to keep the bulls happy. First, the Federal
Reserve remains extremely accommodative and we feel that Chairman Greenspan
seems to believe that the disinflationary implications of the technology boom
outweigh the fears that strong economic growth will eventually lead to
inflation. Secondly, there appears to be little concern about the rapid increase
in money supply as the demand for stable and strong currencies remains strong.
Thirdly, there seems to be no concern about the current account deficit. The
U.S. expansion is investment led and therefore there are strong inflows of
capital into the U.S. which compensate for this deficit in the balance of
payment accounts. Finally, equity markets seem little concerned about the rise
in long-term interest rates and in the steep increase in the price of oil and
natural gas. We question the sustainability of current oil prices and believe
that prices may peak soon thereby dampening inflationary expectations.
We do not share quite such an optimistic view. First, we believe that technology
led productivity gains are not a panacea and that the Fed will continue to raise
interest rates so long as demand exceeds productivity-enhanced supply of goods
and services, and until spending slows. Secondly, productivity cannot continue
to offset the
BENCHMARKS 4Q99 1 YEAR 3 YEARS (6) LIFE OF FUND (6)
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Needham Growth Fund (1) 36.85% 79.72% 35.56% (7) 39.36% (8)
Dow Jones Industrial Average (2) 11.62% 27.20% 22.82% 24.67%
S&P 500 Index (3) 14.88% 21.04% 27.22% 26.33%
S&P 400 Midcap Index (4) 17.18% 14.70% 21.84% 21.10%
Russell 2000 Index (5) 18.60% 21.35% 13.31% 13.99%
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.
4. S&P 400 MIDCAP STOCK INDEX IS A BROAD UNMANAGED MEASURE OF THE U.S. STOCK
MARKET.
5. RUSSELL 2000 IS A BROAD UNMANAGED INDEX COMPRISED OF THE SMALLEST 2000 NASDAQ
COMPANIES.
6. COMPOUND ANNUAL GROWTH RATE. ASSUMES ALL DIVIDENDS ARE REINVESTED.
7. TOTAL RETURN FOR THE 3 YEARS WAS 149.12%, ASSUMING ALL DIVIDENDS WERE
REINVESTED IN SHARES OF THE FUND.
8. TOTAL RETURN SINCE INCEPTION WAS 277.57%, ASSUMING ALL DIVIDENDS WERE
REINVESTED IN SHARES OF THE FUND. THE INCEPTION DATE OF THE FUND WAS 1/1/96.
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.
2
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ANNUAL REPORT 1999
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ever shrinking pool of labor; eventually there will be some wage inflation.
Thirdly, the Fed's reliance on market rates instead of official interest rates
and even margin requirements to influence investment attitudes and risk
perceptions, may be misguided. The market is not going to do the Fed's job,
especially in light of the amount of newly formed wealth and liquidity chasing
both equities and a finite supply of real assets. The Fed's challenge remains
the same: How to orchestrate a soft landing for the U.S. economy!
Returning to our signals and precautions, let us review some market challenging
facts and risks, especially as past performance is no guarantee of future
results! The Fed is tightening monetary policy and will contrive to tighten
until the economy produces unambiguous evidence that growth is slowing. The Fed
believes that the low unemployment rate is due to low inflation. We believe the
economy is and will remain stronger for a longer period of time, therefore rates
will trend higher than most market participants currently believe, and finally
when growth slows, the securities markets will change dramatically(1).
Specifically regarding technology, let us note several trends. There is a major
change in computing platforms led by Internet technology. The adoption of
e-commerce oriented Internet technologies has major implications for other areas
of the economy such as retailing, media and financial services. This Internet
infrastructure has facilitated Business to Consumer e-commerce and will drive
the Business to Business model as well. The manufacturing and distribution
sectors should become more efficient and productive as inventories of parts and
stocks of primary materials get pushed back up the supply chain, thus keeping
supply and demand more in balance.
We are in the early stages of the Internet-related infrastructure build out, so
there will be increased demand for software, hardware and networking systems.
The explosion in wireless technology and devices is driving the need for
bandwidth security and reliability. While the improvements in semiconductor
technology have facilitated innovations by adding software and networks to
computing power, the true gating factor is now networking bandwidth (which is
becoming plentiful and affordable): Optical networks and broadband are becoming
mainstream. All this infrastructure growth, including servers, storage and
communications, increases demand for components and equipment. This brings us
full circle to the semiconductor device manufacturers and their related capital
equipment: we are entering a period of increasing demand and accelerating growth
which could last at least two years if not longer(2).
If this sounds like a good news -- bad news scenario, it is! But the conclusions
hopefully are clear. While we are in a period of heightened uncertainty for
interest rates and the traditional economy, we are in a period of accelerating
growth in technology [IT] spending both
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(1) SOURCE: "FIVE THINGS TO KEEP IN MIND" LEIF H. OLSEN INVESTMENTS, INC.
(2) SOURCE: "TECHNOLOGY YEARBOOK" GOLDMAN SACHS & CO.
NEEDHAM GROWTH FUND NET ASSETS
FOR YEARS ENDED 12/31
[BAR GRAPH OMITTED]
plot points as follows:
1996 $14,379
1997 $21,769
1998 $17,946
1999 $42,144
NEEDHAM GROWTH FUND DISTRIBUTIONS ($ PER SHARE)
LONG-TERM SHORT-TERM
YEAR CAPITAL GAINS CAPITAL GAINS INCOME
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1996 $0.000 $0.670 $0.000
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1997 $0.010 $2.330 $0.052
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1998 $0.004 $0.000 $0.006
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1999 $3.320 $0.000 $0.000
3
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NEEDHAM GROWTH FUND
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in the U.S. and worldwide (IT spending in U.S. as % of GDP was 3% in 1990 and it
is estimated to surpass 5% in 2002(3)). The risks to this positive scenario are
best expressed by our concerns about valuation levels of the market in general
and more specifically the Internet stocks. We also remain concerned about
inflation and interest rate levels and finally about the present level of
volatility in the markets. While we have no control over interest rates or the
future direction of the markets, we can learn from the history of inventions and
the investment implications and we can analyze risk and volatility in order to
minimize it.
Inventions that led to fundamental changes in the early economies date back to
the wheel and the printing press. In the modern economy these included the
telegraph, railroads and hardwire telephone companies and in the new era economy
we have the Internet. Each technology revolution has five stages of evolution:
1) Experimentation; 2) Capitalization; 3) Management; 4) Hypercompetition; and
5) Consolidation(4). As product cycles contract, so do life cycles of companies
which do not innovate or reinvent themselves. In the Internet cycle, we have
passed the first two stages, next comes management (or lack thereof),
competition (both product and price) and the inevitable consolidation. There is
ample precedent: 50 telegraph companies to 1 by 1950; 1,380 railroad companies
at the turn of century to 30 today! Do we need 400 Internet auction sites? How
many e-commerce shoe sites, 1,500?(5). The conclusion is inescapable and
possibly financially quite painful for many investors.
Finally, let us review volatility. Volatility is expressed in our equity
investments by the amount and rate of change in price, both on the upside and
downside. This then means that volatility is a good measure of risk: Risk is the
probability of losing money -- how much, how often and how quickly! While
investors tend to think of risk in terms of actual losses, it is equally
important to look forward to assess the potential for loss(6). While most
investors tend to equate risk with only losses, both gains and losses are
expressions of risk! Therefore unusually large actual gains do not preclude
significant future losses. Why do we bring it up? You guessed it: past
performance is no guidance to future performance. It is therefore important to
choose an investment style or mutual fund that best fits your investment
criteria and risk profile.
In order to choose a style or fund that fits your criteria, we should examine
the following investment trends: First, we see a move away from indexing and
momentum investing to a stock picker's market. Secondly, as the economic cycle
matures we see a move from large-cap to mid-cap and small-cap investing. It is
not outside the realm of possibility that the Russell 2000 index outperforms the
large-cap indices in 2000. Thirdly, if interest rates remain at these levels or
rise,
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(3) SOURCE: U.S. DEPARTMENT OF COMMERCE
(4) SOURCE: "INFORMATION RULES" HAL VARIAN -- UNIVERSITY OF CALIFORNIA AT
BERKELEY
(5) SOURCE: "WHERE ARE WE IN THE REVOLUTION?" ERIC W. PFEIFFER -- FORBES ASAP
(6) SOURCE: "TRIPLE-DIGIT MUTUAL FUND PERFORMERS, RISK & VOLATILITY" LEAH
MODIGLIANI, MORGAN STANLEY DEAN WITTER
TOP TEN HOLDINGS*[DAGGER]
(AS OF 12/31/99)
1) BEA Systems, Inc. BEAS 4.78%
2) Kronos, Inc. KRON 4.10%
3) IONA Technologies PLC IONA 3.73%
4) ACT Manufacturing, Inc. ACTM 3.63%
5) Hadco Corporation HDC 3.49%
6) UnitedGlobalCom, Inc., Class A UCOMA 3.22%
7) Varian Semiconductor Equipment Associates, Inc. VSEA 3.10%
8) Advanced Fibre Communications AFCI 3.06%
9) United Pan Europe Communications N.V. UPCOY 3.05%
10) Advanced Micro Devices, Inc. AMD 2.97%
TOP TEN HOLDINGS = 35.13% OF PORTFOLIO
*CURRENT PORTFOLIO HOLDINGS MAY NOT BE INDICATIVE OF FUTURE PORTFOLIO HOLDINGS.
[DAGGER]CALCULATION OF PERCENTAGES ARE BASED ON THE TOTAL VALUE OF COMMON STOCKS
AND INVESTMENT COMPANIES.
4
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ANNUAL REPORT 1999
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there could be a move from evaluation metrics focusing on multiples of revenue
or revenue growth to the more traditional criteria such as multiples of earnings
or cash flow. Fourth, if we encounter a prolonged downturn in the equity
markets, we are likely to see a reduction in the rapid-fire trading habits of
stock and mutual fund traders and a return to investing for the long term; the
strategy that has made the most sense and the most money for people over the
years and which is more tax efficient and cost efficient.
We ask you to review the amount of volatility in investment returns that you are
willing to tolerate this year. The Fund regularly utilizes its ability to sell
short and hedge and these investment strategies can help to reduce volatility
and smooth out investment returns, on both the upside and the downside. Markets
are, alas, growing increasingly volatile. Similarly, we ask you to review your
investment goals and expectations for the next five years. While the Fund earned
an excellent return in 1999 (79.7%) and for the life of the Fund (39.4%
compounded annually), annualized returns for the average equity fund over the
last five years have been 22%, and we are concerned about the increasing sense
of entitlement by the investing public to these very high equity returns.
We conclude by wishing you all a happy and prosperous 2000. We look forward to
an exciting and challenging investment climate this year. We as 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, concerns or would like to obtain a
prospectus or further information on the Needham Growth Fund, please do not
hesitate to contact us at 800/625-7071, visit our website at www.needhamco.com
or visit the Morningstar website at www.morningstar.net (enter "NEEGX" into the
ticker field).
Yours sincerely,
/S/PETER J. R. TRAPP
Peter J. R. Trapp
Portfolio Manager
[PIE CHART OMITTED] plot points as follows:
SECTOR WEIGHTINGS*[DAGGER]
(AS OF 12/31/99)
HEALTHCARE/MEDICAL DEVICES/PHARMACEUTICALS 13.23%
MEDIA/LEISURE/CABLE 12.99%
SHORT-TERM INVESTMENTS 0.46%
RETAIL/BUSINESS SERVICES 7.46%
TECHNOLOGY/TELECOMMUNICATIONS 65.86%
* EXCLUDES SHORT POSITIONS OF 10.17% OF PORTFOLIO.
[DAGGER]CALCULATION OF PERCENTAGES ARE BASED ON THE TOTAL VALUE OF COMMON
STOCKS, INVESTMENT COMPANIES AND CASH.
PORTFOLIO SECTOR BREAKDOWN
WITH EXAMPLES
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TECHNOLOGY AND TELECOMMUNICATIONS:
Computer Software, Hardware & Peripherals;
Contract Manufacturing & Materials; Electronics
& Distribution, Instrumentation & Storage;
Networking and Communications Equipment;
Semiconductor Devices & Capital Equipment
and Wireless Communications.
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HEALTHCARE/MEDICAL DEVICES/
PHARMACEUTICALS: Health Care Services;
Hospital & Physician Management; Medical
Devices & Supplies and Biotechnology.
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MEDIA/LEISURE/CABLE: Cable TV;
Broadcasting & Media and Content.
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RETAIL/BUSINESS SERVICES:
Business Services & e-Commerce and Retailing.
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SHORT-TERM INVESTMENTS
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5
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NEEDHAM GROWTH FUND
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GOOD IDEAS THAT WORKED*
REALIZED AND UNREALIZED GAINS THROUGH
YEAR ENDED 12/31/99
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Advanced Fibre Communications
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AT&T Corp. Liberty Media Group Class A
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BEA Systems, Inc
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IONA Technologies PLC
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Varian Semiconductor Equipment Associates
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*EXCLUDES GAINS AND LOSSES FROM SECURITIES SOLD SHORT
AND HEDGES.
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GOOD IDEAS AT THE TIME*
REALIZED AND UNREALIZED LOSSES THROUGH
YEAR ENDED 12/31/99
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Aspen Technology, Inc.
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Hyperion Solutions Corp.
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Inprise Corporation
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PhyCor, Inc.
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Quintiles Transnational Corporation
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*EXCLUDES GAINS AND LOSSES FROM SECURITIES SOLD SHORT
AND HEDGES.
BEA SYSTEMS (BEAS) -- We visited BEAS in the spring of 1999 to find out why a
seemingly reasonable 1Q99 had lead to such a rout in the stock. Chairman Bill
Coleman could not be faulted for his candor, insight and analysis of the
shortfall. What attracted us was his vision for the company as it transitioned
from a distributed systems middleware company to a leading provider of
platform-oriented e-commerce systems. The acceleration in both
Business-to-Business (B2B) and Business-to-Consumers (B2C) e-commerce has fueled
demand for its high performance, high volume, transaction-oriented suite of
products led by TUXEDO and WebLogic. We expect growth in margins and earnings to
increase, and we continue holding the stock to achieve long-term gains.
IONA TECHNOLOGIES (IONA) -- We have followed IONA for a long time and noted the
collapse in stock price because of execution issues and its subsequent quick
rebound in March 1999. When reviewed during the summer, there was still
execution and demand risk relating to Y2K, especially in the U.S. IONA is the
largest player serving the CORBA market. CORBA is an end to end platform
middleware architecture that makes disparate software and systems work together.
We finally became convinced of the turnaround and started buying the stock in
mid-October 1999. Sentiment in the software stocks, both Enterprise Resources
(ERP) and Application Integration (EAI), was way too bearish given the long-term
growth prospects in this sector.
ASPEN TECHNOLOGY (AZPN) -- Our interest in supply chain software led us to AZPN,
a leading supplier of process manufacturing optimization software and service
solutions to companies in the chemicals and petroleum products, pharmaceuticals,
electric power, food and beverage, consumer products and basic minerals
businesses. We figured with the strength in the economy and cost savings from
improved efficiency, productivity and capacity utilization, the stock would be a
winner. Unfortunately, a series of customer push-outs and revenue and earnings
shortfalls led to a review of our investment assumptions. Finally, with the
rising concern for Y2K pushouts, we decided to sell the stock to realize a loss,
which offsets other gains.
QUINTILES TRANSNATIONAL (QTRN) -- We had originally invested in Envoy, a leading
electronic data interchange provider, that was acquired by QTRN, the leading
contract research organization (CRO) providing services worldwide to the
biotechnology, pharmaceutical and medical device industries. QTRN also provides
contract sales, marketing services, health services and healthcare policy
consulting. The stock struggled all summer despite the enthusiasm for the
merger. Unfortunately QTRN announced an earnings shortfall. While disappointed,
we remain a believer in the company's potential and continue to maintain our
position.
6
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ANNUAL REPORT 1999
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Statement of Net Assets
DECEMBER 31, 1999
SHARES VALUE
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COMMON STOCKS - (101.9%)
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BROADCASTING & MEDIA - (4.0%)
AT&T Corp.-Liberty Media Group Series A*[DAGGER] 15,000 $ 851,250
USA Networks, Inc.*[DAGGER] 15,000 828,750
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1,680,000
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BUSINESS SERVICES & E-COMMERCE - (3.3%)
Cendant Corp.* 20,000 531,250
Euro909.com ADR* 15,000 412,500
McAfee.com Corp.* 5,000 225,000
PurchasePro.com, Inc.* 150 20,625
SourcingLink.net, Inc.* 7,500 195,000
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1,384,375
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CABLE TV - (10.4%)
Cable & Wireless Communications Plc ADR*[DAGGER] 10,000 700,000
Insight Communications Co., Inc.* 20,000 592,500
Shaw Communications, Inc.* 10,000 331,250
United Pan Europe Communications
NV ADR*[DAGGER][DAGGER] 10,500 1,338,750
UnitedGlobalCom, Inc., Class A* 20,000 1,412,500
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4,375,000
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COMPUTER HARDWARE - (0.6%)
Compaq Computer Corp. 10,000 270,625
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COMPUTER PERIPHERALS - (1.1%)
Seagate Technology, Inc.* 10,000 465,625
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COMPUTER SOFTWARE - (19.0%)
Banyan System, Inc.* 40,000 800,000
BEA Systems, Inc.*[DAGGER] 30,000 2,098,125
Inprise Corp.* 35,000 387,188
Iona Technologies Plc ADR* 30,000 1,635,000
Kronos, Inc.*[DAGGER] 30,000 1,800,000
Manugistics Group, Inc.* 40,000 1,292,500
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8,012,813
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CONTRACT MANUFACTURING & MATERIALS - (9.2%)
ACT Manufacturing, Inc.*[DAGGER] 42,500 1,593,750
Hadco Corp.*[DAGGER] 30,000 1,530,000
Park Electrochemical Corp. 11,900 316,094
Plexus Corp.* 10,000 440,000
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3,879,844
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ELECTRONICS & DISTRIBUTION - (2.0%)
Bell Microproducts, Inc.* 50,000 550,000
Tech Data Corp.* 10,000 271,250
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821,250
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ELECTRONICS & INSTRUMENTATION - (0.8%)
Applied Films Corp.* 10,000 146,875
Planar Systems, Inc.* 30,000 198,750
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345,625
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ELECTRONICS & STORAGE - (1.4%)
Auspex Systems, Inc.* 20,000 205,000
Overland Data, Inc.* 50,000 375,000
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580,000
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
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NEEDHAM GROWTH FUND
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SHARES VALUE
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HEALTH CARE SERVICES - (5.2%)
First Health Group Corp.* 20,000 $ 537,500
IDX Systems Corp.* 25,000 781,250
McKesson HBOC, Inc. 15,000 338,438
Quintiles Transnational Corp.*[DAGGER] 28,000 523,250
- -------------------------------------------------------------------------------
2,180,438
- -------------------------------------------------------------------------------
HOSPITAL & PHYSICIAN MANAGEMENT - (0.9%)
Phycor, Inc.* 50,000 281,250
US Oncology, Inc.* 20,000 98,750
- -------------------------------------------------------------------------------
380,000
- -------------------------------------------------------------------------------
MEDICAL DEVICES & SUPPLIES - (5.6%)
Candela Corp.* 10,000 186,250
CONMED Corp.*[DAGGER] 32,500 840,937
Ocular Sciences, Inc.* 25,000 471,875
PSS World Medical, Inc.* 30,000 283,125
Varian Medical Systems, Inc. 20,000 596,250
- -------------------------------------------------------------------------------
2,378,437
- -------------------------------------------------------------------------------
NETWORKING & COMMUNICATIONS EQUIPMENT - (8.8%)
3Com Corp.* 20,000 940,000
Advanced Fibre Communications*[DAGGER] 30,000 1,340,625
Cabletron Systems, Inc.*[DAGGER][DAGGER] 40,000 1,040,000
Ezenia, Inc.* 50,000 396,875
- -------------------------------------------------------------------------------
3,717,500
- -------------------------------------------------------------------------------
RETAILING - (4.5%)
Abercrombie & Fitch Co.* 25,000 667,187
McNaughton Apparel Group, Inc.* 60,000 435,000
Nordstrom, Inc. 10,000 261,875
PETCO Animal Supplies, Inc.* 25,000 371,875
West Marine, Inc.* 20,000 165,000
- -------------------------------------------------------------------------------
1,900,937
- -------------------------------------------------------------------------------
SEMI-CONDUCTOR DEVICES - (11.7%)
Actel Corp.*[DAGGER] 40,000 960,000
Advanced Micro Devices, Inc.*[DAGGER][DAGGER] 45,000 1,302,187
Cypress Semi-Conductor Corp.*[DAGGER] 20,000 647,500
Galileo Technology Ltd.* 20,000 482,500
Integrated Device Technology, Inc.* 30,000 870,000
MMC Networks, Inc.* 20,000 687,500
- -------------------------------------------------------------------------------
4,949,687
- -------------------------------------------------------------------------------
SEMI-CONDUCTORS CAPITAL EQUIPMENT - (11.6%)
ADE Corp.* 10,000 165,000
Applied Science and Technology, Inc.* 30,000 997,031
Brooks Automation, Inc.* 20,000 651,250
Electroglas, Inc.* 10,000 253,750
ETEC Systems, Inc.* 10,000 448,750
FEI, Co.* 10,000 155,000
FSI International, Inc.* 20,000 230,000
GSI Lumonics, Inc.* 40,000 350,000
Photronics, Inc.* 10,000 286,250
Varian Semi-Conductor Equipment
Associates, Inc.*[DAGGER][DAGGER] 40,000 1,360,000
- -------------------------------------------------------------------------------
4,897,031
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
ANNUAL REPORT 1999
- --------------------------------------------------------------------------------
Statement of Net Assets (continued)
DECEMBER 31, 1999
SHARES VALUE
- -------------------------------------------------------------------------------
WIRELESS COMMUNICATION EQUIPMENT - (1.8%)
EMS Technologies, Inc.* 20,000 $ 235,000
REMEC, Inc.* 20,000 510,000
- -------------------------------------------------------------------------------
745,000
- -------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost $25,192,625) 42,964,187
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INVESTMENT COMPANIES - (2.1%)
H & Q Healthcare Investors Fund 21,523 464,090
H & Q Life Sciences Investors Fund 21,392 427,840
- -------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES (Cost $680,995) 891,930
- -------------------------------------------------------------------------------
NUMBER OF
CONTRACTS
- -------------------------------------------------------------------------------
NAME/EXPIRATION DATE/STRIKE PRICE
- -------------------------------------------------------------------------------
CALL OPTIONS PURCHASED - (1.0%)
Russell 2000 Index, Jan., $475 100 292,500
S&P Mid Cap Index, Jan., $440 100 111,250
- -------------------------------------------------------------------------------
403,750
- -------------------------------------------------------------------------------
PUT OPTIONS PURCHASED - (0.0%)
First Health Group Index, Jan., $22.50 200 6,250
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OPTIONS (Cost $214,750) 410,000
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - (0.5%)
Provident Institutional Funds TempCash Portfolio 100,530 100,530
The RBB Sansom Street Money Market Portfolio 100,530 100,530
- -------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost $201,060) 201,060
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS - (105.5%) (Cost $26,289,430) 44,467,177
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
OTHER LIABILITIES IN EXCESS OF ASSETS - (-5.5%)
- -------------------------------------------------------------------------------
Receivable from Brokers for Securities Sold Short 4,799,957
Other Assets 158,620
Securities Sold Short, at Value (proceeds $4,799,957) (5,036,938)
Loan Payable (2,000,903)
Net Amounts due to Affiliates (184,544)
Other Liabilities (59,582)
- -------------------------------------------------------------------------------
(2,323,390)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET ASSETS - (100.0%) (Applicable to 1,591,851
shares outstanding, $.001 par value, 1,000,000,000
shares authorized) $42,143,787
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 26.47
- -------------------------------------------------------------------------------
* 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] SECURITY POSITION IS EITHER ENTIRELY OR PARTIALLY HELD IN A
SEGREGATED ACCOUNT AS COLLATERAL FOR TEMPORARY BORROWING.
ADR - AMERICAN DEPOSITORY RECEIPT.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
NEEDHAM GROWTH FUND
- --------------------------------------------------------------------------------
Schedule of Securities Sold Short
DECEMBER 31, 1999
NAME OF ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
COMMON STOCKS
Agilent Technologies, Inc. 5,000 $ 386,563
Amazon.com, Inc. 6,000 456,750
American Eagle Outfitters, Inc. 8,000 360,000
Brocade Communications Systems, Inc. 1,000 177,000
Crossroads Systems, Inc. 3,000 253,500
eBay, Inc. 4,000 500,750
Efficient Networks, Inc. 3,000 204,000
Extreme Networks, Inc. 4,000 334,000
Foundry Networks, Inc. 4,000 603,375
Gadzooks, Inc. 4,000 174,250
Rambus, Inc. 6,000 404,625
Rowecom, Inc. 5,000 226,875
SAP AG - Sponsored ADR 4,000 208,250
Verticalnet, Inc. 3,000 492,000
Wit Capital Group, Inc. 15,000 255,000
- -------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $4,799,957) $5,036,938
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
ANNUAL REPORT 1999
- --------------------------------------------------------------------------------
Statement of Operations
FOR THE YEAR ENDED DECEMBER 31, 1999
- -------------------------------------------------------------------------------
INVESTMENT INCOME
- -------------------------------------------------------------------------------
Interest $ 160,980
Dividends 69,907
- -------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 230,887
- -------------------------------------------------------------------------------
EXPENSES
- -------------------------------------------------------------------------------
Investment Advisory fee 332,274
Distribution fees 66,598
Administration and Accounting fee 65,000
Legal fee 58,000
Custodian fee 40,426
Transfer Agent fee 30,000
Audit fee 27,000
Organization expenses 26,500
Directors' fees 24,000
Shareholders' reports 20,055
Filing fee 14,346
Insurance expense 11,400
Other expenses 39,938
- -------------------------------------------------------------------------------
TOTAL EXPENSES 755,537
- -------------------------------------------------------------------------------
Expenses Waived and Reimbursable (90,979)
- -------------------------------------------------------------------------------
NET EXPENSES 664,558
- -------------------------------------------------------------------------------
NET INVESTMENT LOSS (433,671)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
- -------------------------------------------------------------------------------
Net Realized Gain on Investment Securities 7,229,825
Net Realized Loss on Option Contracts (2,295,341)
Change in Unrealized Appreciation of Investment Securities 12,836,170
- -------------------------------------------------------------------------------
NET GAIN ON INVESTMENT SECURITIES 17,770,654
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $17,336,983
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
NEEDHAM GROWTH FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Loss $ (433,671) $ (316,403)
Net Realized Gain on Investment Securities 7,229,825 859,523
Net Realized Loss on Option Contracts (2,295,341) (1,413,201)
Change in Unrealized Appreciation
of Investment Securities 12,836,170 4,157,666
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 17,336,983 3,287,585
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- (6,838)
Net Realized Gains (4,275,566) (4,559)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (4,275,566) (11,397)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1):
- ------------------------------------------------------------------------------------------------------------------------
Shares Issued 26,496,723 3,303,039
Shares Issued in Reinvestment of Distributions 4,063,438 10,402
Shares Redeemed (19,423,568) (10,412,888)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions 11,136,593 (7,099,447)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 24,198,010 (3,823,259)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Beginning of Year 17,945,777 21,769,036
End of Year $42,143,787 $17,945,777
- ------------------------------------------------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED:
- ------------------------------------------------------------------------------------------------------------------------
Shares Issued 1,219,649 216,122
Shares Reinvested 211,197 768
Shares Redeemed (878,176) (687,394)
- ------------------------------------------------------------------------------------------------------------------------
552,670 (470,504)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
ANNUAL REPORT 1999
- --------------------------------------------------------------------------------
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1999 1998 1997 1996(*)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $17.27 $ 14.42 $ 14.49 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
Net Investment (Loss) Income (0.03) (0.30) 0.06 (0.11)
Net Gain on Securities (Realized and Unrealized) 12.55 3.16 2.26 5.27
- -----------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 12.52 2.86 2.32 5.16
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income -- (0.01) (0.05) --
Net Realized Gains (3.32) -- (2.31) (0.67)
In Excess of Net Realized Gains -- -- (0.03) --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions (3.32) (0.01) (2.39) (0.67)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 26.47 $ 17.27 $ 14.42 $ 14.49
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 79.72% 19.85% 15.66% 51.56%
- -----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (thousands) $42,144 $17,946 $21,769 $14,379
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.50% 2.50% 2.50% 2.50%
Ratio of Expenses to Average Net Assets
(Excluding Expenses Waived and Reimbursable) 2.84% 3.44% 3.29% 4.60%
Ratio of Net Investment (Loss) Income to
Average Net Assets (1.63)% (1.72)% 0.37% (1.27)%
Ratio of Net Investment (Loss) Income to
Average Net Assets (Excluding Expenses
Waived and Reimbursable) (1.97)% (2.66)% (0.42)% (3.37)%
Portfolio Turnover Rate 145.45% 585.63% 724.08% 568.93%
<FN>
* FUND COMMENCED OPERATIONS ON JANUARY 1, 1996.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<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,
1999, the Fund reclassed $433,671 of accumulated net investment loss to
paid-in-capital. Net investment loss and net assets were not affected by this
reclassification.
Capital losses after October 31 ("post-October losses") within the taxable year
are deemed to arise on the first business day of the Fund's next taxable year.
The Fund after October 31, 1999 incurred and will elect to defer net capital
losses of $606,838 during the year ended December 31, 2000.
ORGANIZATIONAL COSTS: Organizational costs have been capitalized and are being
amortized on a straight line basis over a period of 60 months.
TEMPORARY BORROWINGS: The Fund has entered into an agreement with the Custodial
Trust Company for temporary purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of securities.
Interest is calculated daily based on the Federal Funds Rate plus one percent.
The Fund may borrow from banks up to 25% of its total assets and may pledge its
assets in connection with these borrowings and that no additional investments
shall be made while borrowings exceed 5% of total assets.
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 and interest expense are recorded on an accrual basis.
USE OF ESTIMATES: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States 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 for, and to reimburse
expenses of, the Fund in an amount that operates to limit annual operating
expenses for the year ended December 31, 1999 to not more than 2.50% of average
daily net assets. For the year ended December 31, 1999, the Advisor waived
$90,979 of its fee.
PFPC, Inc. ("PFPC") acts as the Fund's Administrator. The Fund pays PFPC a fee
at the annual rate of 0.10% of the average daily net asset value of the Fund,
subject to certain minimums. PFPC also acts as the Fund's shareholder servicing
agent and transfer agent.
Certain officers and directors of the Fund are also officers and directors of
the Advisor.
4. DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Under the plan, the Fund pays Needham & Company,
Inc., 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, 1999, the Fund incurred $66,598 of distribution fees, which were primarily
paid to Needham & Company, Inc.
14
<PAGE>
ANNUAL REPORT 1999
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
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, 1999.
Purchases Sales
- --------------------------------------------------------------------------------
Long transactions $42,602,548 $39,216,454
Short sale transactions 54,785,079 57,850,610
- --------------------------------------------------------------------------------
Total $97,387,627 $97,067,064
- --------------------------------------------------------------------------------
At December 31, 1999, net unrealized appreciation of $17,940,766 was comprised
of gross unrealized appreciation and depreciation for financial reporting and
federal income tax purposes of $18,772,125 and $831,359, 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. The Fund is subject to market risk associated with
changes in the value of the underlying financial instrument, as well as the risk
of loss of appreciation if a counterparty fails to perform. For exchange-traded
contracts, the exchange acts as the counterparty to specific transactions, and
therefore, bears the risk of delivery to and from counterparties of specific
positions.
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. Call and put options purchased at December 31, 1999 and
their related market values are included in the accompanying Statement of Net
Assets.
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. In writing an option, the Fund bears the market risk of an
unfavorable change in the price of the security underlying the written option. A
summary of call options written by the Fund for the year ended December 31,1999
is as follows:
Number of Premium
Options Written Contracts Received
- --------------------------------------------------------------------------------
Options outstanding at
beginning of year -- $ --
Options written 1,360 3,218,375
Options expired (1,360) (3,218,375)
- --------------------------------------------------------------------------------
Options outstanding at
December 31, 1999 -- --
- --------------------------------------------------------------------------------
7. SHORT SALE TRANSACTIONS
During the year ended December 31, 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. The Fund will limit short sales in any one
issuer to 2% of net assets. At December 31, 1999, the market value of securities
separately segregated to cover short positions was $11,164,500. 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, 1999 and their related
market values and proceeds are set forth in the Schedule of Securities Sold
Short. These transactions result in off-balance sheet risk since the Fund's
ultimate obligation to purchase the securities sold short may exceed the amount
recognized in the accompanying Schedule of Securities Sold Short.
8. COMPONENTS OF NET ASSETS
At December 31, 1999 net assets consisted of:
Paid-in-Capital $24,140,265
Accumulated Net
Realized Gains 62,756
Net Unrealized Appreciation
of Investment Securities 17,940,766
- --------------------------------------------------------------------------------
Total Net Assets $42,143,787
- --------------------------------------------------------------------------------
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Fund elected early adoption of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") and accordingly, its standards are applied in the accompanying financial
statements. The Fund has always maintained a policy of valuing its securities
positions and derivative instruments at market values or estimated fair values
and of including any realized gains or losses in income. The adoption of SFAS
No. 133 has not resulted in a valuation or an accounting change in the
accompanying financial statements.
15
<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, 1999, and the related statement of operations for
the year then ended, the statements of changes in net assets and financial
highlights for each of the two years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. 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 audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 1999, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Needham Growth Fund as of December 31, 1999, the results of its operations for
the year then ended, the changes in its net assets and the financial highlights
for each of the two years in the period then ended, in conformity with
accounting principles generally accepted in the United States.
/S/ARTHUR ANDERSON
New York, New York
February 22, 2000
- --------------------------------------------------------------------------------
16
<PAGE>
TAX INFORMATION (UNAUDITED)
During 1999, 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 Capital
Date Date Total Gains
- ------------------------------------------------------------------------
11/05/99 11/09/99 $3.32 $3.32
- ------------------------------------------------------------------------
Distributions of long-term capital gains are taxable as such whether paid to you
in cash or reinvested in your account during 1999, 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.
<PAGE>
[NEEDHAM FUNDS LOGO 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
8800 TINICUM BOULEVARD
3RD FLOOR SUITE 200
PHILADELPHIA, PA 19153
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
