SEMIANNUAL
REPORT
NEEDHAM GROWTH FUND
--------------------------------------------------------------------------------
SEEKING TO BUILD WEALTH FOR LONG-TERM INVESTORS.
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
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NEEDHAM FUNDS
www.needhamco.com
<PAGE>
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NEEDHAM FUNDS
Needham Growth Fund
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
www.needhamco.com
Semiannual Report
for the six months ended June 30, 2000
(unaudited)
CONTENTS
LETTER FROM THE ADVISOR 1
SCHEDULE OF NET ASSETS 5
SCHEDULE OF SECURITIES SOLD SHORT 11
STATEMENT OF OPERATIONS 13
STATEMENTS OF CHANGES IN NET ASSETS 14
FINANCIAL HIGHLIGHTS 15
NOTES TO FINANCIAL STATEMENTS 16
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF PLOT POINTS USED IN PRINTED GRAPHIC
--------------------------
Performance
Twelve month period ended
June 30, 2000
NEEDHAM GROWTH FUND 79.19%
S&P 500 (1) INDEX 7.25%
S&P MIDCAP (2) INDEX 16.96%
RUSSELL 2000 (3) INDEX 14.48%
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EDGAR REPRESENTATION OF PLOT POINTS USED IN PRINTED GRAPHIC
------------------------------
Performance since Inception(4)
through
June 30, 2000
Cumulative
NEEDHAM GROWTH FUND 371.71%
S&P 500 (1) INDEX 154.11%
S&P MIDCAP (2) INDEX 134.66%
RUSSELL 2000 (3) INDEX 74.21%
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF PLOT POINTS USED IN PRINTED GRAPHIC
------------------------------
Performance since Inception(4)
through
June 30, 2000
Annualized
NEEDHAM GROWTH FUND 41.14%
S&P 500 (1) INDEX 22.98%
S&P MIDCAP (2) INDEX 20.84%
RUSSELL 2000 (3) INDEX 13.10%
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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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SEMIANNUAL REPORT 2000
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Dear Shareholder:
We are pleased to report our performance results for the Needham Growth Fund
("NGF") (NASDAQ symbol: NEEGX) for the six month period ended June 30, 2000 ("6
Months"), the year ended June 30, 2000 ("1 Year"), the three-year period ended
June 30, 2000 ("3 Years") and since the inception of the Fund through June 30,
2000 ("Life of Fund"). Our performance relative to the major indices for these
periods can be found on Page 2.
The Federal Reserve's (the "Fed") preemptive move
to slow the economy (stated motive) and take some steam out of the U.S. equity
markets (secondary motive) negatively affected all investment returns in the
first half of 2000. Higher interest rates negatively affected the "new" and
"old" economies alike with very few exceptions (semiconductor, semiconductor
capital equipment and contract manufacturing companies).
Markets became more focused on evaluation, and
as I stated in a BARRON'S, June 26, 2000 article, profits, earnings and cash
flow have now become the key investment criteria again. The initial public
offering (IPO) market and supply of secondary or follow-on financings were
generally strong in the first half but declined in the April - June period: 203
deals came to market for a total value of $50.5 billion in the second quarter
versus 323 deals and a value of $59.6 billion during the first quarter. The
drop-off in IPOs was also significant: 97 deals in the second quarter versus 138
deals in the first quarter. Fortunately, the marginal issuers were forced to
cancel their offerings and the implicit quality of the calendar rose.
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 also have a competitive
advantage by acquiring and retaining more customers, or 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 funds 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").
During the first half of this year, we harvested significant long-term capital
gains in the technology area. We also took significant profits from the short
positions in our Internet holdings. As you will note from our current top ten
stocks, BEA Systems, UnitedGlobalCom, United Pan Europe Communications, Actel
and Advanced Fibre Communications, which were part of our first quarter's top
ten, are no longer included. New to the list are GSI Lumonics, a manufacturer of
laser-based systems, instruments and
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF PLOT POINTS USED IN PRINTED GRAPHIC
1st Quarter* 2nd Quarter*
Russell (1) 2000 Index 7.09 -3.77
S&P (2) 500 Index 2.29 -2.66
NASDAQ (3) Composite Index 12.41 -13.23
Morgan Stanley (4) High Tech Index 15.39 -4.31
S&P (5) Health Care Index 0.12 22.83
Bloomberg/ (6) Broadcast & Cable Stock Index -12.00 -5.75
S&P (7) Retail Index 6.80 -4.05
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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components; Merix, a contract manufacturer of printed circuit boards; Adept
Technology, a provider of intelligent automation software and robotic systems
for the electronics, telecommunications, semiconductor and pharmaceutical
industries; Anadigics, a manufacturer of high-frequency power amplifiers and
frequency shifting chips for the communications industry; and Electronics for
Imaging, a hardware and software provider for networked copiers and printers.
BEA Systems, Actel and Advanced Fibre Communications were sold as a result of
our GARP discipline; the other deletions represent a decline in market value.
Our primary focus remains in the technology and telecommunications areas with
approximately 70.9% of the portfolio, up from 65.9% at the end of December 1999.
Our exposure to media/leisure/cable and retail/business services has declined
significantly from both a reduction in market value and disposal of stock
holdings, offset by a recent increase in healthcare/ medical
devices/pharmaceuticals, cash and fixed-income investments.
Specifically, in the technology sector, we increased our exposure to the
contract manufacturing industry, focusing on the smaller less-known companies as
well as those with temporary earnings shortfalls. Likewise, we increased our
exposure in the wireless equipment and components area. We rotated names in the
semiconductor and capital equipment area, focusing on the small cap, emerging
companies with reasonable valuations. We have also initiated positions in the
hardware side, including copier and computer projector companies. Finally, we
continued our short strategy of focusing on the new media or Internet companies,
including e-commerce (both B2B and B2C) and the incubator companies. We also
harvested our gains from shorts in the enterprise software area. As our
semiconductor investments rose to extended evaluations, we used our options
hedging strategy to protect our gains while maximizing our tax efficiency and
then exited several of these stocks.
Our media/leisure/cable investments came under severe pressure during the period
as the Fed aggressively increased interest rates. These companies' EBITDA
multiples contract in this environment as a result of their large capital
expenditure programs. Our holdings in this group fell from 13.0% of the
portfolio at the end of December, 1999 to 8.0% at the end of the first half.
In the healthcare/medical devices/pharmaceutical and biotechnology areas, we
decreased our exposure from 13.2% to 10.1%. While the percentage for the period
is down, the major portion of this occurred in the first quarter of 2000,
reflecting the challenges the healthcare area experienced. Our major initiative
has been an instrumentation company, Thermo Electron, a spin-in of an
agglomeration of medical device companies and a spin-out of certain non-related
assets. The finished product should look somewhat like a major medical device
and manufacturing company, with the commensurate P/E multiple.
<TABLE>
<CAPTION>
BENCHMARKS 6 MONTHS 1 YEAR 3 YEARS(6) LIFE OF FUND (6)
---------- -------- ------ ---------- ----------------
<S> <C> <C> <C> <C>
Needham Growth Fund (1) 24.93% 79.19% 40.73%(7) 41.14% (8)
Dow Jones Industrial Average (2) (8.45%) (3.31%) 12.68% 19.31%
S&P 500 Index (3) (0.42%) 7.25% 19.64% 22.98%
S&P 400 Midcap Index (4) 8.98% 16.96% 20.30% 20.84%
Russell 2000 Index (5) 2.47% 14.48% 10.69% 13.10%
</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.
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 178.73%, ASSUMING ALL DIVIDENDS WERE
REINVESTED IN SHARES OF THE FUND.
8. TOTAL RETURN SINCE INCEPTION WAS 371.71%, 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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SEMIANNUAL REPORT 2000
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Finally, in the retailing/business services sector, we reduced our commitment
from 7.5% to 3.8% at the six month period's end. The Fed's interest rate hikes
coupled with disappointing "comparable store sales", aggravated an already weak
sector. We took losses and rotated into selected small-cap specialty retailing
opportunities, waiting for the "back to school", fall and holiday shopping
seasons.
It is my belief that the current cycle of interest rate increases by the Fed is
complete. Could the next move be to lower interest rates in 2001? There is a
possibility! The market sages tell us that there will be no further increase in
interest rates this year by the Fed and that the Fed has engineered another soft
landing. The general adulation in Congress for Mr. Greenspan, Chairman of the
Fed, is only surpassed by the increase in consumer debt outstanding and the
rebirth of speculative equity market activity. How quickly we forget! Wasn't it
just recently that we experienced the most severe new economy bear market since
October 1998? After all, this was the reason for the paltry investment returns
of the first half of 2000. If you believe, as I do, that the Fed is also
targeting speculative excesses, then maybe we should not be quite so hasty to
return the bear to hibernation, until we digest the market correction.
As we write this letter, we are enjoying the fruits of strong second quarter
earnings, especially in the technology area. While there have been some
prominent companies disappointing Wall Street (Microsoft, Qualcomm and Agilent
Technology, to name a few), the overwhelming majority (over 75%) of technology
companies (that have reported) have made or beaten consensus earnings estimates.
More importantly, however, the economic and business outlook for the second half
of 2000 remains very strong.
Looking forward to the second half of 2000, we are struck by the continued
strength of the PC market, the demand for set top boxes, Internet access
devices, personal displays and cell phones. Yes, there is a transition in cell
phone functions and models, but nevertheless, overall demand is strong. Couple
that with the growth in networking equipment, the trends in optical networking
and communications (where fiber optic is replacing copper wire), the use of
laser and robotics in industry and the explosion in storage requirements, and
you can't help but be heartened by the technology outlook. Alas, Wall Street and
stocks react six months prospectively and the present concern is all about a
potential slowdown in 2001. However, the big picture in tech-land remains very
constructive over the longer term. The scarce resource in technology is
knowledge, not commodities; therefore, technology does not contribute to
inflation. Rather, by boosting productivity, technology companies, such as those
in the semiconductor space, reduce the need for increased new factory and
commercial infrastructure by outsourcing to contract manufacturers. IT managers
reduce inventory and waste. Cheap silicon replaces expensive steel and copper.
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF PLOT POINTS USED IN PRINTED GRAPHIC
NEEDHAM GROWTH FUND NET ASSETS
6/30/96 $ 9,625
12/31/96 $14,379
6/30/97 $25,396
12/31/97 $21,769
6/30/98 $18,579
12/31/98 $17,946
6/30/99 $27,656
12/31/99 $42,144
6/30/00 $67,923
TOP TEN HOLDINGS*+
(AS OF 6/30/00)
1) Advanced Micro Devices, Inc. AMD 4.17%
2) Manugistics Group, Inc. MANU 3.25%
3) IONA Technologies PLC IONA 2.92%
4) GSI Lumonics, Inc. GSLI 2.71%
5) Merix Corporation MERX 2.18%
6) Adept Technology, Inc. ADTK 2.17%
7) ACT Manufacturing, Inc. ACTM 2.15%
8) Anadigics, Inc. ANAD 2.10%
9) Brooks Automation, Inc. BRKS 1.97%
10) Electronics For Imaging, Inc. EFII 1.76%
TOP TEN HOLDINGS = 25.38% OF PORTFOLIO
* CURRENT PORTFOLIO HOLDINGS MAY NOT BE INDICATIVE OF FUTURE PORTFOLIO
HOLDINGS.
+ CALCULATION OF PERCENTAGES ARE BASED ON THE TOTAL VALUE OF COMMON STOCKS AND
INVESTMENT COMPANIES.
3
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NEEDHAM GROWTH FUND
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As always, we seek the silver lining in the dark clouds. GARP investors, such as
the Needham Growth Fund, hold cash and wait for a market sell-off, a product
transition or an earnings shortfall. We then invest in high-quality companies
where the P/E multiple and growth rate meet our discipline.
Specifically, we are increasing our exposure to the semiconductor and
semiconductor capital equipment areas as selected stocks trade down to P/E
multiples of 10x for semiconductor companies and 1-11/2x book value in the
capital equipment area. Likewise, we have rotated into some of the inexpensive
software stocks in the enterprise resources (ERP) and enterprise applications
(EAI) areas. We are continuing to expand our commitment to the contract
manufacturing sector, focusing on enclosures, power management and the raw
materials (resins and laminates) used for printed circuit boards (PCBs).
On the short side, we will continue to be active in the Internet, B2B, B2C and
Internet consulting names, although the easy money has mostly been made.
Likewise, with the political rhetoric escalating during the election campaign,
there are some interesting short opportunities in the drug and healthcare space.
What a difference a year makes! Just twelve months ago, most initial public
offerings traded at a healthy premium (100-500%) of their offering price and
most investors bought for momentum and instantaneous gratification. This year is
the comeback year for stock pickers and relative value, which is clearly our
strength. We continue to make good returns using our investment discipline with
significantly less volatility than many comparable funds.
I am taking this opportunity to alert you to our recent write-ups in both
BARRON'S and INVESTMENT BUSINESS DAILY. Additionally, we have been reviewed in
THE FINANCIAL TIMES (of London), MUTUAL FUND and MONEY magazines. We have also
been written up by STANDARD & POOR'S. These favorable reviews have been
extremely beneficial for the profile of the Fund and for the recognition of our
GARP investment style.
If you have any questions, thoughts or concerns, or would like to obtain a
prospectus (which should be read carefully prior to investing in the Needham
Growth Fund), please contact us at 800/625-7071, visit our website at
www.needhamco.com or visit the Morningstar website at www.morningstar.net (enter
"NEEGX" in the ticker field).
Yours sincerely,
/S/PETER J.R. TRAPP
Peter J. R. Trapp
Portfolio Manager
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF PLOT POINTS USED IN PRINTED GRAPHIC
SECTOR WEIGHTINGS*+
(AS OF 6/30/00)
TECHNOLOGY & TELECOMMUNICATIONS 70.92%
HEALTHCARE/MEDICAL DEVICES/PHARMACEUTICALS 10.05%
MEDIA/LEISURE/CABLE 7.97%
CASH & FIXED INCOME INVESTMENTS 5.50%
RETAIL/BUSINESS SERVICES 3.78%
MISCELLANEOUS & OPTIONS 1.78%
PORTFOLIO SECTOR BREAKDOWN
WITH EXAMPLES
--------------------------------------------------
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.
--------------------------------------------------
HEALTHCARE/MEDICAL DEVICES/
PHARMACEUTICALS: Health Care Services;
Hospital & Physician Management; Medical
Devices & Supplies and Biotechnology.
--------------------------------------------------
MEDIA/LEISURE/CABLE: Cable TV;
Broadcasting & Media and Content.
--------------------------------------------------
RETAIL/BUSINESS SERVICES:
Business Services & e-Commerce and Retailing.
--------------------------------------------------
CASH & FIXED INCOME INVESTMENTS
--------------------------------------------------
MISCELLANEOUS & OPTIONS
--------------------------------------------------
* EXCLUDES SHORT POSITIONS OF 14.37% OF PORTFOLIO.
+ CALCULATION OF PERCENTAGES ARE BASED ON THE TOTAL VALUE OF COMMON STOCKS,
INVESTMENT COMPANIES, OPTIONS, FIXED INCOME INVESTMENTS AND CASH.
4
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SEMIANNUAL REPORT 2000
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Statement of Net Assets (UNAUDITED)
JUNE 30, 2000
SHARES VALUE
--------------------------------------------------------------------------------
COMMON STOCKS - (93.4%)
--------------------------------------------------------------------------------
BROADCASTING & MEDIA - (2.8%)
AT&T Corp.-Liberty Media Group, Series A*+ 40,000 $ 970,000
Liberty Digital, Inc.* 10,000 300,000
USA Networks, Inc.*+ 30,000 648,750
--------------------------------------------------------------------------------
1,918,750
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BUSINESS SERVICES & E-COMMERCE - (1.2%)
Cendant Corp.* 40,000 560,000
Euro909.Com ADR* 23,300 152,906
Genuity, Inc.* 10,000 91,563
--------------------------------------------------------------------------------
804,469
--------------------------------------------------------------------------------
CABLE TV - (5.3%)
Insight Communications Co., Inc.* 22,500 351,563
NTL, Inc.* 10,000 598,738
Shaw Communications, Inc.+ 20,000 493,750
Telewest Communications PLC ADR* 10,000 370,000
United Pan Europe Communications NV ADR*+ 31,500 850,500
UnitedGlobalCom, Inc., Class A* 20,000 935,000
--------------------------------------------------------------------------------
3,599,551
--------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT - (1.3%)
Arch Communications Group, Inc.* 30,000 195,000
Ericsson LM Telephone 20,000 400,000
Ezenia, Inc.* 60,000 266,250
--------------------------------------------------------------------------------
861,250
--------------------------------------------------------------------------------
COMMUNICATIONS SERVICES - (1.4%)
Cable and Wireless PLC ADR 10,000 500,640
China Unicom, Ltd.* 20,000 425,000
--------------------------------------------------------------------------------
925,640
--------------------------------------------------------------------------------
COMPUTER HARDWARE - (0.9%)
Compaq Computer Corp. 25,000 639,061
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMPUTER SOFTWARE - (9.9%)
BEA Systems, Inc.* 2,500 123,594
Citrix Systems, Inc.* 10,000 189,375
Epresence, Inc.* 40,000 290,000
Inprise Corp.* 40,000 245,000
Iona Technologies PLC ADR*+ 30,000 1,890,000
Kronos, Inc.* 30,000 780,000
Legato Systems, Inc.*+ 50,000 756,250
Manugistics Group, Inc.* 45,000 2,103,750
Segue Software, Inc.* 40,000 335,000
--------------------------------------------------------------------------------
6,712,969
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5
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NEEDHAM GROWTH FUND
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SHARES VALUE
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CONTRACT MANUFACTURING & MATERIALS - (12.1%)
ACT Manufacturing, Inc.* 30,000 $ 1,393,125
Artesyn Technologies, Inc.* 35,000 973,437
Benchmark Electronics, Inc.*+ 30,000 1,096,875
Coorstek, Inc.* 10,000 460,000
Manufacturers Services, Ltd.* 5,000 102,813
Merix Corp.*+ 30,000 1,410,000
Park Electrochemical Corp.+ 30,000 1,081,875
Plexus Corp.* 2,000 226,000
SBS Technologies, Inc.* 10,000 369,375
SCI Systems, Inc.* 15,000 587,812
Viasystems Group, Inc.* 30,000 485,625
--------------------------------------------------------------------------------
8,186,937
--------------------------------------------------------------------------------
DEFENSE & ELECTRONICS - (1.4%)
Diagnostic Retrieval System, Inc.* 20,000 232,500
Raytheon Co.+ 20,000 385,000
Teledyne Technologies, Inc.* 20,000 335,000
--------------------------------------------------------------------------------
952,500
--------------------------------------------------------------------------------
EDA & CAD/CAM - (0.9%)
Innoveda, Inc.* 60,000 273,750
Parametric Technology Corp.* 30,000 330,000
--------------------------------------------------------------------------------
603,750
--------------------------------------------------------------------------------
ELECTRONICS & AUTOMATION - (4.0%)
Adept Technology, Inc.* 30,000 1,402,500
Brooks Automation, Inc.* 20,000 1,278,750
--------------------------------------------------------------------------------
2,681,250
--------------------------------------------------------------------------------
ELECTRONICS & DISTRIBUTION - (2.0%)
Bell Microproducts, Inc.* 50,000 918,750
Tech Data Corp.* 10,000 435,625
--------------------------------------------------------------------------------
1,354,375
--------------------------------------------------------------------------------
ELECTRONICS & ELECTRICAL EQUIPMENT - (2.7%)
Applied Power, Inc.+ 30,000 1,005,000
In Focus Corp.* 20,000 643,750
Xerox Corp. 10,000 207,500
--------------------------------------------------------------------------------
1,856,250
--------------------------------------------------------------------------------
ELECTRONICS & INSTRUMENTATION - (3.8%)
Excel Technology, Inc.*+ 15,000 754,687
Genesis Microchip, Inc.* 30,000 536,250
Lecroy Corp.* 22,000 217,250
Planar Systems, Inc.* 40,000 517,500
Southwall Technologies, Inc.* 52,500 574,219
--------------------------------------------------------------------------------
2,599,906
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
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SEMIANNUAL REPORT 2000
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Statement of Net Assets (UNAUDITED) (Continued)
JUNE 30, 2000
SHARES VALUE
--------------------------------------------------------------------------------
ELECTRONICS & STORAGE - (3.9%)
Advanced Digital Information Corp.* 30,000 $ 478,125
Auspex Systems, Inc.* 40,000 197,500
Overland Data, Inc.* 44,000 610,500
Quantum Corp. DLT & Storage Systems* 40,000 387,500
Quantum Corp. Hard Disk Drive* 50,000 553,125
Storage Technology Corp.* 40,000 437,500
Storage Networks, Inc.* 100 9,025
--------------------------------------------------------------------------------
2,673,275
--------------------------------------------------------------------------------
HEALTH CARE SERVICES - (4.5%)
Caremark Rx, Inc.* 40,000 272,500
Dendrite International, Inc.* 15,000 499,688
IDX Systems Corp.*+ 35,000 494,375
IMS Health, Inc. 20,000 360,000
McKesson HBOC+ 50,000 1,046,875
Quintiles Transnational Corp.*+ 28,000 395,500
--------------------------------------------------------------------------------
3,068,938
--------------------------------------------------------------------------------
HOSPITAL & PHYSICIAN MANAGEMENT - (0.5%)
Phycor, Inc.* 200,000 125,000
US Oncology, Inc.* 40,000 200,000
--------------------------------------------------------------------------------
325,000
--------------------------------------------------------------------------------
MEDICAL DEVICES & SUPPLIES - (3.3%)
Charles River Laboratories International* 2,500 55,469
CONMED Corp.*+ 35,000 905,625
Hologic, Inc.* 29,600 199,800
Thermo Electron Corp.*+ 50,000 1,053,125
--------------------------------------------------------------------------------
2,214,019
--------------------------------------------------------------------------------
NETWORKING & COMMUNICATIONS EQUIPMENT - (4.0%)
3Com Corp.* 10,000 576,250
Cabletron Systems, Inc.*+ 40,000 1,010,000
Electronics For Imaging, Inc.* 45,000 1,139,063
Stratos Lightwave, Inc.* 500 13,938
--------------------------------------------------------------------------------
2,739,251
--------------------------------------------------------------------------------
OIL EQUIPMENT & SERVICES - (0.9%)
Varco International, Inc.* 25,000 581,250
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SATELLITE EQUIPMENT & SERVICES - (0.4%)
TCI Satellite Entertainment, Inc.* 35,000 304,062
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SATELLITE NAVIGATION EQUIPMENT & SERVICES - (1.6%)
Ecostar Communications Corp.* 10,000 331,094
KVH Industries, Inc.* 56,500 339,000
Panamsat Corp.* 10,000 436,875
--------------------------------------------------------------------------------
1,106,969
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
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NEEDHAM GROWTH FUND
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SHARES VALUE
--------------------------------------------------------------------------------
SEMI-CONDUCTOR & COMMUNICATIONS DEVICES - (11.9%)
Actel Corp.* 10,000 $ 456,250
Advanced Micro Devices, Inc.* 35,000 2,703,750
Anadigics, Inc.* 40,000 1,362,500
Cypress Semiconductor Corp.*+ 10,000 422,500
General Semiconductor, Inc.* 30,000 442,500
Integrated Device Technology, Inc.* 5,000 299,375
Lattice Semiconductor Corp.* 5,000 345,625
Micron Technology, Inc.* 5,000 440,312
SCG Holding Corp.*+ 21,000 459,375
Standard Microsystems Corp.* 60,000 922,500
Xicor, Inc.* 35,000 234,063
--------------------------------------------------------------------------------
8,088,750
--------------------------------------------------------------------------------
SEMI-CONDUCTORS CAPITAL EQUIPMENT - (8.4%)
ADE Corp.* 20,000 382,500
ASM International N.V.* 5,000 132,500
COHU, Inc. 20,000 539,375
Electroglas, Inc.* 20,000 430,000
FEI, Co.* 10,000 305,000
FSI International, Inc.* 50,000 1,084,375
GSI Lumonics, Inc.*+ 50,000 1,756,250
Nova Measuring Instruments, Ltd.* 40,000 642,500
Photronics, Inc.* 15,000 425,625
--------------------------------------------------------------------------------
5,698,125
--------------------------------------------------------------------------------
SPECIALITY RETAILING & MANUFACTURING - (2.7%)
Brookstone, Inc.* 30,000 287,812
Cutter & Buck, Inc.* 25,000 198,437
McNaughton Apparel Group, Inc.* 60,000 630,000
PETCO Animal Supplies, Inc.* 5,000 98,125
West Marine, Inc.* 40,000 273,750
Williams-Sonoma, Inc.* 10,000 324,375
--------------------------------------------------------------------------------
1,812,499
--------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS & EQUIPMENT - (1.6%)
EMS Technologies, Inc.* 25,000 450,000
Harris Corp. 20,000 655,000
--------------------------------------------------------------------------------
1,105,000
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $50,199,592) 63,413,796
--------------------------------------------------------------------------------
INVESTMENT COMPANIES - (2.0%)
H & Q Healthcare Investors Fund 22,436 692,712
H & Q Life Sciences Investors Fund 22,176 658,350
--------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES (Cost $732,065) 1,351,062
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
SEMIANNUAL REPORT 2000
--------------------------------------------------------------------------------
Statement of Net Assets (UNAUDITED) (Continued)
JUNE 30, 2000 NUMBER OF
CONTRACTS VALUE
--------------------------------------------------------------------------------
NAME/EXPIRATION DATE/STRIKE PRICE
--------------------------------------------------------------------------------
CALL OPTIONS WRITTEN - (-0.6%)
Advanced Micro Devices, Inc., July $100 100 $ (10,312)
Iona Technologies PLC, Sept. $70 100 (73,750)
Manugistics Group, Inc., Oct. $40 100 (140,000)
Manugistics Group, Inc., Oct. $35 100 (167,500)
Plexus Corp., Sept. $110 5 (8,625)
--------------------------------------------------------------------------------
TOTAL CALL OPTIONS WRITTEN (Premiums Received $230,402) (400,187)
--------------------------------------------------------------------------------
CALL OPTIONS PURCHASED - (1.3%)
Amex Natural Gas Index, Aug. $210 100 43,750
Brooks Automation, Inc., July $45 100 193,750
Brooks Automation, Inc., July $50 100 148,750
Eaton Corp., Jan. $70 100 73,750
Microsoft Corp., Jan. $75 200 265,000
Oil Service Index, July $120 100 63,750
Russell 2000 Index, July $530 100 92,500
--------------------------------------------------------------------------------
TOTAL CALL OPTIONS PURCHASED (Cost $764,275) 881,250
--------------------------------------------------------------------------------
PUT OPTIONS PURCHASED - (0.2%)
Advanced Micro Devices, Inc., July $80 100 80,625
Brooks Automation, Inc., July $50 50 4,375
Cabletron Systems, Inc., July $20 60 1,125
Cypress Semiconductor Corp., July $45 100 48,125
Integrated Device Technology, July $50 100 5,625
Iona Technologies PLC, Sept. $50 100 32,500
--------------------------------------------------------------------------------
TOTAL PUT OPTIONS PURCHASED (Cost $262,176) 172,375
--------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OPTIONS (Cost $796,049) 653,438
--------------------------------------------------------------------------------
PAR
(000)
--------------------------------------------------------------------------------
CORPORATE BONDS - (4.4%)
Federal National Mortgage Assoc. 6.625%
Due 04/15/02 (Cost $2,969,322) $3,000 2,986,908
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Needham Growth Fund
--------------------------------------------------------------------------------
Statement of Net Assets (UNAUDITED) (Continued)
JUNE 30, 2000
SHARES VALUE
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - (1.2%)
Provident Institutional Funds TempCash Portfolio 406,558 $ 406,558
The RBB Sansom Street Money Market Portfolio 406,558 406,558
--------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (Cost $813,116) 813,116
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL INVESTMENTS - (101.9%) (Cost $55,510,144)++ 69,218,320
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OTHER LIABILITIES IN EXCESS OF ASSETS - (-1.9%)
--------------------------------------------------------------------------------
Receivable from Brokers for Securities Sold Short 12,015,125
Other Assets 218,623
Securities Sold Short at Value (proceeds $11,384,837) (11,619,430)
Payable for Investment Securities Purchased (1,427,431)
Net Amounts due to Affiliates (431,875)
Other Liabilities (50,470)
--------------------------------------------------------------------------------
(1,295,458)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NET ASSETS - (100.0%) (Applicable to 2,053,698 shares
outstanding, $.001 par value, 1,000,000,000 shares authorized) $ 67,922,862
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 33.07
--------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY.
+ SECURITY POSITION IS EITHER ENTIRELY OR PARTIALLY HELD IN A SEGREGATED
ACCOUNT AS COLLATERAL FOR SECURITIES SOLD SHORT.
++ APPROXIMATES COST FOR FEDERAL INCOME TAX PURPOSES.
ADR - AMERICAN DEPOSITORY RECEIPT.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
SEMIANNUAL REPORT 2000
--------------------------------------------------------------------------------
Schedule of Securities Sold Short (UNAUDITED)
JUNE 30, 2000
NAME OF ISSUER SHARES VALUE
--------------------------------------------------------------------------------
Agilent Technologies, Inc. 2,500 $ 184,375
Akamai Technologies, Inc. 2,500 296,836
Amazon.com, Inc. 7,500 272,344
Apple Computer, Inc. 7,500 392,812
BMC Software, Inc. 5,000 182,422
Business Objects S.A. 4,000 352,500
Celestica, Inc. 5,000 248,125
CMGI, Inc. 5,000 229,062
Commerce One, Inc. 5,000 226,875
E.Piphany 2,500 267,969
ebay, Inc. 7,500 407,344
Freemarkets, Inc. 5,000 237,187
Gillette Co. 5,000 174,687
Hewlett-Packard Co. 2,500 312,187
Infospace.com, Inc. 2,500 138,125
Infosys Technolgy, Ltd. 2,500 443,125
Internap Network 5,000 207,578
International Capital Group, Inc. 5,000 185,078
Jazztel PLC 2,500 65,625
Kana Communicatons 2,500 154,688
Kulicke & Soffa Industries, Inc. 5,000 296,875
Lehman Brothers Holdings, Inc. 5,000 472,813
Lernout & Hauspie Speech Products 10,000 440,625
Lifeminders, Inc. 5,000 147,813
Martha Stewart Living Omnimedia 10,000 220,000
Numerical Technologies, Inc. 5,000 243,125
Oxford Health Plans, Inc. 10,000 238,125
Pacificare Health Systems 5,000 300,938
Pcorder.com, Inc. 5,000 38,750
Powerwave Technologies, Inc. 5,000 220,000
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
NEEDHAM GROWTH FUND
--------------------------------------------------------------------------------
Schedule of Securities Sold Short (UNAUDITED) (Continued)
JUNE 30, 2000
NAME OF ISSUER SHARES VALUE
--------------------------------------------------------------------------------
Priceline.com, Inc. 5,000 $ 189,922
PurchasePro.com, Inc. 2,500 102,500
Qualcomm, Inc. 2,500 150,000
Rambus, Inc. 3,000 309,000
Rational Software Corp. 2,500 232,344
SAP AG - Sponsored ADR 7,500 352,031
Software.com, Inc. 2,500 324,687
Symantec Corp. 5,000 269,687
Teradyne, Inc. 5,000 367,500
Triquint Semiconductor, Inc. 5,000 478,438
Verisign, Inc. 2,500 441,250
Verticalnet Inc. 5,000 184,688
Yahoo! Inc. 5,000 619,375
--------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $11,384,837) $11,619,430
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
SEMIANNUAL REPORT 2000
--------------------------------------------------------------------------------
Statement of Operations (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
<S> <C>
----------------------------------------------------------------------------------------
INVESTMENT INCOME
----------------------------------------------------------------------------------------
Interest $ 172,210
Dividends 67,792
----------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 240,002
----------------------------------------------------------------------------------------
EXPENSES
----------------------------------------------------------------------------------------
Investment Advisory fee 359,723
Distribution fees 72,152
Administration and Accounting fee 42,500
Custodian fee 38,400
Legal fee 29,453
Transfer Agent fee 15,000
Audit fee 13,703
Organization expenses 13,213
Shareholders' reports 13,079
Directors' fees 12,293
Filing fee 8,783
Insurance expense 5,114
Other expenses 24,485
----------------------------------------------------------------------------------------
TOTAL EXPENSES 647,898
----------------------------------------------------------------------------------------
Expenses Waived and Reimbursable --
----------------------------------------------------------------------------------------
NET EXPENSES 647,898
----------------------------------------------------------------------------------------
NET INVESTMENT LOSS (407,896)
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
----------------------------------------------------------------------------------------
Net Realized Gain on Investment Securities 15,394,779
Net Realized Gain on Option Contracts 653,266
Change in Unrealized Appreciation (Depreciation) of Investment Securities (4,467,185)
----------------------------------------------------------------------------------------
NET GAIN ON INVESTMENT SECURITIES 11,580,860
----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $11,172,964
----------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Needham Growth Fund
--------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
--------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
--------------------------------------------------------------------------------------------
OPERATIONS:
--------------------------------------------------------------------------------------------
Net Investment Loss $ (407,896) $ (433,671)
Net Realized Gain on Investment Securities 15,394,779 7,229,825
Net Realized Gain (Loss) on Option Contracts 653,266 (2,295,341)
Change in Unrealized Appreciation (Depreciation)
of Investment Securities (4,467,185) 12,836,170
--------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 11,172,964 17,336,983
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
--------------------------------------------------------------------------------------------
Net Investment Income -- --
Net Realized Gains -- (4,275,566)
--------------------------------------------------------------------------------------------
Total Distributions -- (4,275,566)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1):
--------------------------------------------------------------------------------------------
Shares Issued 31,240,291 26,496,723
Shares Issued in Reinvestment of Distributions -- 4,063,438
Shares Redeemed (16,634,180) (19,423,568)
--------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 14,606,111 11,136,593
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 25,779,075 24,198,010
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
NET ASSETS
--------------------------------------------------------------------------------------------
Beginning of Period 42,143,787 17,945,777
End of Period $ 67,922,862 $ 42,143,787
--------------------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED:
--------------------------------------------------------------------------------------------
Shares Issued 994,744 1,219,649
Shares Reinvested -- 211,197
Shares Redeemed (532,897) (878,176)
--------------------------------------------------------------------------------------------
461,847 552,670
--------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
SEMIANNUAL REPORT 2000
--------------------------------------------------------------------------------
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD (UNAUDITED) 1999 1998 1997 1996(*)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 26.47 $17.27 $ 14.42 $ 14.49 $ 10.00
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------
Net Investment (Loss) Income (0.14) (0.03) (0.30) 0.06 (0.11)
Net Gain on Securities
(Realized and Unrealized) 6.74 12.55 3.16 2.26 5.27
-----------------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 6.60 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 PERIOD $ 33.07 $ 26.47 $ 17.27 $ 14.42 $ 14.49
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 24.93%++ 79.72% 19.85% 15.66% 51.56%
-----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $67,923 $42,144 $17,946 $21,769 $14,379
-----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.25%+ 2.50% 2.50% 2.50% 2.50%
Ratio of Expenses to Average Net Assets
(Excluding Expenses Waived and
Reimbursable) 2.25%+ 2.84% 3.44% 3.29% 4.60%
Ratio of Net Investment (Loss) Income to
Average Net Assets (1.41)%+ (1.63)% (1.72)% 0.37% (1.27)%
Ratio of Net Investment (Loss) Income to
Average Net Assets (Excluding Expenses
Waived and Reimbursable) (1.41)%+ (1.97)% (2.66)% (0.42)% (3.37)%
Portfolio Turnover Rate 143.83%+ 145.45% 585.63% 724.08% 568.93%
<FN>
+ ANNUALIZED.
++ NON-ANNUALIZED.
* FUND COMMENCED OPERATIONS ON JANUARY 1, 1996.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
NEEDHAM GROWTH FUND
--------------------------------------------------------------------------------
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. 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, provided 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 is 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, 2000 to not more than 2.50% of average
daily net assets. For the six months ended June 30, 2000, the Advisor waived
none of its fee. Included in the accompanying Statement of Net Assets as of June
30, 2000 is net amounts due to affiliates of $431,875, which represents
investment advisory fee 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. 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, 2000, the Fund incurred $72,152 of
distribution fees, which were primarily paid to Needham & Company, Inc.
16
<PAGE>
SEMIANNUAL REPORT 2000
--------------------------------------------------------------------------------
Notes to Financial Statements (UNAUDITED) (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 six months ended June 30, 2000.
Purchases Sales
---------------------------------------------------------------
Long transactions $ 31,687,943 $ 26,188,695
Short sale transactions 114,214,748 120,799,628
---------------------------------------------------------------
Total $145,902,691 $146,988,323
---------------------------------------------------------------
At June 30, 2000, net unrealized appreciation of $13,473,583 was comprised of
gross unrealized appreciation and depreciation for financial reporting and
federal income tax purposes of $19,184,199 and $5,710,616, 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 June 30, 2000 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 six months ended June 30,
2000 is as follows:
Number of Premium
Options Written Contracts Received
------------------------------------------------------------
Options outstanding at
beginning of period -- $ --
Options written 4,470 3,664,117
Options expired (315) (129,576)
Options repurchases (3,750) (3,304,139)
------------------------------------------------------------
Options outstanding at
June 30, 2000 405 $ 230,402
------------------------------------------------------------
7. SHORT SALE TRANSACTIONS
During the six months ended June 30, 2000, 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 June 30, 2000, the market value of securities
separately segregated to cover short positions was $16,919,750. For financial
statement purposes, an amount equal to the settlement amount is included in the
accompanying 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, 2000 and
their related market values and proceeds are set forth in the accompanying
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 June 30, 2000 net assets consisted of:
Paid-in Capital $39,180,045
Accumulated Net Realized Loss (841,567)
Undistributed Net Realized Gains 16,110,801
Net Unrealized Appreciation of
Investment Securities 13,473,583
-------------------------------------------------------------
Total Net Assets $67,922,862
-------------------------------------------------------------
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.
17
<PAGE>
[GRAPHIC OMITTED}
NEEDHAM FUNDS
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
