SECURITIES AND EXCHANGE COMMISSION File No. 33-98310
WASHINGTON, DC 20549 811-9114
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 7 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 9 |X|
(Check appropriate box or boxes)
THE NEEDHAM FUNDS, INC.
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(Exact name of Registrant as Specified in Charter)
445 Park Avenue
New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 371-8300
John C. Michaelson Copy to: William H. Bohnett, Esq.
The Needham Funds, Inc. Fulbright & Jaworski L.L.P.
445 Park Avenue 666 Fifth Avenue
New York, New York 10022 New York, New York 10103
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(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: as soon as practicable,
following effectiveness of this filing.
It is proposed that this filing will become effective (check appropriate box):
|X| Immediately upon filing pursuant to paragraph (b)
|_| On (date) pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| On (date) pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| On (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_| This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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[Needham Logo]
THE NEEDHAM FUNDS, INC.
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NEEDHAM GROWTH FUND
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
PROSPECTUS
April 20, 2000
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The Securities and Exchange Commission has not approved or disapproved of
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
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Table of Contents
Page No.
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RISK/RETURN SUMMARY.........................................................1
BAR CHART AND PERFORMANCE TABLE.............................................2
FEES AND EXPENSES OF THE FUND...............................................3
INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES,
POLICIES AND RISKS.................................................4
RISK FACTORS................................................................9
INVESTMENT ADVISER.........................................................10
MANAGEMENT OF THE FUND.....................................................10
DISTRIBUTION ARRANGEMENTS..................................................11
HOW TO PURCHASE SHARES.....................................................12
AUTOMATIC INVESTMENT PROGRAM...............................................13
NET ASSET VALUE............................................................13
REDEMPTIONS................................................................14
SHAREHOLDER SERVICES.......................................................15
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS....................................16
ADMINISTRATOR, SHAREHOLDER SERVICING AGENT AND
TRANSFER AGENT....................................................17
CUSTODIAN..................................................................17
ADDITIONAL INFORMATION.....................................................17
FINANCIAL HIGHLIGHTS.......................................................19
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RISK/RETURN SUMMARY
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Investment Goal: The Needham Growth Fund seeks long-term capital appreciation
through investing primarily in the equity securities of growth
companies with superior long-term growth rates.
Principal Investment Strategy: Under normal market conditions, the Fund invests at least 65% of
its total assets in equity securities of domestic issuers listed
on a nationally recognized securities exchange or traded on the
Nasdaq System. The Fund invests in stocks from a variety of
industries, including the healthcare, technology, media/leisure
and business and consumer services industries. These are some of
the sectors within the economy which the Adviser believes will
have significant long-term growth rates and often include the
stocks of rapidly growing smaller and mid-sized companies.
Principal Investment Risks: The Fund invests primarily in equity securities, which fluctuate
in value. Political and economic news can influence marketwide
trends. Other factors may cause price swings in a single company's
stock or the stocks of the companies within a given industry. In
addition, the Fund often invests in smaller companies. Smaller
companies may have limited product lines, markets or financial
resources. Securities of smaller companies may trade at a lower
volume than more widely held securities and may fluctuate in value
more sharply than those of other securities. The Fund is not a
"diversified" fund within the meaning of the Investment Company
Act of 1940. Accordingly, the Fund may invest its assets in a
relatively small number of issuers, thus making an investment in
the Fund potentially more risky than an investment in a
diversified fund which is otherwise similar to the Fund. Loss of
money is a risk of investing in the Fund.
Who Should Invest in the Fund: The Fund is not intended to provide a balanced investment program.
The Fund is most suitable for an investor who is willing to accept
a higher degree of risk than in some other mutual funds.
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Bar Chart and Performance Table
The bar chart and table shown below indicate the risks of investing in the
Fund. The bar chart shows changes in the performance of the Fund's shares from
year to year over a four-year period. The Adviser has been managing the Fund
since it commenced investment operations on January 1, 1996. The table following
the bar chart shows how the Fund's average annual returns for the listed periods
compare to those of the S&P 500, a widely used composite index of 500 publicly
traded stocks.
The Fund's past performance does not necessarily indicate how the Fund will
perform in the future.
[GRAPHIC OMITTED]
(In the printed version of the document, a line graph appears which depicts the
following plot points:
1996 1997 1998 1999
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51.56% 15.66% 19.85% 79.72%
Figure 1
During the four-year period shown in the above chart, the highest quarterly
return was 36.85% (for the quarter ended December 31, 1999) and the lowest
quarterly return was (14.37)% (for the quarter ended September 30, 1998).
Average annual total returns
for the periods ended December 31, 1999
Past 1 Year Since January 1, 1996
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Needham Growth Fund 79.72% 39.36%
S&P 500 21.04% 26.33%
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Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
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Shareholder Fees (fees paid directly from your account)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)............................ None
Maximum Deferred Sales Charge (Load) (as a percentage of offering price)......................................... None
Maximum Sale Charge (Load) Imposed on Reinvested Dividends and Other Distributions............................... None
Redemption Fee (as a percentage of amount redeemed) during first six months after purchase....................... 0.50%(1)
Thereafter....................................................................................................... None
Exchange Fee..................................................................................................... None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees.................................................................................................. 1.25%(2)
Distribution and/or Service (12b-1) Fees......................................................................... 0.25%
Other Expenses................................................................................................... 1.34%(2)
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Total Annual Fund Operating Expenses............................................................................. 2.84%
Fee Waiver and Expense Reimbursement(2) (.34)%(2)
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Net Expenses 2.50%
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(1) The redemption fee is currently being waived by the Fund. A fee of $10.00
is charged for each redemption by wire.
(2) The Adviser has agreed by contract 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 ending December 31, 2000 to not more than 2.50% of
average daily net assets.
Example
This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years
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$253 $779 $1,331 $2,836
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INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES, POLICIES AND RISKS
Needham Growth Fund ("NGF" or the "Fund") seeks to create long-term tax
efficient capital appreciation for its shareholders by investing in equities of
public companies with above average prospective long-term growth rates. These
above average growth rates are exhibited by companies at the vortex of rapid and
fundamental changes in the world economy resulting from technological or
demographic change. In this manner, the Fund seeks to build wealth for long-term
investors. The Fund strives for maximum tax efficiency by balancing gains and
losses and does not view its historically high turnover to be an impediment to
this goal. The central premise of the Fund's investment style is growth, but
more specifically, "Growth At a Reasonable Price" or "GARP." This style has
become more popular as the markets have risen to unprecedented levels and as
investors have come to understand some of the dangers and disadvantages of
momentum or aggressive growth investing.
The methodology used for GARP investing is detailed below:
o The Fund relies on fundamental research. Investment decisions at the Fund
are based upon the independent analysis of business fundamentals. The first
level of analysis concerns industry prospects. Company-specific analysis
includes company visits, discussions with management and employees, and
discussions with customers and competitors. The Fund focuses, above all, on
the quality of the management because it believes that management is the
most critical element in determining the success of a business.
o The Fund relies on macro-economic analysis. Investment decisions also are
based on detailed analysis of the U.S. and worldwide economies and
macro-economic trends; an analysis of the high growth sectors of those
economies; an analysis of the sector rotation within the respective equity
markets; an analysis of the dominant or growing companies within these
sectors; and finally a ranking by sector and valuation of those stocks.
o The Fund is not a technical trader. The Fund does not rely upon "technical"
investing (based upon computer-based stock selection, technical analysis
and charts), including "momentum" investing. Once the Fund qualitatively
identifies businesses and managements in which it would like to invest, it
then values those businesses to assess a reasonable price at which to
purchase the stock. The Fund seeks to purchase securities at prices which
the Fund believes have the potential to earn a return of at least 50% over
an eighteen-month period. The Fund believes that 2000 will be a market that
rewards fundamental analysis and experience over formula approaches.
o The Fund focuses on long-term values. In the short term, equity markets
often incorrectly value stocks. Good companies are often undervalued based
on short-term factors such as a disappointing quarter for the company not
representative of the strength of the business, undue general or
industry-specific pessimism, institutions wishing to exit the stock in size
or a lack of knowledge and support for the stock. The Fund believes that
these undervalued situations represent buying opportunities. Lower quality
companies are often overvalued based on short-term factors such as
inordinate optimism about a new industry or technology, aggressive
forecasts, investment banks promoting their clients, earnings spikes,
momentum investors driving up prices or accounting gimmicks. These
overvalued situations represent
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opportunities for short-selling as, in the long-term, real underlying value
does eventually assert itself.
o The Fund invests in rapidly growing companies. The Fund invests in
companies that are likely to be the beneficiaries of long-lasting economic
trends resulting from fundamental technological change.
The Fund currently has investments in technology, healthcare,
communications, media/leisure, and business and consumer services. Most of these
areas benefit from the power of information technology. In the industrial
technology area, this includes instrumentation, oilfield services and equipment,
and contract manufacturing. In the electronics area this includes semiconductors
(capital equipment, devices, design software), telecommunications/Internet
(equipment, system software, content) and data storage. In the healthcare field
this includes medical devices and healthcare services (information systems,
managed care, physician practice management). In the consumer/business services
area this includes branded consumer products, specialty retailers, and
outsourcing of services such as data management and telemarketing.
The Fund focuses on industries at the vortex of changes.
Our investment themes include:
(1) The growth of industries centered on the microchip. The major
technological driver of the past ten years and the ten years to come
is the microchip. Major industries have been built around the
capabilities provided by this device. These industries include: the
assembly, distribution and service of personal computers,
semiconductors, the design of semiconductors and the equipment to
manufacture semiconductors, electronic components, data storage,
networking of computers, software and the whole new area of the
Internet with its many ramifications for networking equipment, content
and operating software and commerce. Each of these are now major
industries in their own right. Some of these companies have strong
proprietary positions and form core long-term holdings for the Fund.
However, many technology companies offer a commodity product without a
strong proprietary differentiation -- these companies are the repeated
victims of global overcapacity and lack pricing power and do not make
good long-term investments.
(2) The application of information technology to healthcare. Demand for
healthcare services grows insatiably with the aging population. Yet
this is one of the least efficient industries in America when it comes
to using data efficiently to improve the quality of service while
improving efficiency and reducing costs. Only recently have control of
costs and knowledge of outcomes been of any real interest to
healthcare providers. The environment has changed dramatically and
information systems are now a priority among healthcare providers. The
Adviser believes the restructuring of information systems of one of
the largest industries in America is in its infancy.
(3) The application of information technology to oil and gas production.
The exploration for oil and gas has changed dramatically in the past
fifteen years with technological improvements based on electronics
leading to lower
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exploration costs and greater access to reserves. Companies with
advanced technology have established leadership positions in providing
equipment and services.
(4) The growth of business outsourcing services. Strategic outsourcing by
business represents a true paradigm shift in how businesses operate.
The rapid expansion of communications capability has facilitated the
growth of business outsourcing. In the past, companies were
constrained by the high cost and primitive capabilities of
communications and data technology to do all possible jobs internally,
many only tangential to their main business. These services ranged
from legal work to managing data processing centers. Increasingly,
well run businesses are, by competitive necessity, focusing their own
efforts on only a few areas of core competency and contracting all
other services to partners who are focused on delivering a top quality
service in that particular area. As a result of communications
improvements, now further enhanced by the Internet, suppliers are able
to maintain continuous, real-time and low cost interface with
customers over distances, further reducing the need to maintain
in-house capability. Suppliers have become "transparent" to the
customer. Two areas of particular interest within outsourcing are the
outsourcing of manufacturing of products and the outsourcing of data
and telephone services. In manufacturing, there is a rapid transition
throughout American industry from strictly internal manufacturing to
the purchase of components and subassemblies to entire "box build,"
where the complete product is contracted to an outside manufacturer,
leaving the "manufacturer" only the high value-added design and
customer interface functions. The outsourcing of data service is a
rapidly growing industry with services ranging from electronic
payments to inbound and outbound telephone sales and fulfillment to
brokerage firms' clearing operations.
(5) Restructurings and spin-offs. The Fund also looks for investment
opportunities in restructurings and spin-offs, primarily in the
information technology industries. Business continues to restructure
to increase shareholders' value by focusing on core competencies and
operations. The divestiture of underperforming operations was a theme
of the 1980s and early 1990s. The Fund is now seeing the spin-off to
shareholders and the divestiture of good but unrelated businesses that
helps companies focus resources on core areas. These restructurings
often represent excellent investment opportunities at both the parent
and the subsidiary. The parent company's returns are often enhanced by
the divestiture as resources are directed at higher return
opportunities, management is better able to focus on the core
business, and the market finds the remaining business easier to
understand and therefore support. When good businesses are spun-off to
shareholders, an investment opportunity may arise as the former
subsidiary management is often more focused and provided with strong
incentives to succeed, but the company is often not adequately
followed or understood in the marketplace.
In summary, the keys to successful investing by the Fund include an
understanding of macro economic trends, an evaluation of the high growth sectors
of the economy, and their leaders and
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laggards, an analysis of the business fundamentals, quality of management, and
competitive position. After making an evaluation, the Fund decides what price to
pay for the growth prospects bearing in mind the discipline of Growth At a
Reasonable Price. The Fund then uses its patience and liquidity to execute on
its investment opportunities.
The Fund may engage in investment strategies for hedging purposes or to
seek to increase its investment return. Each of the percentage limitations with
respect to investments in securities described below applies immediately after a
purchase and any subsequent change in the applicable percentage resulting from
market fluctuations does not require unwinding any part of the transaction.
The Fund has adopted certain investment restrictions which are fundamental
and may not be changed without a shareholder vote. Except as specifically noted,
the Fund's investment objective and policies described in the following pages
are not fundamental policies and may be changed or modified by the Fund's Board
of Directors without shareholder approval. The Fund will not, however, change
its investment objective without first providing written notice to shareholders
at least 30 days in advance. A complete list of the Fund's fundamental
investment restrictions and certain other policies not described in the
Prospectus may be found in the Statement of Additional Information.
Under normal market conditions, the Fund intends to invest at least 65% of
its total assets in equity securities of domestic issuers listed on a nationally
recognized securities exchange or traded on the Nasdaq System. The balance of
the Fund's assets may be held in cash or invested in other securities, including
preferred stock, common stock equivalents (mainly securities exchangeable for
common stock), options, futures and various corporate debt instruments.
Equity Securities
The Fund emphasizes investments in common stocks which may include equity
securities of smaller companies. The Fund also may buy securities such as
convertible debt, preferred stock, warrants, or other securities exchangeable
for shares of common stock and other equity securities, including publicly
traded partnership interests. In selecting equity investments for the Fund, the
Adviser seeks to identify companies in a variety of industries, including but
not limited to the technology, healthcare and specialty retail industries, which
it believes will achieve superior growth rates, based on its market research and
company analysis. When investing in technology the Adviser focuses on product
cycles and unit growth. When investing in retailing and healthcare the Adviser
focuses heavily on demographic, regulatory and lifestyle trends. The Adviser
will consider overall growth prospects, financial condition, competitive
position, technology, research and development, productivity, labor costs, raw
materials costs and sources, competitive operating margins, return on
investment, management and other factors.
Borrowing and Leverage
As a fundamental policy, the Fund may borrow from banks up to 25% of its
total assets and may pledge its assets in connection with these borrowings. If
the Fund makes additional investments while borrowings are outstanding, this may
constitute a form of leverage. This leverage may exaggerate changes in the
Fund's share value and the gains and losses on the Fund's investments.
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Short Sales
The Fund may sell securities short and borrow the same security from a
broker or other institution to complete the sale. The Fund may make a profit or
loss depending upon whether the market price of the security decreases or
increases between the date of the short sale and the date on which the Fund
replaces the borrowed security. All short sales must be fully collateralized and
the Fund will not sell short securities whose underlying value exceeds 25% of
its net assets. The Fund will also limit short sales in any one issuer's
securities to 2% of the Fund's net assets and will not sell short more than 2%
of any one class of the issuer's securities.
Options, Futures and Forward Contracts
The Fund may buy and sell options and futures contracts to manage its
exposure to changing interest rates, security prices, currency exchange rates
and precious metals prices. The Fund may enter into forward contracts as a hedge
against future fluctuations in foreign exchange rates. The Fund may buy and sell
stock index futures contracts or related options in anticipation of general
market or market sector movements. The Fund may also invest in indexed
securities or related options whose value is linked to currencies, interest
rates, commodities, indices, or other financial indicators. Options and futures
may be combined with each other or with forward contracts in order to adjust the
risk and return characteristics of the overall strategy. The Fund may invest in
options and futures based on any type of security, index, or currency related to
their investments, including options and futures traded on foreign exchanges and
options not traded on exchanges.
Except as described below, the Fund will not engage in options, futures or
forward transactions, other than for hedging purposes, if as a result more than
5% of its total assets would be so invested. The Fund may engage in these kinds
of transactions to an unlimited extent for hedging purposes.
Options, futures and forward contracts can be volatile investments and
involve certain risks. The ability of the Fund to use these strategies
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. If the Fund makes a transaction at an
inappropriate time or judges market conditions incorrectly, options and futures
strategies may significantly lower the Fund's return. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. See Statement of Additional Information.
Defensive Investments
The Fund may invest temporarily up to 100% of its assets in cash or cash
equivalents, investment grade debt securities or repurchase agreements for
defensive purposes. Consistent with the Fund's investment objective and
policies, its Adviser may make changes in the portfolio consistent with the
Fund's policies whenever it believes doing so is in the best interest of the
Fund. To the extent the Fund takes defensive positions, it may not achieve its
investment objectives.
Non-Diversification and Investment in Market Sectors
The Fund is "non-diversified" for purposes of the 1940 Act and so has the
flexibility to invest its assets in the securities of fewer issuers than if it
was "diversified." To the extent the Fund invests a significant portion of its
assets in a few issuers' securities, the performance of the Fund could be
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significantly affected by the performance of those issuers. The Fund must,
however, meet certain diversification requirements under Federal tax law. See
Statement of Additional Information--"Investment Restrictions."
As a fundamental policy, the Fund will not invest more than 25% of its net
assets in issuers conducting their principal business in the same industry.
However, the Fund at times may invest more than 25% of its total assets in
securities of issuers in one or more market sectors. A market sector may be made
up of companies in a number of related industries. Business and economic
developments affecting that sector likely would have greater effect on the Fund
than those same developments would have on a fund invested in a wider spectrum
of market or industrial sectors.
Risk Factors
The Fund invests primarily in equity securities, which fluctuate in value.
Therefore, shares of the Fund will also fluctuate in value. Political and
economic news can influence marketwide trends. Other factors may be ignored by
the market as a whole but may cause price swings in a single company's stock or
the stocks of the companies within a given industry. The net asset value of the
Fund's shares, to the extent the Fund invests in debt securities, is affected by
changes in the general level of interest rates.
Investments in smaller companies may offer greater opportunities for
capital appreciation than larger companies, but may also involve certain special
risks. These companies may have limited product lines, markets, or financial
resources and may be dependent on a limited management group. These securities
may also trade less frequently and at a lower volume than more widely held
securities, and may fluctuate in value more sharply than those of other
securities. There may be less available information about these issuers or less
market interest than is normally the case with respect to larger companies.
Certain investment techniques described in this Prospectus, such as short
sales, options and futures strategies, and leverage, may entail risks and may
result in significant capital loss. The Fund may engage in various strategies as
described above, to varying degrees, both to seek to increase its return and to
hedge its portfolio against movements in the securities markets and exchange
rates. Use of these strategies involves the risk of imperfect correlation in
movements in the price of options and futures and movements in the price of the
securities or currencies which are the subject of the hedge. There can be no
assurance that a liquid secondary market for options and futures contracts will
exist at any specific time. Options and futures contracts, and certain of the
other investments described above and in the Statement of Additional
Information, may be considered "derivative" investments, and entail certain
risks described above and in the Statement of Additional Information.
It is anticipated that in 2000 the rate of portfolio turnover of the Fund
may be approximately 100-200%. This rate of turnover will likely result in
higher brokerage commissions and higher levels of realized gains than if the
turnover rate was lower and may subject investors to higher levels of taxable
gains.
In addition, the Fund may invest in the securities of non-U.S. issuers,
which have risks that are different from the risks associated with investments
in the securities of U.S. issuers.
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INVESTMENT ADVISER
Needham Investment Management L.L.C. (the "Adviser"), 445 Park Avenue, New
York, NY 10022, is the investment adviser for the Fund. Needham Investment
Management L.L.C. was formed in 1995 and is registered as an investment adviser
with the Securities and Exchange Commission. Needham Investment Management
L.L.C. is an affiliate of Needham & Company, Inc. Needham & Company, Inc. is the
Fund's distributor and is an investment banking firm specializing in emerging
growth companies. Needham & Company, Inc. has substantial expertise in
investment research, underwriting and private investments.
The Adviser directs investments of the Fund pursuant to an Investment
Advisory Agreement dated January 1, 1996 (the "Advisory Agreement"). The Fund
pays the Adviser a fee at the annual rate of 1.25% of the average daily net
value of the Fund. This fee is higher than that paid by most mutual funds. The
Adviser or persons employed by or associated with the Adviser are, subject to
the authority of the Fund's Board of Directors, responsible for the overall
management of the Fund's affairs. The Adviser has 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 ending December 31, 2000 to not more than
2.50% of average daily net assets.
Portfolio Manager
Mr. Peter J.R. Trapp joined Needham in 1994 as a Senior Vice President in
institutional sales and has served as a Managing Director of Needham & Co. since
1996 and also serves as Executive Vice President and Portfolio Manager of the
Fund. Mr. Trapp has been primarily responsible for the day-to-day management of
the Fund's Portfolio since January 1998.
MANAGEMENT OF THE FUND
The Directors of the Fund are responsible for generally overseeing the
conduct of the Fund's business. The Directors of the Fund include the following
individuals:
George A. Needham--Mr. Needham founded Needham & Company, Inc. in 1985 and is
its Chairman and Chief Executive Officer. Mr. Needham received BS and BA degrees
from Bucknell University and an MBA from the Stanford University Graduate School
of Business. Mr. Needham is also a General Partner of Needham Capital Partners,
L.P., Needham Capital Partners, II, L.P. and a General Partner of Needham
Emerging Growth Partners, L.P., all private investment partnerships.
John C. Michaelson--Mr. Michaelson is President and Chief Executive Officer of
Needham Investment Management L.L.C. Mr. Michaelson joined Needham & Company,
Inc. in 1986 and is a Managing Director. Mr. Michaelson is also a General
Partner of Needham Capital Partners, L.P., Needham Capital Partners, II, L.P.
and Needham Emerging Growth Partners, L.P., all private investment partnerships.
Mr. Michaelson received BA and MA degrees with honors from Oxford University and
an MBA with distinction from the Harvard School of Business.
Roger W. Johnson--Mr. Johnson was the Administrator of the U.S. General Services
Administration from 1993 to March 1996 and was also a member of the President's
Management Council and the National Economic Council during that period. Prior
to 1993, Mr. Johnson served for nine years as Chairman and Chief Executive
Officer of Western Digital Corporation, a Fortune 500 technology
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firm. He is currently a director of Sypris Solutions, Inc., Women's Consumer
Network, Maxtor Corporation, Carole Little and Insulectro.
James Poitras--Mr. Poitras was Founder, President, Chief Executive Officer and
Chairman of the Board of Integrated Silicon Systems, a computer software
company, from 1985 to 1995. Mr. Poitras was a co-founder of Avanti Inc. in 1995,
is a member of the Institute of Electrical and Electronics Engineers' Industry
Advisory Commission and has lectured widely on business development and
entrepreneurship.
F. Randall Smith--Mr. Smith is a founder and Chief Executive and Investment
Officer of Capital Counsel LLC, a registered investment advisory firm. He was a
co-founder of Train, Smith Counsel, a registered investment advisory firm from
1975 to 1999, and National Journal, a weekly publication on the U.S. Government,
and served as Special Assistant to the Undersecretary of State for Economic
Affairs prior to joining Train, Smith Counsel.
DISTRIBUTION ARRANGEMENTS
Needham & Company, Inc., an affiliate of the Adviser, acts as a distributor
for the Fund. Rule 12b-1 adopted by the Securities and Exchange Commission under
the 1940 Act permits an investment company to directly or indirectly finance any
activity associated with the distribution of its shares and/or
shareholder-related services in accordance with a plan adopted by the Fund's
Board of Directors ("12b-1 Plan"). Pursuant to this rule, the Directors of the
Fund have approved, and the Fund has entered into, a Distribution and Services
Agreement (the "Distribution Agreement") with Needham & Company, Inc. under
which the Fund may pay a service fee to Needham & Company, Inc. or others at an
annual rate of up to 0.25 of 1% of the aggregate average daily net assets of the
Fund which are attributable to Needham & Company, Inc. or the various other
service providers. These fees are paid out of the Fund's assets on an on-going
basis, and thus over time these fees may increase the cost of your investment
and may cost you more than paying other types of sales charges. In addition, the
Adviser may pay amounts from its own resources for the provision of such
services.
The Distribution Agreement provides that Needham & Company, Inc. will use
the services fee received from the Fund, in part, for payments (i) to compensate
broker-dealers or other persons for providing distribution assistance, (ii) to
otherwise promote the sale of shares of the Fund such as by paying for the
preparation, printing and distribution of prospectuses for other than current
shareholders and sales literature or other promotional activities, and (iii) to
compensate banks and other qualified financial institutions for providing
administrative, accounting and shareholder liaison services with respect to the
Fund's shareholders. Some payments under the Distribution Agreement are used to
compensate broker-dealers based on assets maintained in the Fund by their
customers. Distribution services fees are accrued daily and paid monthly, and
are charged as expenses of the Fund as accrued. Distribution services fees
received from the Fund will not be used to pay any interest expenses, carrying
charges or other financial costs. In adopting the Distribution Agreement, the
Directors of the Fund determined that there was a reasonable likelihood that the
Distribution Agreement would benefit the Fund and the shareholders.
The Fund and/or Needham & Company, Inc. may enter into related servicing
agreements appointing various firms, such as broker-dealers or banks, to provide
all or any portion of the foregoing services for their customers or clients
through the Fund. The Fund and/or Needham &
11
<PAGE>
Company, Inc. may enter into servicing agreements with banks and others,
including the Adviser or its affiliates, to provide these kinds of services.
The administrative and accounting services provided by banks and other
qualified financial institutions may include, but are not limited to,
establishing and maintaining shareholder accounts, sub-accounting, processing of
purchase and redemption orders, sending confirmation of transactions, forwarding
financial reports and other communications to shareholders and responding to
shareholder inquiries regarding the Fund. PFPC Trust Company acts as custodian
of the Fund's portfolio. Its address is 400 Bellevue Parkway, Wilmington,
Delaware, 19809.
HOW TO PURCHASE SHARES
You may purchase shares of the Fund at net asset value without any sales or
other charge by sending a completed application form to:
Needham Growth Fund
c/o PFPC Inc.
P.O. Box 8949
Wilmington, DE 19899-8949.
However, you should not send any correspondence by overnight courier to
this post office box address. Correspondence sent by overnight courier should be
addressed to the Fund at:
Needham Growth Fund
c/o PFPC Inc.
400 Bellevue Parkway, Suite 108
Wilmington, DE 19809
Telephone transactions may not be used for initial purchases. If you want
to make subsequent telephone transactions, select this feature on your
Application or call 1-800-625-7071 to request an authorization form to set up
your account for this feature. PFPC Inc. is the Administrator of the Fund.
You also may purchase shares of the Fund through authorized broker-dealers
or other institutions who may charge for their services. These sales agents have
the responsibility of transmitting purchase orders and funds, and of crediting
their customers' accounts following redemptions in a timely manner and in
accordance with their customer agreements and this Prospectus.
The minimum initial investment for individuals, corporations, partnerships,
IRAs or trusts is $1,500. There is a $100 minimum for subsequent investments.
Shares of the Fund are offered on a continuous basis. The Fund, however,
reserves the right, in its sole discretion, to reject any application to
purchase shares. Your application will not be accepted unless it is accompanied
by a check drawn on a U.S. bank, savings and loan, or credit union in U.S. funds
for the full amount of the shares to be purchased.
After you open an account, you may purchase additional shares by sending a
check payable to Needham Growth Fund and following the instructions given above.
All shares will be purchased
12
<PAGE>
at the net asset value per share next determined after receipt of your
application in proper order and acceptance of your application by the Fund.
Subsequent investments may also be made by telephone (electronic funds transfer)
from a bank checking or money market account. The transfer must specify account
name, address and Needham account number. You must set up this feature in
advance according to the above instructions.
The Fund will charge a $25.00 fee against your account, in addition to any
loss sustained by the Fund, for any payment check returned for insufficient
funds.
You should contact the Fund at 1-800-625-7071 to obtain the latest wire
instructions for wiring funds to PFPC Inc. for the purchase of Fund shares and
to notify PFPC Inc. that a wire transfer is coming.
Automatic Investment Program
You may also be eligible to participate in the Fund's Automatic Investment
Program, an investment plan that automatically debits money from your bank
account and invests it in the Fund through the use of electronic funds transfers
or automatic bank drafts. This feature must be set up by you in advance. You may
elect to make subsequent investments by transfers of a minimum of $50 on the
fifth or twentieth day of each month into your established Fund account. Contact
the Administrator for more information about the Fund's Automatic Investment
Program.
NET ASSET VALUE
The price of the Fund's shares is based on the net asset value of the Fund.
The net asset value per share of the Fund will be determined on each day when
the New York Stock Exchange (the "Exchange") is open for business at the close
of the Exchange and will be computed by determining the aggregate market value
of all assets of the Fund less its liabilities, and then dividing by the total
number of the Fund's shares outstanding. The determination of net asset value
for a particular day is applicable to all applications for the purchase of
shares as well as all requests for the redemption of shares received before the
close of trading on the Exchange on that day. Therefore, the price at which a
purchase or redemption is effected is based on the next calculation of net asset
value after the order is placed.
Portfolio securities and options positions for which market quotations are
readily available are stated at the last sale price reported by the principal
exchange for each such security as of the exchange's close of business.
Securities and options for which no sale has taken place during the day and
securities which are not listed on an exchange are valued at the mean of the
current closing bid and asked 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 by the Board of Directors, although the actual
calculations may be made by persons acting pursuant to the direction of the
Board of Directors. The assets of the Fund may also be valued on the basis of
valuations provided by a pricing service approved by or on behalf of the Board
of Directors.
13
<PAGE>
REDEMPTIONS
You may redeem your shares at any time. You are entitled to redeem all or
any portion of the shares credited to your accounts by submitting a written
request for redemption by regular mail to: Needham Growth Fund, c/o PFPC Inc. at
P.O. Box 8949, Wilmington, DE 19899-8949. Redemption requests sent by overnight
courier should be sent to PFPC Inc. at 400 Bellevue Parkway, Suite 108,
Wilmington, DE 19809.
Upon the receipt of a redemption request, you will receive a check based on
the net asset value next determined after the redemption request was received,
which may be more or less than the amount originally invested. If the shares to
be redeemed represent an investment made by check, the Fund reserves the right
to withhold the proceeds until the check clears. It will normally take up to
three days to clear local checks and up to seven days to clear other checks, but
may take longer under some circumstances. Shares redeemed or exchanged within
six months of purchase will be charged a redemption fee of 0.50%. The redemption
fee currently is being waived by the Fund.
Your written redemption request will be considered to have been received in
"proper order" if the following conditions are satisfied:
o your request is in writing, indicates the number of shares to be redeemed and
identifies the shareholder's account number;
o your request is signed by you exactly as the shares are registered;
o your request is accompanied by certificates, if any, issued representing the
shares, which have been endorsed for transfer (or are themselves accompanied by
an endorsed stock power) exactly as the shares are registered; and
o if you are requesting that the redemption proceeds be sent other than to the
address of record or if the proceeds of a requested redemption exceed $50,000,
the signature(s) on the request must be guaranteed by an eligible signature
guarantor through a medallion program. You can obtain a signature guarantee from
a domestic bank or trust company, broker, dealer, clearing agency or savings
association which is a participant in a medallion program recognized by the
Securities Transfer Association. The three recognized medallion programs are
Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges Medallion
Program (SEMP) and New York Stock Exchange, Inc. Medallion Signature Program
(MSP). Signature guarantees which are not a part of these programs will not be
accepted.
Your written redemption request will not be effective until all documents
are received in "proper order" by PFPC Inc.
Telephone Redemptions
The Fund permits individual shareholders (once within a thirty day period)
or a representative of record for an account to redeem shares by telephone in
amounts up to $10,000 by calling 1-800-625-7071. In order to use this service,
you must have elected to do so in your Application or complete an authorization
form supplied by the Fund. Telephone redemptions must be in amounts of $1,000 or
more. Instructions must include your account number. Checks issued must be made
14
<PAGE>
payable to the owner of record and may only be mailed to the address of record.
The request cannot be honored if an address change has been made for the account
within 60 days of the telephone redemption request.
If there are multiple account owners, PFPC Inc. may rely on the
instructions of only one owner. This account option is not available for
retirement account shares, or newly purchased (within the prior 15 days) shares.
The Administrator may record all calls.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures may include, among other
things, requiring some form of personal identification prior to acting upon
telephone instructions. The Fund reserves the right to refuse a telephone
redemption if it believes it is advisable to do so. Assuming the Fund's security
procedures are followed, neither the Fund nor PFPC Inc. will be responsible for
the authenticity of redemption instructions received by telephone and believed
to be genuine and any loss therefrom will be borne by the investor. During
periods of substantial economic or market change, telephone redemptions may be
difficult to complete. You may always redeem shares by mail if you are unable to
contact the Fund by telephone.
Additional Information on Redemptions
If you hold Fund shares in non-certificate form, you may elect to have
redemption proceeds of $5,000 or more wired to your brokerage account or a
commercial bank account designated by you. The current fee for this service is
$10.00.
If you have an IRA or other retirement plan, you must indicate on your
redemption request whether or not to withhold Federal income tax. Redemption
requests failing to indicate an election not to have Federal tax withheld will
be subject to withholding.
You may also redeem Fund shares through broker-dealers holding such shares
who have made arrangements with the Fund permitting redemptions by telephone or
facsimile transmission. These broker-dealers may charge a fee for this service.
If your transactions in the Fund's shares at any time reduce your account
value to below $500, the Fund may choose to notify you that, unless your account
is brought up to at least such minimum amount, the Fund may, within a reasonable
time, redeem all your shares in the account and close it by making payment to
you of the proceeds.
Shareholder Services
The Fund offers certain tax-sheltered retirement plans through which you
may purchase shares, including IRAs (and "rollovers" from existing retirement
plans) for you and your spouse, SEP-IRAs and Roth IRAs. Shares of the Fund may
also be purchased by Qualified Retirement Plans such as profit-sharing and money
purchase plans, 401(k) Plans and other Defined Contribution Plans, and by
Defined Benefit Plans. Should you have questions on the purchase of shares by
retirement plans, please call 1-800-344-9028 for Shareholder Services. These
types of accounts may be established only upon receipt of a written application
form.
15
<PAGE>
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
The Fund intends to make annual distributions to its shareholders of record
of substantially all of its realized net capital gains (the excess of realized
net long-term capital gains over realized net short-term capital losses), any
realized net gains from foreign currency transactions, net investment income and
the excess, if any, of realized net short-term capital gains over realized net
long-term capital losses. The Fund may make additional distributions, if
necessary, to avoid a 4% Federal excise tax on certain undistributed ordinary
income and capital gain net income. Certain distributions made to shareholders
of record as of a date in October, November or December of a given year which
are paid by the Fund in January of the immediately subsequent year will be
taxable to shareholders as if received on December 31 of such given year.
Dividends from the investment company's taxable income (whether paid in
cash or reinvested in additional Fund shares) are taxable to shareholders as
ordinary income. Distributions of net capital gain (the excess of net long-term
capital gain over net short-term capital losses) are also taxable to
shareholders. In general, a noncorporate shareholder's net capital gains will be
taxed at a maximum rate of 20% for property held more than 12 months.
Distributions of net investment income and capital gain net income are taxable
whether received in cash or reinvested in additional shares.
Unless a shareholder elects to do otherwise, all dividends and capital
gains distributions from the Fund will be automatically reinvested in additional
full and fractional Fund shares. Shareholders who do not wish to have dividends
and distributions automatically reinvested in Fund shares, may choose between
two options:
(1) automatic reinvestment of capital gains distributions in Fund shares and
payment of dividends in cash; or
(2) payment of all dividends and distributions in cash.
Shareholders may change this election at any time by notifying the
Administrator or their account representative if the account is maintained at an
eligible broker-dealer or bank. Dividends and distributions will be reinvested
at the Fund's per share net asset value on the reinvestment date established for
the dividend or distribution.
The Fund is required to withhold as "backup withholding" 31% of all
dividends, capital gain distributions and redemption proceeds payable to any
individuals and certain other non-corporate shareholders who do not provide the
Fund with a correct taxpayer identification number and certain required
certifications or who are otherwise subject to backup withholding. Upon a
redemption of Fund shares, a shareholder will ordinarily recognize a taxable
gain or loss, subject to certain Federal tax rules. The Fund anticipates that it
will be subject to foreign withholding taxes for which it may, in certain years,
be able to pass through as a credit or deduction to its shareholders.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and shareholders. In addition to
those considerations, there may be other Federal, state, local, or foreign tax
considerations applicable to a particular investor. Prospective shareholders are
therefore urged to consult their tax advisers with respect to the effects of the
investment on their own tax situations.
16
<PAGE>
ADMINISTRATOR, SHAREHOLDER
SERVICING AGENT AND TRANSFER AGENT
The Fund employs PFPC Inc. as Administrator under an administration
contract dated January 2, 1996 (the "Administration Contract") to provide
administrative services to the Fund. The services provided by the Administrator
under the Administration Contract are subject to the supervision of the officers
and Directors of the Fund, and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records and
preparation of reports. Subject to certain waivers for these services, the Fund
pays a monthly fee at the annual rate of 0.10% on the first $200 million of
average daily net assets of the Fund, subject to a minimum annual fee of
$100,000.
PFPC Inc. also provides various shareholder services made available to each
shareholder, including performance of transfer agency and registrar functions
and dividend paying agent. PFPC Inc., as Administrator, acts as the Fund's
shareholder servicing agent. The principal address of PFPC Inc. is 400 Bellevue
Parkway, Wilmington, Delaware 19809.
CUSTODIAN
PFPC Trust Company acts as custodian for the Fund. Rules adopted under the
1940 Act permit the Fund to maintain its non- U.S. securities and cash in the
custody of certain eligible banks and securities depositories. Pursuant to these
rules, the Fund's non-U.S. securities and cash are held by its sub-custodians
who have been approved by or under the delegated authority of the Board of
Directors of the Fund in accordance with the rules of the Commission. Selection
of the sub-custodians and any decision to invest in non-U.S. markets has been
made following a consideration of a number of factors, including, but not
limited to, the practices, procedures, internal controls and financial stability
of the institution, the ability of the institution to perform capable custodial
services for the Fund and provide reasonable care for Fund assets, the
reputation and standing of the institution in its national market, the political
and economic stability of the countries in which the sub-custodians will be
located, and risks of potential nationalization or expropriation of Fund assets.
In addition, the 1940 Act requires that non-U.S. sub-custodians, among other
requirements, have no lien on the assets of the Fund and maintain adequate
accessible records.
ADDITIONAL INFORMATION
Auditors
Arthur Andersen LLP, 1345 Avenue of the Americas, 5th Floor, New York, New
York 10105, serves as the Fund's independent auditors.
Ernst & Young L.L.P., 787 Seventh Avenue, 18th Floor, New York, New York
10019, acted as the Fund's independent auditors for the fiscal years ended
December 31, 1996 and December 31, 1997.
17
<PAGE>
Counsel
Fulbright & Jaworski L.L.P., 666 Fifth Avenue, 31st Floor, New York, New
York 10103 serves as the Fund's counsel.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past four years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). The information
for the fiscal years ended December 31, 1998 and 1999 has been audited by Arthur
Andersen L.L.P., whose report, along with the Fund's financial statements, is
included in the Fund's Annual Report, which is available upon request. The
information for the fiscal years ended December 31, 1996 and 1997 was audited by
Ernst & Young, LLP, the Fund's prior independent accountants.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
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 Net Investment (Loss) Income
to Average Net Assets........................ (1.63)%** (1.72)%** 0.37%** (1.27)%**
Portfolio Turnover Rate........................ 145.45% 585.63% 724.08% 568.93%
</TABLE>
*Fund commenced operations on January 1, 1996.
**Had certain waivers and reimbursements not been in effect, the ratio of
expenses to average net assets, for the years ended December 31, 1999, 1998,
1997 and 1996, would have been 2.84%, 3.44%, 3.29% and 4.60%, respectively, and
the ratio of net investment income (loss) to average net assets, for the years
ended December 31, 1999, 1998, 1997 and 1996, would have been (1.97)%, (2.66)%,
(0.42)% and (3.37)%, respectively.
19
<PAGE>
For investors who want more information about the Fund, the following documents
are available upon request:
Annual/Semi-Annual Reports: Additional information about the Fund's investments
is available in the Fund's annual and semi-annual reports to shareholders. In
the annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
Statement of Additional Information: The Fund's SAI provides more detailed
information about the Fund and is incorporated into this Prospectus by
reference, making it legally part of this prospectus.
The Fund's Annual Report, Semi-Annual Report and SAI are available, without
charge, upon request by contacting the Fund's Transfer Agent, PFPC Inc., at
800-625-7071. Shareholder inquiries should be directed to Needham Growth Fund,
c/o PFPC Inc., P.O. Box 8949, Wilmington, DE, 19899-8949. Correspondence sent by
overnight courier should be sent to Needham Growth Fund, c/o PFPC Inc., 400
Bellevue Parkway, Suite 108 Wilmington, DE 19809.
You also can review the Fund's reports and SAI at the Securities and Exchange
Commission's Public Reference Room. Text-only copies can be obtained from the
SEC for a fee by writing to or calling the Public Reference Room of the SEC,
Washington, D.C. 20549-6009. 800-SEC-0330. Copies also can be obtained free from
the SEC's website at www.sec.gov.
Investment Company Act
File No. 811-9114
NEEDHAM GROWTH
FUND(R)
PROSPECTUS
April 20, 2000
<PAGE>
------------------------------------------
NEEDHAM GROWTH FUND
445 Park Avenue
New York, New York 10022
------------------------------------------
A no-load, nondiversified open-end management investment company which
seeks capital appreciation by investing in equities of companies with above
average long-term growth rates.
------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
April 20, 2000
------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current Prospectus for Needham Growth Fund (the
"Fund"), dated April 20, 2000, a copy of which may be obtained at no charge by
contacting the Fund's administrator, PFPC Inc., P.O. Box 8949, Wilmington, DE
19899-8949 or by calling PFPC Inc. at 1-800-625-7071 or Needham & Company, Inc.
at 1-800-344-9028.
The Fund's financial statements are incorporated by reference in this
Statement of Additional Information from the Fund's Annual Report.
<PAGE>
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES..............................................1
INVESTMENT RESTRICTIONS.......................................................10
INVESTMENT ADVISER............................................................12
THE DISTRIBUTOR AND DISTRIBUTION OF THE SHARES................................14
TRANSFER AGENCY, ADMINISTRATION SERVICES
AND FUND ACCOUNTING..................................................16
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................16
MANAGEMENT....................................................................19
NET ASSET VALUE...............................................................21
PERFORMANCE INFORMATION.......................................................22
TAX-SHELTERED RETIREMENT PLANS................................................24
TAXES .....................................................................24
Taxation of the Fund--In General.....................................24
Taxation of the Fund's Investments...................................25
Taxation of the Shareholders.........................................27
ORGANIZATION AND CAPITALIZATION...............................................31
FINANCIAL STATEMENTS..........................................................32
i
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
(see "INVESTMENT OBJECTIVES AND POLICIES" in the Fund's prospectus)
The Needham Funds, Inc. is an open-end management investment company
organized as a corporation under the laws of the State of Maryland on October
12, 1995, which seeks long-term capital appreciation through investing in equity
securities of growth companies with superior long-term growth rates. The Fund
is classified as a non-diversified fund under the Investment Company Act of 1940
(the "1940 Act") and is offered on a no-load basis.
Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of domestic issuers listed on a nationally
recognized securities exchange or traded on the Nasdaq System. The balance of
the Fund's assets may be held in cash or invested in other securities, including
preferred stock, common stock equivalents, options, futures and various
corporate debt instruments.
Debt Securities
The Fund may buy debt securities of all types issued by both domestic and
foreign issuers, including government securities, corporate bonds and
debentures, commercial paper, and certificates of deposit. It is the Fund's
intention to invest no more than 35% of total assets in debt securities.
Lower-Rated Debt Securities
The Fund may purchase lower-rated debt securities, sometimes referred to as
"junk" or "high yield bonds" (those rated BB or lower by Standard & Poor's
Corporation ("S&P") or Ba or lower by Moody's Investors Service, Inc.
("Moody's")). However, no more than 10% of the Fund's total assets (such 10%
also being included in the 35% limitation stated above) may be invested in non-
investment grade debt securities. These securities are considered to be highly
speculative, may have poor prospects of attaining investment standing and may be
in default. Like those of other fixed-income securities, the value of
lower-rated securities fluctuate in response to changes in interest rates. In
addition, the values of such securities are also affected by changes in general
economic conditions and business conditions affecting the specific industries of
their issuers.
The lower ratings of certain securities held by the Fund reflect the
greater possibility that adverse changes in the financial condition of the
issuer, or in general economic conditions, or both may impair the ability of the
issuer to make payments of interest and principal. A number of factors,
including ability of the issuer to make timely payments, could lessen liquidity
and limit the Fund's ability to sell at prices approximating the values the Fund
placed on such securities. In the absence of a liquid trading market for
securities held by the Fund, it may be difficult to establish the fair market
value of these securities. The rating assigned to a security by Moody's or S&P
does not reflect an assessment of the volatility of the security's market value
or of the liquidity of an investment in the security.
1
<PAGE>
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments.
Issuers of lower-rated securities are often highly leveraged and,
consequently, their ability to service their debt during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may be unable to repay debt at maturity by refinancing. The risk of
loss due to default is significantly greater because such securities frequently
are unsecured and subordinated to senior indebtedness. Certain of the
lower-rated securities in which the Fund invests are issued to raise funds in
connection with the acquisition of a company. The highly leveraged capital
structure of such issuers may make them especially vulnerable to adverse changes
in economic conditions.
In order to enforce its rights in the event of a default under such
securities, the Fund may be required to take possession of and manage assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the Fund's net asset value. A
Fund may also be limited in its ability to enforce its rights and may incur
greater costs in enforcing its rights in the event an issuer becomes the subject
of bankruptcy proceedings.
Other Debt Securities
Zero-coupon securities are debt securities which are usually issued at a
deep discount and do not provide for payment of interest prior to maturity. Even
though zero-coupon securities do not pay current interest in cash, the Fund is
nonetheless required to accrue interest income on them and to distribute the
amount of that interest at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to satisfy its
distribution requirement.
When other debt obligations are stripped of their unmatured interest
coupons by the holder, the stripped coupons are sometimes sold separately. The
principal or corpus is then sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does not
receive any rights to periodic cash interest payments. Purchasers of stripped
principal obligations acquire, in effect, discount obligations that are
economically identical to zero-coupon bonds.
Investing in Convertible Securities
The Fund may invest in convertible securities: that is, bonds, notes,
debentures, preferred stocks and other securities which are convertible into
common stocks. Investments in convertible securities may provide incidental
income through interest and dividend payments and/or an opportunity for capital
appreciation by virtue of their conversion or exchange features.
2
<PAGE>
Convertible debt securities and convertible preferred stocks, until
converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stocks changes, and, therefore, also tends to follow movements in the
general market for equity securities. As the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock, although typically not as much as
the underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide
for a stream of income (or in the case of zero coupon securities, accretion of
income) with generally higher yields than common stocks. Convertible securities
generally offer lower yields than non-convertible securities of similar quality
because of their conversion or exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Investing in Foreign Securities
Certain of the Fund's investments may be of securities in issuers located
in countries having repatriation restrictions. Investment in securities subject
to repatriation restrictions of more than seven days will be considered illiquid
securities and will be subject to the Fund's overall 15% limitation on
investment in illiquid securities.
Individual foreign economies may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. Further, a Fund investing in foreign securities may encounter
greater difficulties or be unable to pursue legal remedies or obtain judgments
in foreign courts.
Because foreign securities typically will be denominated in foreign
currencies, the value of such securities to the Fund will be affected by changes
in currency exchange rates and in exchange control regulations, and costs will
be incurred in connection with conversions between currencies.
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A change in the value of a foreign currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Fund's securities
denominated in the currency. Such changes will also affect the Fund's income and
distributions to shareholders. The Fund may be affected either favorably or
unfavorably by fluctuations in the relative rates of exchange between the
currencies of different nations, and the Fund therefore may engage in certain
foreign currency hedging strategies. Such hedging strategies may include the
purchase and sale of foreign currencies on a spot or forward basis, or the
purchase and sale of options or futures contracts with respect to foreign
currencies. Such strategies involve certain investment risks and transaction
costs to which the Fund might not otherwise be subject. These risks include
dependence on the Adviser's ability to predict movements in exchange rates, as
well as the difficulty of predicting, and the imperfect movements between,
exchange rates and currency hedges.
Investments may be made from time to time in companies in developing
countries as well as in developed countries. Although there is no universally
accepted definition, a developing country is generally considered by the Adviser
to be a country which is in the initial state of industrialization. Shareholders
should be aware that investing in the equity and fixed income markets of
developing countries involves exposure to unstable governments, economies based
on only a few industries and securities markets which trade a small number of
securities. Securities markets of developing countries tend to be more volatile
than the markets of developed countries; however, such markets have in the past
provided the opportunity for higher rates of return to investors. There are
substantial risks involved in investing in securities issued by developing
country companies which are in addition to the usual risks inherent in foreign
investments. Some countries in which the Fund may invest may have fixed or
managed currencies. Further, certain currencies may not be traded
internationally. Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a U.S. instrument and foreign entities may not be subject
to accounting, auditing, and financial reporting standards and requirements
comparable to those of the U.S. There is generally less government supervision
and regulation for exchanges, financial institutions and issuers in foreign
countries than there is in the U.S. Moreover, certain foreign investments may be
subject to foreign withholding taxes. Foreign markets have different clearance
and settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended securities purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of Fund
securities due to settlement problems could also result
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either in losses to the Fund due to subsequent declines in value of the Fund
security or, if the Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser.
Foreign securities such as those purchased by the Fund may be subject to
foreign government taxes, higher custodian fees and dividend collection fees
which could reduce the yield on such securities. Trading in futures contracts
traded on foreign commodity exchanges may be subject to the same or similar
risks as trading in foreign securities.
Foreign Currency Transactions
Under normal circumstances, consideration of the prospects for currency
exchange rates will be incorporated into the long-term investment decisions made
for the Fund with regard to overall diversification strategies. Although the
Fund values its assets daily in terms of U.S. dollars, it does not intend
physically to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund may do so from time to time and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. The Fund may use forward contracts, along
with futures contracts and put and call options, to "lock in" the U.S. dollar
price of a security bought or sold and as part of its overall hedging strategy.
The Fund will conduct its foreign currency exchange transactions, either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through purchasing put and call options on, or by entering
into, futures contracts or forward contracts to purchase or sell foreign
currencies. See "-- Forward Foreign Currency Exchange Contracts" and "-- Futures
and Options Transactions."
It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security is less than
the amount of foreign currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward currency contract prices. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
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<PAGE>
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward contracts as a hedge against future
fluctuations in foreign exchange rates. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell a fixed
amount of U.S. dollars or foreign currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at the price set at the time of the contract. Unlike foreign currency futures
contracts, which are standardized exchange-traded contracts, forward currency
contracts are usually traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers.
The Fund may enter into forward contracts under various circumstances. For
example, the Fund may enter into a forward contract for the purchase or sale of
a security denominated in a foreign currency in order to lock in the price of
the security in U.S. dollars or some other foreign currency which the Fund is
holding. By entering into a forward contract for the purchase or sale of a fixed
amount of U.S. dollars or other currency for the amount of foreign currency
involved in the underlying security transactions, the Fund will be able to
protect itself against any adverse movements in exchange rates between the time
the security is purchased or sold and the date on which payment is made or
received. The Fund may also purchase a forward contract to hedge against an
anticipated rise in a currency versus the U.S. dollar or other currency, pending
investment in a security denominated in that currency.
The Fund may enter into a forward contract to sell or purchase, for a fixed
amount of U.S. dollars or other currency, an amount of foreign currency other
than the currency in which the securities to be hedged or purchased are
denominated approximating the value of some or all of the portfolio securities
to be hedged or purchased. This method of hedging, called cross-hedging, will be
used when it is determined that the foreign currency in which the portfolio
securities are denominated has insufficient liquidity or is trading at a
discount as compared with some other foreign currency with which it tends to
move in tandem. The Fund is permitted to enter into forward contracts with
respect to currencies in which certain of its portfolio securities are
denominated and on which options have been written.
In certain of the above circumstances the Fund may have realized fewer
gains than had the Fund not entered into the forward contracts. Moreover, the
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible, since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
The Fund's Custodian will place cash or liquid equity or debt securities
into a segregated account of the Fund in an amount equal to the value of the
Fund's total assets committed to the consummation of forward foreign currency
contracts. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
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basis so that the value of the account will equal the amount of the Fund's
commitments with respect to such contracts. At maturity of a forward currency
contract, the Fund may either sell the portfolio security and make delivery of
the foreign currency, or it may retain the security and terminate its
contractual obligation to deliver the foreign currency prior to maturity by
purchasing an "offsetting" contract with the same currency trade obligating it
to purchase, on the same maturity date, the same amount of the foreign currency.
There can be no assurance, however, that the Fund will be able to effect such a
closing purchase transaction.
Futures and Options Transactions
The use of financial futures contracts and options on such futures
contracts may reduce the Fund's exposure to fluctuations in the prices of
portfolio securities and may prevent losses if the prices of such securities
decline. Similarly, such investments may protect the Fund against fluctuation in
the value of securities in which the Fund is about to invest.
The use of financial futures contracts and options on such futures
contracts as hedging instruments involves several risks. First, there can be no
assurance that the prices of the futures contracts or options and the hedged
security will move as anticipated. If prices do not move as anticipated, the
Fund may incur a loss on its investment. Second, investments in options, futures
contracts and options on futures contracts may reduce the gains which would
otherwise be realized from the sale of the underlying securities which are being
hedged. Third, the effective use of options and futures contracts also depends
on the Fund's ability to terminate options and futures positions as desired.
There can be no assurance there will be a sufficiently liquid market for the
Fund to effect closing transactions at any particular time or at an acceptable
price. If the Fund cannot close a futures position, or if limitations imposed by
an exchange or board of trade on which futures contracts are traded prevent the
Fund from closing out a contract, the Fund may incur a loss or may be forced to
make or take delivery of the underlying securities or currencies at a
disadvantageous time.
In addition, the purchase or sale of futures contracts or sale of options
on futures contracts involve the risk that the Fund could lose more than the
original margin deposit required to initiate the transaction. The purchase of
options on futures contracts involves less potential risk than the purchase or
sale of futures contracts because the maximum amount at risk is the premium paid
for the options plus transaction costs. Although the maximum amount at risk when
the Fund purchases an option on a security, currency, index or futures contract
is the premium paid for the option plus transaction costs, there may be
circumstances when the purchase of an option would result in a loss to the Fund,
whereas the purchase of the underlying security, currency or futures contract
would not, such as when there is no movement in the level of the underlying
security, currency or futures contract. The value of an options or futures
position relating to a non-U.S. currency may vary with changes in the value of
either the currency involved or the U.S. dollar or both and has no relationship
to the investment merits of individual non-U.S. securities held in a hedged
investment portfolio.
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The Fund may write covered call options on its underlying portfolio
securities, whether equity or debt, on stock or bond indexes and on currencies
in which the Fund invests. Covered call writing may be used for hedging purposes
and for closing long call positions and for achieving incremental income. A call
option will be considered covered if the Fund (a) owns the security or currency
underlying the written option, (b) holds a call option on the underlying
security, currency or index with a similar exercise price or (c) maintains
sufficient cash, cash equivalents or liquid high grade securities sufficient to
cover the exercise price of the option.
The Fund may also write covered put options. This technique will be used
when the Fund seeks to purchase a security, or group of securities in the case
of an index option, at a price equal to or less than the prevailing market price
at the time of the put sale. The Fund may also sell covered puts for achieving
incremental income. A put will be considered covered if a Fund (a) maintains
cash, cash equivalents or liquid, high grade debt obligations sufficient to
cover the exercise price of the option, (b) holds a put option on the underlying
security with an exercise price equal to or greater than the exercise price of
the written put or (c) where the exercise price of the purchased put is lower
than that of the written put, the Fund maintains sufficient cash, cash
equivalents or liquid high grade debt obligations equal to the difference. Puts
may also be written in order to close long put positions. In calculating the 5%
limitation on options, futures and forward transactions, other than for hedging
purposes, the Fund shall include the premiums paid on options and options on
futures (excluding in-the-money amounts on such options) and the initial margin
deposits on the Fund's futures positions.
In order to fix the cost of future purchases, the Fund may purchase calls
on equity and debt securities that the Adviser intends to include in the Fund's
portfolio. Calls may also be used to participate in an anticipated price
increase of a security without taking on the full risk associated with actually
purchasing the underlying security. The Fund may purchase puts to hedge against
a decline in the market value of portfolio securities.
Repurchase Agreements and Reverse Repurchase Agreements
The Fund will only enter into a repurchase agreement where (i) the
underlying securities are of the type which the Fund's investment policies would
allow it to purchase directly, (ii) the market value of the underlying security,
including accrued interest, will be at all times equal to or exceed the value of
the repurchase agreement, and (iii) payment for the underlying securities is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. The Fund will not enter into
a repurchase agreement with a maturity of more than seven business days if, as a
result, more than 15% of the value of the Fund's net assets would then be
invested in such repurchase agreements and other illiquid securities.
The Fund may enter into reverse repurchase agreements in which the Fund
sells securities and agrees to repurchase them at a mutually agreed date and
price. Generally, the Fund will be able to keep the interest income associated
with those portfolio securities while the securities reside with the other party
to the agreement. Such transactions are advantageous if the interest cost to the
Fund
8
<PAGE>
of the reverse repurchase transaction is less than the cost of otherwise
obtaining the cash raised through the transaction.
Reverse repurchase agreements involve the risk that the market value of the
securities that the Fund is obligated to repurchase under the agreement may
decline below the repurchase price. In the event the other party under a reverse
repurchase agreement becomes bankrupt or insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.
Securities Lending
The Fund may lend its portfolio securities, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have a market value at least equal
to the current market value of the securities loaned; (2) the Fund may at any
time call the loan and regain the securities loaned; (3) the Fund will receive
any interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed such percentage of
the total assets of the Fund as the Directors may establish, but not to exceed
20%, including repurchase agreements. In addition, it is anticipated that the
Fund may share with the borrower some of the income received on the collateral
for the loan or that it will be paid a premium for the loan.
Before the Fund enters into a loan, the Adviser considers the relevant
facts including the creditworthiness of the borrower. The risks in lending
portfolio securities consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
Indexed Securities
The Fund may purchase securities whose prices are indexed to the prices of
other securities, securities indices, currencies, commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. The performance of indexed
securities largely depends on the performance of the security, currency,
commodity or other instrument to which they are indexed, as well as general
economic factors in the U.S. or abroad. At the same time, indexed securities are
subject to the credit risks associated with the issuer of the security and their
values may decline substantially if the issuer's creditworthiness deteriorates.
Indexed securities may be more volatile than the underlying instrument itself.
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<PAGE>
Additional Risks Associated with Hedging Instruments
The Fund's ability to hedge effectively all or a portion of its securities
depends upon the ability of the Adviser to predict correctly the degree to which
price movements of securities held in the Fund's portfolio correlate to the
price movements of the relevant hedging instruments. In addition, the
effectiveness of any hedging strategy using index options, index futures,
interest rate options or interest rate futures depends upon the correlation
between the components of the underlying index and the securities held by the
Fund.
Other Permitted Investments
The Fund may invest in securities issued by other investment companies
within the limits prescribed by the Investment Company Act of 1940 (the "1940
Act") and applicable rules thereunder. As a shareholder of another investment
company, the Fund would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses thus would be in addition to the advisory and other expenses that
the Fund bears in connection with its own operations.
The Fund may also purchase or sell portfolio securities on a when-issued or
delayed delivery basis in compliance with applicable 1940 Act guidelines.
When-issued or delayed delivery transactions involve a commitment by the Fund to
purchase or sell securities with payment and delivery to take place in the
future in order to secure what is considered to be an advantageous price or
yield to the Fund at the time of entering into the transaction.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Fund as
fundamental policies and may only be changed by the affirmative vote of a
majority of the Fund's outstanding shares. The term "majority of the Fund's
outstanding shares" means the vote of (i) 67% or more of the Fund's shares
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund are present or represented by proxy, or (ii) more than 50% of the
Fund's outstanding shares, whichever is less.
These investment restrictions provide that the Fund may not:
1. Make investments for the purpose of exercising control or management;
2. Purchase or sell real estate or real estate mortgage loans (provided
that such restriction shall not apply to securities secured by real estate or an
interest therein or issued by companies which invest in real estate or interests
therein), commodities or commodity contracts (except that the Fund may deal in
forward foreign exchange between currencies and the Fund may purchase and sell
interest rate and currency options, futures contracts and related options and
indexed
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notes and commercial paper), or interests or leases in oil, gas or other mineral
exploration or development programs (provided that such restriction shall not
apply to securities issued by companies which invest in oil, gas or other
mineral exploration or development programs);
3. Except as described in the Prospectus, purchase any securities on
margin, except for use of short-term credit necessary for clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of initial
or variation margin in connection with futures contracts or options transactions
is not considered the purchase of a security on margin);
4. Borrow amounts and pledge assets in connection therewith in excess of
25% of its total assets taken at market value (including the amount borrowed),
and then only from banks as a temporary measure, including to meet redemptions
or to settle securities transactions and provided further that no additional
investments shall be made while borrowings exceed 5% of total assets;
5. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from making any otherwise
permissible borrowings, mortgages or pledges, short sales, or entering into
permissible reverse repurchase agreements, and options and futures transactions;
6. Underwrite any issue of securities (except to the extent that the Fund
may be deemed to be an underwriter within the meaning of the Securities Act of
1933 in the disposition of restricted securities);
7. Make loans of its securities exceeding 20% of its total assets; and
8. Invest 25% or more of its net assets in one or more issuers conducting
their principal business in the same industry.
As matters of non-fundamental policy, the Fund may not:
1. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of any one
such company is owned by the Fund, (ii) 5% of the Fund's total assets, taken at
market value, would be invested in any one such company, or (iii) 10% of the
Fund's total assets, taken at market value, would be invested in such companies'
securities. Any purchase by the Fund of securities of other investment
companies, except in connection with a merger, consolidation, acquisition or
reorganization, shall be made in the open market where no commission results
other than customary brokerage commissions;
2. With respect to 50% of the value of its total assets, invest more than
25% of the value of its total assets in the securities of one issuer, and with
respect to the other 50% of the value of its total assets, invest more than 5%
of the value of its total assets in the securities of one issuer or
11
<PAGE>
acquire more than 10% of the outstanding voting securities of a single issuer.
This restriction shall not apply to U.S. Government securities;
3. With respect to 75% of the value of its total assets, purchase more than
10% of the outstanding voting securities of any issuer;
4. Invest in oil, gas or mineral exploration or development programs or
leases;
5. Purchase or sell real estate or make real estate mortgage loans or
invest in real estate limited partnerships not traded on a national securities
exchange, except that the Fund may purchase or sell securities issued by
entities engaged in the real estate industry or instruments backed by real
estate; and
6. Invest in warrants (other than warrants acquired by the Fund as a part
of a unit or attached to securities at the time of purchase) if, as a result,
such investment (valued at the lower of cost or market value) would exceed 5% of
the value of the Fund's net assets, provided that any warrants in which the Fund
is short "against the box" will be netted for purposes of this 5% limitation.
These restrictions are not fundamental policies and may be changed by the
Board of Directors without a shareholder vote, to the extent permitted by
applicable law including rules of the Commission. Except as otherwise may be
specifically stated herein, the Fund's other investment policies stated in this
Statement of Additional Information and in the Prospectus are not considered
fundamental and may be changed by the Board of Directors at any time without a
shareholder vote if and to the extent any such changes are consistent with the
requirements of the 1940 Act.
If a percentage restriction is adhered to at the time of the investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of net assets will not be considered a violation
of any of the foregoing restrictions. The Fund shall, however, reduce its
holdings of illiquid securities in an orderly fashion in order to maintain
adequate liquidity.
INVESTMENT ADVISER
The investment adviser of the Fund is Needham Investment Management L.L.C.
(the "Adviser"), a Delaware limited liability company, pursuant to an Investment
Advisory Agreement with the Fund dated as of January 1, 1996 (the "Advisory
Agreement"). The Adviser furnishes an investment program for the Fund and
determines, subject to the overall supervision and review of the Board of
Directors, what investments should be purchased, sold and held. The Adviser is
ninety-nine percent (99%) owned by Needham & Company, Inc. Each of Messrs.
Needham and Michaelson may be deemed to be control persons of Needham & Company,
Inc. based upon their positions as officers, directors and/or the stockholders
of that entity. (See "MANAGEMENT" and
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"THE DISTRIBUTOR AND THE DISTRIBUTION OF THE SHARES" in this Statement of
Additional Information).
Under the terms of the Advisory Agreement, and at the direction of the
Board of Directors, the Adviser maintains records and furnishes or causes to be
furnished all required reports or other information concerning the Fund to the
extent such records, reports and other information are not maintained by the
Administrator, Shareholder Servicing Agent, Custodian or other agents.
The Adviser provides the Fund with office space, facilities and certain
business equipment and provides the services of consultants, executive and
clerical personnel for administering the affairs of the Fund. The Adviser
compensates all executive and clerical personnel and Directors of the Fund if
such persons are employees or affiliates of the Adviser or its affiliates.
The expenses borne by the Fund include: the charges and expenses of the
shareholder servicing and dividend disbursing agent; custodian fees and
expenses; legal, auditors' fees and expenses; brokerage commissions for
portfolio transactions; taxes, if any; the advisory fee; extraordinary expenses
(as determined by the Directors of the Fund); expenses of shareholder and
Director meetings, and of preparing, printing and mailing proxy statements,
reports and other communications to shareholders; expenses of preparing and
setting in type prospectuses and periodic reports and expenses of mailing them
to current shareholders; expenses of registering and qualifying shares for sale
(including compensation of the Adviser's employees in relation to the time spent
on such matters); expenses relating to the Plan of Distribution (Rule 12b-1
Plan); fees of Directors who are not "interested persons" of the Adviser;
membership dues of the Investment Company Institute; fidelity bond and errors
and omissions insurance premiums; the cost of maintaining the books and records
of the Fund; and any other charges and fees not specifically enumerated as an
obligation of the Distributor (as hereinafter defined) or Adviser.
The Advisory Agreement provides that the fee payable to the Adviser will be
reduced to the extent expenses of the Fund exceed certain limits as specified in
the Prospectus and those expenses are in excess of certain expense limitations
if and as required by state regulation, and further that the Adviser will make
any other necessary arrangements to limit expenses in accordance with applicable
expense limitations unless the Fund has obtained an appropriate waiver of such
expense limitations or expense items from a particular state authority. Under
the Advisory Agreement, the maximum annual expenses which the Fund may be
required to bear, inclusive of the advisory fee but exclusive of interest,
taxes, brokerage fees, Rule 12b-1 Plan distribution payments and extraordinary
items, may not exceed the lowest expense limitation imposed by any state in
which the Fund is registered or the specified Prospectus expense limit,
whichever is lower. The amount of the advisory fee to be paid to the Adviser
each month will be reduced by the amount, if any, by which the annualized
expenses of the Fund for that month exceed the foregoing limitations.
For the fiscal years ended December 31, 1999, December 31, 1998 and
December 31, 1997 the Fund accrued advisory fees of $332,274, $230,585 and
$290,440, respectively, and the Adviser
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reimbursed to the Fund or waived other expenses in the amount of $90,979,
$172,712 and $182,591 for such periods, respectively. The advisory fee is
accrued daily and paid monthly. For the 2000 fiscal year, if the aggregate
annual expenses of the Fund exceed the amount permissible under the foregoing
limitations, then the Adviser has agreed after the end of the 2000 fiscal year
to promptly return such advisory fees previously received during such fiscal
year equal to the total amount by which expenses exceed the amount of the
limitations, and, if necessary, make any other arrangements necessary to
maintain the Fund's expenses within such limitations. If aggregate annual
expenses are within the limitations during fiscal 2000, however, any excess
amount previously withheld will be paid to the Adviser.
The Advisory Agreement was re-approved by the Board of Directors of the
Fund on October 14, 1999, including a majority of the Directors who are not
parties to the Advisory Agreement or interested persons of any such party. The
Advisory Agreement provides that it shall continue in effect from year to year
with respect to the Fund as long as it is approved at least annually (i) by a
vote of a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act) or (ii) by a vote of a majority of the Directors of the Fund
including a vote of a majority of the Directors who are not parties to the
Advisory Agreement or "interested persons" of any party thereto, cast in person
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated on 60 days' written notice by either party and will
terminate automatically if it is assigned within the meaning of the Act.
THE DISTRIBUTOR AND DISTRIBUTION OF THE SHARES
Shares of the Fund are offered on a continuous basis and are currently
distributed through Needham & Company, Inc., 445 Park Avenue, New York, New York
10022 (the "Distributor"). The Board of Directors of the Fund has approved a
Distribution and Services Agreement (the "Distribution Agreement") appointing
the Distributor as a distributor of shares of the Fund.
The Distribution Agreement provides that the Distributor will bear the cost
and expense of printing and distributing any materials not prepared by the Fund
and other materials used by the Distributor in connection with its offering
shares of the Fund. The Fund will pay all fees and expenses in connection with
registering and qualifying its shares under federal and state securities laws.
To compensate the Distributor and other services providers for the
distribution and/or shareholder-related services provided by them, the Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. Fees paid by the Fund under the Plan will be used for promotional,
distribution and shareholder-related services incurred only during the
applicable year. Pursuant to the Plan, the service providers are required to
provide the Fund at least quarterly with a written report of the amounts
expended under the Plan and the purpose for which such expenditures were made.
The Board of Directors reviews such reports on a quarterly basis.
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The Plan has most recently been approved by the Board of Directors of the
Fund, including a majority of the Directors who are not "interested persons" of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan, on October 14, 1999. The Plan continues in effect as to the Fund,
provided such continuance is approved annually by a vote of the Directors in
accordance with the Act. Information with respect to distribution revenues and
expenses will be presented to the Directors each year for their consideration in
connection with their deliberations as to the continuance of the Plan. In the
review of the Plan, the Directors will be asked to take into consideration
expenses incurred in connection with the distribution of shares. The Plan may
not be amended to increase materially the amount to be spent for the services
described therein without approval of the shareholders of the Fund, and all
material amendments of the Plan must also be approved by the Directors in the
manner described above. The Plan may be terminated at any time, without payment
of any penalty, by vote of a majority of the Directors who are not "interested
persons" of the Fund and who have no direct or indirect financial interest in
the operation of the Plan, or by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) on not more than 30 days'
written notice to any other party to the Plan. The Plan will automatically
terminate in the event of its assignment (as defined in the 1940 Act). So long
as the Plan is in effect, the election and nomination of Directors who are not
"interested persons" of the Fund shall be committed to the discretion of the
Directors who are not "interested persons." The Directors have determined that,
in their judgment, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders. The Fund will preserve copies of the Plan and any
agreement or report made pursuant to Rule 12b-1 under the Act, for a period of
not less than six years from the date of the Plan or such agreement or report,
the first two years in an easily accessible place.
The Fund has entered into service agreements with, among others, the
Distributor, Charles Schwab & Company, Inc ("Schwab"), Jack White & Company and
National Financial Services Corp. Though the terms of the Fund's agreements
vary, service providers generally are required to provide various shareholder
services to the Fund, including records maintenance, shareholder communications,
transactional services, tax information and reports, and facilitation of
purchase and redemption orders. Payments generally are made under the Plan at
the annual rate of 0.25% of the value of the Fund's shares held in accounts
maintained by each such service provider. In the case of certain of the Fund's
agreements, the Adviser is required to pay an additional 0.10% of the value of
all Fund shares held in their respective accounts. The Fund is required to make
these payments to its service providers regardless of any actual expenses
incurred by them.
The Fund incurred total expenses of $66,598, $46,685 and $58,219 during
fiscal years 1999, 1998 and 1997, respectively, under its agreements with its
principal underwriter and other service providers. During fiscal 1999, the Fund
paid or accrued $50,963 to the Distributor, $4,582 to National Financial
Services Corp. and $3,350 to Lehman Brothers. During fiscal 1998, the Fund paid
or accrued $43,664 to the Distributor, $1,621 to National Financial Services
Corp. and $696 to Jack White & Company. During fiscal 1997, the Fund paid or
accrued $54,337 to the Distributor, $1,362 to Jack White & Company and $1,063 to
Lehman Brothers.
15
<PAGE>
During the last fiscal year, the Fund paid or incurred the following
amounts for the following services under the Plan:
<TABLE>
<S> <C>
Advertising................................................................................... $ --
Printing and mailing prospectuses to other than current shareholders.......................... --
Compensation to broker-dealers................................................................ $66,598
Compensation to sales personnel............................................................... --
Other......................................................................................... --
</TABLE>
TRANSFER AGENCY, ADMINISTRATION SERVICES
AND FUND ACCOUNTING
PFPC Inc. has been retained by the Fund to perform shareholder servicing,
registrar and transfer agent functions for the Fund pursuant to an agreement
with the Fund. PFPC Inc. has also been retained pursuant to a separate agreement
to perform certain Fund and shareholder accounting and administrative functions.
For the fiscal years ended December 31, 1999, December 31, 1998 and December 31,
1997, respectively, the Fund accrued $95,000, $95,000 and $117,250 in transfer
agency, administration and accounting fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities and
other investments for the Fund, the selection of brokers and dealers to effect
the transactions and the negotiation of brokerage commissions, if any. In
transactions on stock and commodity exchanges in the U.S., these commissions are
negotiated, whereas on foreign stock and commodity exchanges these commissions
are generally fixed and are generally higher than brokerage commissions in the
U.S. In the case of securities traded on the over-the-counter markets, there are
generally no stated commissions, but the price usually includes an undisclosed
commission or markup. In underwritten offerings, the price includes a disclosed,
fixed commission or discount. The Fund may invest in obligations which are
normally traded on a "principal" rather than agency basis. This may be done
through a dealer (e.g., securities firm or bank) who buys or sells for its own
account rather than as an agent for another client, or directly with the issuer.
A dealer's profit, if any, is the difference, or spread, between the dealer's
purchase and sale price for the obligation.
16
<PAGE>
In purchasing and selling the Fund's portfolio investments, it is the
Adviser's policy to obtain quality execution at the most favorable prices
through responsible broker-dealers. In selecting broker-dealers, the Adviser
will consider various relevant factors, including, but not limited to: the size
and type of the transaction; the nature and character of the markets for the
security or asset to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the broker-dealer's firm; the
broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions.
The Adviser may cause the Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission that is in excess of the
commission another broker-dealer would have received for executing the
transaction if it is determined that such commission is reasonable in relation
to the value of the brokerage and/or research services as defined in Section
28(e) of the Securities Exchange Act of 1934 which have been provided. Such
research services may include, among other things, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
portfolio strategy. Any such research and other information provided by brokers
to the Adviser is considered to be in addition to and not in lieu of services
required to be performed by the Adviser under its Advisory Agreement with the
Fund. The research services provided by broker- dealers can be useful to the
Adviser in serving its other clients or clients of the Adviser's affiliates. For
each of the years ended December 31, 1997, 1998 and 1999, under 1% of the Fund's
total brokerage commissions were paid to brokers under arrangements covering
research services of the type contemplated by Section 28(e).
The Board of Directors periodically reviews the Adviser's performance
of its responsibilities in connection with the placement of portfolio
transactions on behalf of the Fund and reviews the commissions paid by the Fund
over representative periods of time to determine if they are reasonable in
relation to the benefits to the Fund.
Investment decisions for the Fund are made independently from those of the
other investment accounts managed by the Adviser or affiliated companies.
Occasions may arise, however, when the same investment decision is made for more
than one client's account. It is the practice of the Adviser to allocate such
purchases or sales insofar as feasible among its several clients or the clients
of its affiliates in a manner it deems equitable. The principal factors which
the Adviser considers in making such allocations are the relative investment
objectives of the clients, the relative size of the portfolio holdings of the
same or comparable securities and the availability in the particular account of
funds for investment. Portfolio securities held by one client of the Adviser may
also be held by one or more of its other clients or by clients of its
affiliates. When two or more of its clients or clients of its affiliates are
engaged in the simultaneous sale or purchase of securities, transactions are
allocated as to amount in accordance with formulae deemed to be equitable as to
each client. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
17
<PAGE>
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Board may determine, the
Adviser may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund. In addition, the
Fund may employ Needham & Company, Inc. (which is the Fund's Distributor) as a
broker consistent with the rules under the Investment Company Act of 1940 and
the Fund's Rule 17e-1 procedures. For the fiscal year ended December 31, 1999,
the Fund paid brokerage commissions of $180,432. Of that amount, $24,615 was
paid to the Distributor. For the fiscal year ended December 31, 1998, the Fund
paid brokerage commissions of $256,199. Of that amount, $2,010 was paid to the
Distributor. For the fiscal year ended December 31, 1997, the Fund paid
brokerage commissions of $315,668. None of that amount was paid to the
Distributor.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, the Fund will effect portfolio transactions without regard to
the holding period (subject to compliance with certain tax requirements for
qualification as a regulated investment company) if, in the judgment of the
Adviser, such transactions are advisable in light of a change in circumstances
of a particular company, within a particular industry or country, or in general
market, economic or political conditions. The Fund anticipates that in 2000 its
annual portfolio turnover rate may be between 100% and 200%. For the fiscal
years ended December 31, 1997, 1998 and 1999, the Fund's portfolio turnover
rates were 724%, 586% and 145%, respectively. The Fund may pay a greater amount
in brokerage commissions than similar size funds with a lower turnover rate. In
addition, since the Fund may have a high rate of portfolio turnover, the Fund
may realize capital gains or losses. Capital gains will be distributed annually
to the shareholders. Capital losses cannot be distributed to shareholders but
may be used to offset capital gains at the Fund level and carried forward for up
to eight years to the extent there are no gains to offset for a particular year.
See "Taxes" both in the Prospectus and in this Statement of Additional
Information. The portfolio turnover rate of the Fund may vary significantly from
year to year.
18
<PAGE>
MANAGEMENT
The Directors and officers of the Fund, their addresses, ages,
positions with the Fund and principal occupations during the past five years are
set forth below. The Directors are responsible for the overall supervision of
the Fund and its affairs, as well as evaluating the Adviser, consistent with
their duties as directors under the corporate laws of the State of Maryland.
<TABLE>
<CAPTION>
Name and Address Age Position with Registrant Occupation(s) During Past 5 Years
- ---------------- --- ------------------------ ---------------------------------
<S> <C> <C>
GEORGE A. NEEDHAM*+ 57 Chairman and Director of the Chairman of the Board and Chief Executive
445 Park Avenue Fund. Officer of Needham & Company, Inc.
New York, NY 10022
JOHN C. MICHAELSON*+ 46 President and Director of the President of the Adviser since January 1997;
445 Park Avenue Fund. Managing Director of Needham &
New York, NY 10022 Company, Inc.
ROGER W. JOHNSON 65 Director of the Fund. Administrator of the U.S. General Services
600 Anton Blvd. Suite 1260 Administration from 1993 to June 1996;
Costa Mesa, CA 92626 President, Chief Executive Officer and
Chairman of the Board of Western Digital
Corporation from 1984 to 1993; Director of
Sypris Solutions, Inc., Maxtor Corporation,
Carole Little and Insulectro; CEO of the
Young Presidents Organization.
JAMES POITRAS 57 Director of the Fund. Founder, Chairman, President and Chief
21 Gulfshore Boulevard North Executive Officer of Integrated Silicon
Naples, FL 33940 Systems (a computer software company)
from 1985 to 1995; Co-Founder of Avanti
Inc. in 1995.
F. RANDALL SMITH 61 Director of the Fund. Founder and Chief Executive and
174 East 75th Street Investment Officer of Capital Counsel LLC
New York, NY 10021 (a registered investment adviser) since
November 1999; Co-Founder and Managing
Partner of Train, Smith Counsel (a registered
investment adviser) from 1975 to October 1999.
PETER J.R. TRAPP*+ 54 Executive Vice President of Executive Vice President of the Adviser,
445 Park Avenue the Fund since January 1998. Managing Director of Needham &
New York, NY 10022 Company, Inc.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Position with Registrant Occupation(s) During Past 5 Years
- ---------------- --- ------------------------ ---------------------------------
<S> <C> <C>
GLEN ALBANESE*+ 28 Treasurer of the Fund. Chief Financial Officer of Needham &
445 Park Avenue Company, Inc. since January, 2000; CFO of
New York, NY 10022 Needham Asset Management from 1997 to
1999 and Portfolio Administrator from 1996
to 1997; Senior Accountant of PaineWebber
Group, Inc. from 1995-1996.
</TABLE>
- ------------------------
* An "interested person" as defined in the 1940 Act.
+ May be deemed to be an "affiliated person" of the Adviser.
Remuneration
The fees for non-interested directors, $5,500 per year and $500 for each
meeting attended in person or by telephone, are paid by the Fund. The Board of
Directors has established an audit committee, comprised of the Fund's
non-interested directors, which will review the audits of the Fund and recommend
firms to serve as independent auditors of the Fund. As of March 20, 2000, the
directors and officers of the Fund as a group owned 155,186.622 shares of the
Fund.
For the fiscal year ending December 31, 1999, the Directors earned from the
Fund the following compensation:
COMPENSATION TABLE
(for the fiscal year ended December 31, 1999)
<TABLE>
<CAPTION>
Name of Director Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued as Part Annual Benefits from Registrant &
from Registrant of Fund Expenses upon Retirement Fund Complex
- ---------------- --------------- ------------------------ --------------- ------------------
<S> <C> <C> <C> <C>
George A. Needham $0 $0 $0 $0
John C. Michaelson $0 $0 $0 $0
Roger W. Johnson $7,500 $0 $0 $7,500
James Poitras $8,000 $0 $0 $8,000
F. Randall Smith $8,000 $0 $0 $8,000
</TABLE>
Directors and employees of the Fund and the Adviser are permitted to engage
in personal securities transactions subject to the restrictions and procedures
contained in the Fund's Code of Ethics, which was approved by the Boards of
Directors of the Fund and the Adviser.
20
<PAGE>
NET ASSET VALUE
The net asset value per share of the Fund will be determined on each day
when the New York Stock Exchange (the "Exchange") is open for business at the
close of the Exchange and will be computed by determining the aggregate market
value of all assets of the Fund less its liabilities, and then dividing by the
total number of shares outstanding. The determination of net asset value for a
particular day is applicable to all applications for the purchase of shares as
well as all requests for the redemption of shares received before the close of
trading on the Exchange on that day. Shares of the Fund are sold at the public
offering price which is determined once each day the Fund is open for business
and is the net asset value per share.
Portfolio securities positions for which market quotations are readily
available are stated at the last sale price reported by the principal exchange
for each such security as of the exchange's close of business. Securities for
which no sale has taken place during the day and securities which are not listed
on an exchange are valued at the mean of the current closing bid and asked
prices. Foreign market closing prices are translated into U.S. dollar values at
the mean of the bid and asked prices for the particular foreign currency as
quoted on the valuation date. The value of a financial futures contract equals
the unrealized gain or loss on the contract that is determined by marking it to
the current settlement price for a like contract acquired on the day on which
the commodity futures contract is being valued. A settlement price may not be
used if the market makes a limit move with respect to the financial futures
contract. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market.
Short-term investments denominated in U.S. dollars that will mature in 60
days or less are stated at amortized cost; short-term investments denominated in
foreign currencies are stated at amortized cost as determined in the foreign
currency, translated to U.S. dollars at the current day's exchange rate. All
other securities and assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors, although the actual calculations may be made by persons
acting pursuant to the direction of the Board of Directors. The assets of the
Fund may also be valued on the basis of valuations provided by a pricing service
approved by the Board of Directors.
Generally, trading in foreign securities and futures contracts, as well as
corporate bonds, United States Government securities and money market
instruments, is substantially completed each day at various times prior to the
close of the Exchange. The values of such securities used in determining the net
asset value of the shares of the Fund may be computed as of such times. Foreign
currency exchange rates are also generally determined prior to the close of the
Exchange. Occasionally, events affecting the value of such securities and such
exchange rates may occur between such times and the close of the Exchange which
will not be reflected in the computation of the Fund's net asset value. If
events materially affecting the value of such securities occur during
21
<PAGE>
such period, then these securities will be valued at their fair market value as
determined in good faith by the Directors.
PERFORMANCE INFORMATION
The Fund may advertise its performance in terms of average annual total
return for 1, 5 and 10 year periods, or for such lesser periods as the Fund has
been in existence. Average annual total return which may be used in such
advertising is calculated according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods at the end of the
year or period.
Under the foregoing formula, the time periods used in any advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication. Average
annual total return, or "T" in the above formula, is computed by finding the
average annual compounded rates of return over the period that would equate the
initial amount invested to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and distributions.
The calculation assumes an initial $1,000 payment and assumes all dividends
and distributions by the Fund are reinvested at the price stated in the
Prospectus on the reinvestment dates during the period, and includes all
recurring fees that are charged to all shareholder accounts.
A Fund may also calculate total return on a cumulative basis which reflects
the cumulative percentage change in value over the measuring period. The formula
for calculating cumulative total return can be expressed as follows:
Cumulative Total Return = [ (ERV) - 1 ]
-----
P
See the Fund's Prospectus for the Fund's year-end performance information.
Other Information
The Fund's performance data quoted in any advertising and other promotional
materials represents past performance and is not intended to predict or indicate
future results. The return
22
<PAGE>
and principal value of an investment in the Fund will fluctuate, and an
investor's redemption proceeds may be more or less than the original investment
amount.
Comparison of Fund Performance
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., Morningstar, Inc. or other independent services which
monitor the performance of investment companies, and may be quoted in
advertising in terms of its ranking in each applicable universe. In addition,
the Fund may use performance data reported in financial and industry
publications, including Barron's, Business Week, Forbes, Fortune, Investor's
Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal
and USA Today.
The Fund may from time to time use the following unmanaged indices for
performance comparison purposes:
S&P 500 Index -- the S&P 500 is an index of 500 stocks designed to mirror
the overall equity market's industry weighting. Most, but not all, large
capitalization stocks are in the Index. There are also some small capitalization
names in the Index. The Index is maintained by Standard & Poor's Corporation. It
is market capitalization weighted. There are always 500 issuers in the S&P 500.
Changes are made by Standard & Poor's as needed.
S&P 400 Midcap Index -- the S&P 400 Midcap Index is an index of 400 stocks
having mid-sized capitalizations. The Index is maintained by Standard & Poor's
Corporation. It is market capitalization weighted. There are always 400 issuers
in the S&P 400 Midcap. Changes are made by Standard & Poor's as needed.
Russell 2000(R) Index -- the Russell 2000(R) Index measures the performance
of 2,000 companies with small to mid-size capitalizations domiciled in the U.S.
and its territories. The companies that comprise the Index are selected by first
ranking the 3,000 largest U.S. companies based on market capitalization and then
excluding the 1,000 largest of such companies and including the next largest
2,000 companies . The Index is market capitalization weighted and is maintained
by the Frank Russell Company. There are always 2,000 issuers in the Russell
2000(R) Index. The Frank Russell Company reconstitutes the Index annually.
NASDAQ Composite Index -- the NASDAQ Composite Index is a broad-based
capitalization-weighted index of all NASDAQ National Market & SmallCap stocks.
Morgan Stanley High Tech Index -- the Morgan Stanley High Tech Index is an
equal dollar-weighted index of 35 stocks from 9 technology sectors.
S&P Health Care Index -- 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.
23
<PAGE>
Bloomberg/Broadcast & Cable Stock Index -- the Bloomberg/Broadcast & Cable
Stock Index is a price-weighted index that measures the performance of the U.S.
broadcasting and cable industries.
S&P Retail Index -- the S&P Retail Index is a capitalization-weighted index
of all stocks in the S&P 500 that are in the retail industry.
TAX-SHELTERED RETIREMENT PLANS
The Fund offers certain tax-sheltered retirement plans through which shares
may be purchased, including IRAs (and "rollovers" from existing retirement
plans) for individuals and their spouses, SEP-IRAs and Roth IRAs. Shares of the
Fund may also be purchased by Qualified Retirement Plans such as profit-sharing
and money purchase plans, 401(k) Plans and other Defined Contribution Plans, and
by Defined Benefit Plans. Persons who wish to establish a tax-sheltered
retirement plan should consult their own tax advisers or attorneys regarding
their eligibility to do so and the laws applicable thereto, such as the
fiduciary responsibility provisions and diversification requirements and the
reporting and disclosure obligations under the Employee Retirement Income
Security Act of 1974. The Fund is not responsible for compliance with such laws.
Further information regarding the retirement plans, including applications and
fee schedules, may be obtained upon request to the Fund.
TAXES
Taxation of the Fund -- In General
The Fund is a separate entity for federal income tax purposes and the Fund
has qualified and elected to be treated for each taxable year as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended. By so qualifying, the Fund generally will not be subject to Federal
income tax on that part of its investment company taxable income (consisting
generally of net investment income, income from certain foreign currency
transactions and any excess of net short-term capital gains over net long-term
capital loss) and net capital gain that is annually distributed to its
shareholders. The Fund intends to continue to so qualify and elect to be treated
as a regulated investment company so long as to do so is in the best interests
of its shareholders. To so qualify, the Fund, among other things, must (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or certain other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b)(i) have at least 50%
of the market value of the Fund's assets represented by cash, U.S. government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting
24
<PAGE>
securities of such issuer, and (ii) not have more than 25% of the value
of its assets invested in the securities of any one issuer (other than U.S.
government securities and the securities of other regulated investment
companies).
In addition, the Fund must satisfy the distribution requirements of the
Code, including the requirement that it distribute at least 90% of its
"investment company taxable income" annually. By qualifying (and electing to be
treated) as a regulated investment company, the Fund will not be subject to
federal income tax on its investment company taxable income and net capital gain
that it distributes to shareholders. However, if for any taxable year the Fund
does not satisfy the requirements of Subchapter M of the Code, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to shareholders as ordinary dividend income to the extent of that Fund's
current or accumulated earnings or profits.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year the Fund must
distribute (i) at least 98% of its ordinary income realized during such calendar
year, (ii) at least 98% of its capital gain net income for the twelve month
period ending on October 31 (or December 31, if the Fund so elects), and (iii)
any income or gain from the prior year that was neither distributed to
shareholders nor taxed to the Fund for such year. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.
As long as the Fund qualifies as a regulated investment company for U.S.
federal income tax purposes and distributes all of its investment company
taxable income and net capital gain, it will not be subject to any corporate
income or excise taxes in the State of Maryland.
Taxation of the Fund's Investments
Ordinarily, gains and losses realized from portfolio transactions are
treated as capital gain or loss. However, all or a portion of the gain or loss
from the disposition of non-U.S. dollar denominated securities (including debt
instruments, certain financial forward, futures and option contracts, and
certain preferred stock) may be treated as ordinary income or loss under Section
988 of the Code. In addition, all or a portion of the gain realized from the
disposition of market discount bonds is treated as ordinary income under Section
1276 of the Code. Generally, a market discount bond is defined as any bond
bought by the Fund after its original issuance, at a price below its principal
amount. Finally, all or a portion of the gain realized from engaging in
"conversion transactions" is treated as ordinary income under Section 1258 of
the Code. "Conversion transactions" are defined to include certain forward,
futures, option and straddle transactions, transactions marketed or sold to
produce capital gains, or transactions described in applicable Treasury
regulations.
25
<PAGE>
Under Section 1256 of the Code, any gain or loss the Fund realizes from
certain futures or forward contracts and options transactions is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. Absent
an election to the contrary, gain or loss arises upon exercise or lapse of such
contracts and options as well as from closing transactions. In addition, any
such contracts or options remaining unexercised at the end of the Fund's taxable
year are treated as sold for their then fair market value, resulting in
additional gain or loss to the Fund characterized in the manner described above.
Offsetting positions held by the Fund involving certain financial forward,
futures or options contracts (including certain foreign currency forward
contracts or options) may constitute "straddles." "Straddles" are defined to
include "offsetting positions" in actively traded personal property. The tax
treatment of "straddles" is governed by Sections 1092 and 1258 of the Code,
which, in certain circumstances, override or modify the provisions of Sections
1256 and 988. If the Fund were treated as entering into "straddles" by reason of
its engaging in certain forward contracts or options transactions, such
"straddles" generally would be characterized as "mixed straddles" if the forward
contracts or options transactions comprising a part of such "straddles" were
governed by Section 1256. However, the Fund may make one or more elections with
respect to "mixed straddles." Depending on which election is made, if any, the
results to the Fund may differ. If no election is made, to the extent the
"straddle" rules apply to positions established by the Fund, losses realized by
the Fund will be deferred to the extent of unrealized gain in the offsetting
position. Moreover, as a result of the "straddle" rules, short-term capital loss
on "straddle" positions may be recharacterized as long-term capital loss, and
long-term capital gains may be treated as short-term capital gains or ordinary
income.
If the Fund makes a "constructive sale" of an "appreciated financial
position," the Fund will recognize gain but not loss as if the position were
sold at fair market value on the date of such constructive sale. Constructive
sales include short sales of substantially identical property, offsetting
notional principal contracts with respect to substantially identical property
and futures and forward contracts to deliver substantially identical property.
However, transactions that otherwise would be treated as constructive sales are
disregarded if closed within 30 days after the close of the taxable year and the
Fund holds the position and does not hedge such position for 60 days thereafter.
In addition, to the extent provided in regulations (which have not yet been
promulgated), a constructive sale also occurs if a taxpayer enters into one or
more other transactions (or acquires one or more positions) that have
"substantially the same effect" as the transactions described above. Appreciated
financial positions include positions with respect to stock, debt, instruments
or partnership interests if gain would be recognized on a disposition at fair
market value. If the constructive sale rules apply, adjustments are made to the
basis and holding period of the affected financial position, and the Fund would
recognize gain but would not have cash available to make distributions.
Accordingly, the gain realized under the constructive sale provisions would
impact on the amount of distributions required by the Fund so as to avoid the
imposition of the 4% excise tax.
26
<PAGE>
If the Fund invests in any non-U.S. corporation that either satisfies (i)
the "passive income test" (e.g., receives at least 75% of its annual gross
income from passive sources, such as interest, dividend, rental, royalty or
capital gain income) or (ii) the "passive asset test" (e.g., at least 50% of its
assets on average consist of assets which produce or are held for the production
of passive income) ("passive foreign investment company" or "PFIC") and that
does not distribute its income on a regular basis, the Fund could be subject to
federal income tax and additional interest charges on "excess distributions"
received from such company or gain from the sale of stock in such company, even
if all income or gain actually received by the Fund is timely distributed to its
shareholders. In addition, any gain on sale of PFIC stock would be treated as
ordinary income. The Fund would not be able to pass through to its shareholders
any credit or deduction for such a tax. If the Fund were to invest in the stock
of a passive foreign investment company and elect to treat such company as a
"qualified electing fund" under the Code (and the company agreed to adhere to
certain information reporting requirements), in lieu of the foregoing
consequences, the Fund would be required to include in income each year a
portion of the ordinary earnings and net capital gains of the qualified electing
fund, even if not distributed to the Fund, and such amounts would be subject to
the 90% and calendar year distribution requirements described above even if the
Fund received no money to distribute. To satisfy those distribution
requirements, the Fund would have to use cash from other sources, including
proceeds from the disposition of its assets. As an alternative to a qualified
electing fund election, the Fund generally could elect to mark-to-market shares
of a publicly traded PFIC and thereby avoid the application of the excess
distribution rules. However, the gain realized under such approach would impact
upon the amount of distributions required by the Fund so as to avoid the
imposition of the 4% excise tax (because no cash would be available from such
mark-to-market transaction with which to make any such distribution).
Accordingly, the Fund will limit its investments in such passive foreign
investment companies and will undertake appropriate actions to limit its tax
liability, if any, with respect to such investments.
Taxation of the Shareholders
Distributions of net investment income and the excess of net short-term
capital gain over net long-term capital loss are taxable as ordinary income to
shareholders. The Fund may also make distributions of net capital gain (the
excess of net long-term capital gain over net short-term capital loss). In
general, a noncorporate shareholder's net capital gains will be taxed at a
maximum rate of 20% for property held more than one year. The Fund will provide
information relating to the portions of any net capital gain distribution that
may be treated by noncorporate shareholders as eligible for the maximum 20%
rate. Such treatment would apply regardless of the length of time the shares of
the Fund have been held by such shareholders. Any loss realized upon a taxable
disposition of shares within six months from the date of their purchase is
treated as a long-term capital loss to the extent of any long-term capital gain
distributions received by shareholders during such period.
27
<PAGE>
Distributions of net investment income and capital gain net income are
taxable as described above whether received in cash or reinvested in additional
shares. A shareholder's tax basis in each share received from the Fund is equal
to the fair market value of such share on the payment date.
Distributions by the Fund result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's tax basis, such distribution nevertheless is taxable to the
shareholder as ordinary income or long-term capital gain as described above,
even though, from an investment standpoint, it may constitute a partial return
of capital. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a distribution receive a return
of investment upon such distribution which is nevertheless taxable to them.
A redemption of Fund shares by a shareholder will result in the recognition
of taxable gain or loss depending upon the difference between the amount
realized and his tax basis in his Fund shares. Such gain or loss is treated as a
capital gain or loss if the shares are held as capital assets. In the case of a
noncorporate shareholder, if such shares were held for more than one year at the
time of disposition such gain will be long-term capital gain and will be taxed
at a maximum effective rate of 20% and if such shares were held for one year or
less at the time of disposition, such gain will be short-term capital gain and
will be taxed at a maximum effective rate of 39.6%. Capital gains of corporate
shareholders will be long-term or short-term depending upon whether the
shareholder's holding period exceeds one year, and are not subject to varying
effective tax rates. In addition, any loss realized upon a taxable disposition
of shares within six months from the date of their purchase is treated as a
long-term capital loss to the extent of long-term capital gain distributions
received from the Fund during such six-month period. Finally, all or a portion
of any loss realized upon a taxable disposition of Fund shares may be disallowed
if other shares of the same Fund are purchased (including a purchase by
automatic reinvestment) within 30 days before or after such disposition. In such
a case, the tax basis of the shares acquired is adjusted to reflect the
disallowed loss. Dividends from domestic corporations may comprise some portion
of the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions
received by corporations from the Fund may be eligible for the 70% deduction for
dividends received. Taxable corporate shareholders will be informed of the
portion of dividends which so qualify. Receipt of qualifying dividends may
result in the reduction of a corporate shareholder's tax basis in its shares by
the untaxed portion of such dividends if they are treated as "extraordinary
dividends" under Section 1059 of the Code. The dividends-received deduction is
reduced to the extent the shares of the Fund with respect to which the dividends
are received are treated as debt-financed under federal income tax law and is
eliminated if the shares are deemed to have been held for less than 46 days (91
days for preferred stock) during the 90-day (180 days for preferred stock)
period beginning on the date which is 45 days (90 days for preferred stock)
before the ex-dividend date (for this purpose, holding periods are reduced for
periods where the risk of loss with respect to shares is diminished). The same
restrictions apply to the Fund with respect to its ownership of the
dividend-paying stock. In addition, the deducted amount is included in the
28
<PAGE>
calculation of the federal alternative minimum tax, if any, applicable to such
corporate shareholders. In contrast, distributions of net capital gains are not
eligible for the dividends-received deduction for corporate shareholders.
Income received by the Fund may give rise to withholding and other taxes
imposed by foreign countries. If more than 50% of the value of the Fund's assets
at the close of a taxable year consists of securities of foreign corporations,
the Fund may make an election that will permit shareholders in lieu of the Fund
to take a credit (or, if more advantageous, a deduction) for foreign income
taxes paid by the Fund, subject to limitations contained in the Code. Investors
would then include in gross income both dividends paid to the shareholders and
the foreign taxes paid by the Fund on its foreign investments. The Fund cannot
assure investors that they will be eligible for the foreign tax credit. The Fund
will advise the shareholders annually of their share of any creditable foreign
taxes paid by the Fund.
Taxation of a shareholder who, as to the U.S., is a nonresident alien
individual, foreign trust or estate, foreign corporation or foreign partnership
(a "Foreign Shareholder"), as defined in the Code, depends, in part, on whether
the Foreign Shareholder's income from the Fund is "effectively connected" with a
U.S. trade or business carried on by such shareholder.
If the Foreign Shareholder is a nonresident alien and the income from the
Fund is not effectively connected with a U.S. trade or business carried on by
the Foreign Shareholder, Fund distributions other than net capital gains
distributions and distributions not out of earnings and profits are subject to a
30% (or lower treaty rate) U.S. withholding tax. Furthermore, such Foreign
Shareholders are subject to an increased U.S. tax on their income if the Fund
elects (as described above) to "pass through" amounts of foreign taxes paid by
the Fund due to the fact that such Foreign Shareholders are not able to claim a
credit or deduction with respect to the foreign taxes treated as having been
paid by them. Net capital gain distributions to, and capital gains realized by,
such a Foreign Shareholder upon the sale of shares or receipt of distributions
which are in excess of its tax basis and not made from earnings and profits are
not subject to U.S. tax unless the Foreign Shareholder is an individual and is
present in the U.S. for 183 days or more during the taxable year in which the
gain was realized, and certain other conditions are satisfied. Until December
31, 2000, dividends paid to a foreign address may be presumed to be paid to a
resident of that country. Thereafter, a Foreign Shareholder will be required to
satisfy certification requirements in order to claim treaty benefits or
otherwise claim a reduction of or exemption from withholding under the foregoing
rules. These requirements will require identification of the holder and must be
made under penalties of perjury. A Foreign Shareholder that is eligible for a
reduced rate of U.S. withholding tax pursuant to a tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized securities gains and the proceeds of any redemption,
regardless of the extent to which gain or loss may be realized, paid to
29
<PAGE>
shareholders if they fail to certify either that the Taxpayer Identification
Number ("TIN") furnished in connection with the opening of an account is correct
or that shareholders have not received notice from the IRS of being subject to
backup withholding as a result of failure to properly report taxable dividend or
interest income on a federal income tax return. Furthermore, the IRS may notify
the Fund to institute backup withholding if the IRS determines a shareholder's
TIN is incorrect or if a shareholder failed to properly report taxable dividend
and interest income on a federal tax return.
If a shareholder is a resident alien or if dividends or distributions from
the Fund are effectively connected with a U.S. trade or business carried on by
the shareholder, then Fund distributions and any gains realized with respect to
the shares are subject to U.S. federal income tax at the rates applicable to
U.S. citizens or residents or domestic corporations, as appropriate.
The value of shares held by an individual Foreign Shareholder, even though
he is a nonresident at his death, is includible in his gross estate for U.S.
federal estate tax purposes.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
above. Such shareholders may be required to provide appropriate documentation to
establish their entitlement to the benefits of such a treaty. Foreign
Shareholders are advised to consult their own tax advisers with respect to (a)
whether their income from the Fund is or is not effectively connected with a
U.S. trade or business carried on by them, (b) whether they may claim the
benefits of an applicable tax treaty, and (c) any other tax consequences to them
of an investment in the Fund.
The foregoing discussion is a general summary of certain of the material
U.S. federal income tax consequences of owning and disposing of shares in the
Fund. This summary is based on the provisions of the Code, final, temporary and
proposed U.S. Treasury Regulations promulgated thereunder, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect.
The foregoing discussion is a general summary of certain of the current
federal income tax laws affecting the Fund and investors in the shares. The
discussion does not purport to deal with all of the federal income tax
consequences applicable to the Fund, or to all categories of investors, some of
which may be subject to special rules. Investors should consult their own
advisors regarding the tax consequences, including state and local tax
consequences to them of investment in the Fund. Foreign Shareholders should also
consult their tax advisers with respect to the applicability of a 30%
withholding tax (which may be reduced or eliminated under certain income tax
treaties) upon Fund distributions of ordinary income.
This summary does not deal with all aspects of U.S. federal income taxation
that may be relevant to particular shareholders in light of their particular
circumstances. Accordingly, shareholders should consult their tax advisers about
the application of the provisions of tax law described in this Statement of
Additional Information in light of their particular tax situations.
30
<PAGE>
ORGANIZATION AND CAPITALIZATION
General
The Needham Funds, Inc. ("Needham Funds") was incorporated in Maryland on
October 12, 1995 and is registered with the Commission under the 1940 Act as an
open-end management investment company. Needham Funds may from time to time
issue shares of one or more of its portfolios. Only shares of one such
portfolio, the Fund, are being offered by this Prospectus. The business and
affairs of Needham Funds are managed under the direction of its Board of
Directors. Needham Funds is an affiliate of Needham & Company, Inc.
Needham Funds has an authorized capitalization of one billion shares of
$0.001 par value common stock. Each share of Needham Funds entitles the
shareholder to participate equally in dividends and distributions declared and
in net assets upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities, except expenses related to the distribution of the
shares will be borne solely by Needham Funds. Shares issued are fully-paid and
non-assessable by Needham Funds. Additional portfolios may be created by the
Board of Directors, without further action by the shareholders, in the future
and any one or more of such portfolios may have multiple classes of shares.
Maryland law does not require annual meetings of shareholders, except under
certain specified circumstances, and it is anticipated that shareholder meetings
will be held only when required by Federal or Maryland law. Shareholders do have
the right under the Articles of Incorporation to call a vote for the removal of
directors. Needham Funds will be required to call a special meeting of
shareholders in accordance with the requirements of the 1940 Act to seek
approval of new management and advisory arrangements, of a material increase in
distribution or account maintenance fees, or of a change in fundamental
policies, objectives or restrictions.
The following persons hold of record or beneficially own 5% or more of the
Fund's outstanding common stock:
NAME AND ADDRESS PERCENT HELD
---------------- ------------
Charles Schwab & Co. Inc. 11%
101 Montgomery Street
San Francisco, CA 94110
National Financial Services Corp. 8.2%
200 Liberty Street, 5th Floor
New York, NY 10281
31
<PAGE>
FINANCIAL STATEMENTS
The statement of net assets, including the schedules of securities sold
short, as of December 31, 1999, the related statements of operations for the
fiscal year ended December 31, 1999, statements of changes in net assets for the
fiscal years ended December 31, 1999 and December 31, 1998, financial
highlights, and notes to the financial statements and the independent auditors'
report to the Board of Directors and shareholders of the Fund dated February 22,
2000 are incorporated herein by reference to the Fund's Annual Report. A copy of
the Fund's Annual Report may be obtained without charge from PFPC Inc. by
calling 800-625-7071.
32
<PAGE>
PART C.
OTHER INFORMATION
Item 23. Exhibits
- -------- --------
Exhibits Required
By Form N-1A
-----------------
Exhibit 1 Articles of Incorporation of Registrant.
(Previously filed as Exhibit 1 to the
Registration Statement.)
Exhibit 2 By-Laws of Registrant. (Previously filed as
Exhibit 2 to the Registration Statement.)
Exhibit 3 Not applicable.
Exhibit 4(a) Form of Investment Advisory Agreement
between Registrant and Needham Investment
Management L.L.C. (Previously filed as
Exhibit 5(a) to the Registration Statement.)
Exhibit 4(b) Form of Investment Advisory Agreement
Supplement between Needham Growth Fund and
Needham Investment Management L.L.C.
(Previously filed as Exhibit 5(b) to the
Registration Statement.)
Exhibit 5 Distribution and Services Agreement between
Registrant and Needham & Company, Inc.
(Previously filed as Exhibit 6 to Pre-Effective
Amendment No. 1 to the Registration Statement.)
Exhibit 6 Not applicable.
Exhibit 7 Form of Custodian Services Agreement between
Registrant and PNC Bank, National Association.
(Previously filed as Exhibit 8 to Pre-Effective
Amendment No. 1 to the Registration Statement.)
Exhibit 8(a) Form of Administration and Accounting Services
Agreement between Registrant and PFPC Inc.
(Previously filed as Exhibit 9(a) to
Pre-Effective Amendment No. 1 to the Registration
Statement.)
Exhibit 8(b) Form of Transfer Agency Services Agreement
between Registrant and PFPC Inc. (Previously
filed as Exhibit 9(b) to Pre-Effective Amendment
No. 1 to the Registration Statement.)
Exhibit 9 Opinion of Counsel as to Legality of Securities
Being Registered.
<PAGE>
Exhibit 10 Consent of Arthur Andersen L.L.P., Independent
Auditors.
Exhibit 11 Incorporated by reference to the Fund's Annual
Report for the year ended December 31, 1999.
Exhibit 12 Form of Initial Subscription Agreement between
the Fund and Needham Investment Management L.L.C.
(Previously filed as Exhibit 13 to Pre-Effective
Amendment No. 1 to the Registration Statement.)
Exhibit 13 Plan of Distribution Pursuant to Rule 12b-1.
(Previously filed as Exhibit 15 to Pre-Effective
Amendment No. 1 to the Registration Statement.)
Exhibit 14 Financial Data Schedule.
Exhibit 15 Not applicable.
Exhibit 16 Code of Ethics.
Item 24. Persons Controlled by or Under Common Control with Registrant
- -------- -------------------------------------------------------------
The Registrant and Needham Investment Management L.L.C. (the "Adviser"), a
Delaware limited liability company, may be deemed to be under the common control
of Needham & Company, Inc. a Delaware corporation. Each of George A. Needham and
John C. Michaelson may be deemed to be control persons of Needham & Company,
Inc. based upon their positions as officers, directors and/or stockholders of
that entity.
Item 25. Indemnification
- -------- ---------------
Section 2-418 of the General Corporation Law of the State of Maryland, the
state in which the Registrant was organized, empowers a corporation, subject to
certain limitations, to indemnify its directors, officers, employees and agents
against expenses (including attorneys' fees, judgments, penalties, fines and
settlements) actually and reasonably incurred by them in connection with any
suit or proceeding to which they are a party so long as they acted in good faith
or without active and deliberate dishonesty, or they received no actual improper
personal benefit in money, property or services, if, with respect to any
criminal proceeding, so long as they had no reasonable cause to believe their
conduct to have been unlawful.
Article Eight of the Fund's Articles of Incorporation and Article X of the
Fund's Bylaws provide for indemnification.
The Fund's directors and officers are insured against losses arising from
any claim against them as such for wrongful acts or omissions, subject to
certain limitations.
The Registrant will comply with applicable indemnification requirements as
set forth in releases under the Investment Company Act.
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser
- -------- ----------------------------------------------------
The investment adviser to the Fund is Needham Investment Management L.L.C.,
445 Park Avenue, New York, New York 10022, a registered investment adviser under
the Investment Advisers Act of 1940. Additional information regarding the
Adviser is included in its Form ADV filed with the Securities and Exchange
Commission (SEC File No. 801-50449).
The following information is provided with respect to each executive
officer of the Adviser:
John C. Michaelson, President of the Adviser and the Fund, and a Managing
Director of Needham & Company, Inc., 445 Park Avenue, New York, New York, a
registered broker-dealer engaged in a variety of investment banking and
institutional brokerage activities.
Peter J.R. Trapp, Executive Vice President of the Adviser and the Fund, and
a Managing Director of Needham & Company, Inc., 445 Park Avenue, New York,
New York, a registered broker-dealer engaged in a variety of investment
banking and institutional brokerage activities.
Item 27. Principal Underwriter
- -------- ---------------------
(a) Not applicable.
(b) Officers and Directors:
Positions and Positions and
Name and Principal Offices with Offices with
Business Address Underwriter Registrant
------------------ ------------- -------------
George A. Needham Chief Executive Officer and Chairman
Chairman of the Board
John C. Michaelson Managing Director President
Edgar F. Heizer, Jr. Director None
Joseph H. Reich Director None
<PAGE>
Positions and Positions and
Name and Principal Offices with Offices with
Business Address Underwriter Registrant
------------------ ------------- -------------
Eugene R. White Director None
Peter J.R. Trapp Managing Director Executive Vice
President
Glen Albanese Chief Financial Officer Treasurer
John Barr Managing Director None
Warren Foss Managing Director None
Vincent Gallagher Managing Director None
Craig Gilkes Managing Director None
Margaret Johns Managing Director None
Chad W. Keck Managing Director None
Vincent Kenney Managing Director None
Bernard Lirola Managing Director None
John McManus Managing Director None
John Prior Managing Director None
Janice Robertson Managing Director None
Stuart W. Sanderson Managing Director None
David Townes Managing Director None
The principal business address for all such persons is 445 Park Avenue, New
York, New York 10022.
(c) Not applicable.
Item 28. Location of Accounts and Records
- -------- --------------------------------
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder are maintained at
the offices of PFPC Inc.
Item 29. Management Services
- -------- -------------------
Not applicable.
Item 30. Undertakings
- -------- ------------
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of New York, State of New York, on the 20th
day of April, 2000.
THE NEEDHAM FUNDS, INC.
By: /s/ John C. Michaelson
----------------------
John C. Michaelson
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------- --------------------- --------------
<S> <C> <C>
/s/ George A. Needham Director and Chairman April 20, 2000
- ---------------------------------
George A. Needham
/s/ John C. Michaelson Director and President April 20, 2000
- --------------------------------- (Principal Executive,
John C. Michaelson Financial and Accounting
Officer)
/s/ Roger W. Johnson Director April 20, 2000
- ---------------------------------
Roger W. Johnson
/s/ James Poitras Director April 20, 2000
- ---------------------------------
James Poitras
/s/ F. Randall Smith Director April 20, 2000
- ---------------------------------
F. Randall Smith
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<S> <C> <C> <C>
1 -- Articles of Incorporation of Registrant. (Previously filed as Exhibit 1 to the Registration
Statement).*
2 -- By-Laws of Registrant. (Previously filed as Exhibit 2 to the Registration Statement).*
3 -- Not applicable.
4(a) -- Form of Investment Advisory Agreement between Registrant and Needham Investment
Management L.L.C. (Previously filed as Exhibit 5(a) to the Registration Statement).*
4(b) -- Form of Investment Advisory Agreement Supplement between Needham Growth Fund and
Needham Investment Management L.L.C. (Previously filed as Exhibit 5(b) to the
Registration Statement).*
5 -- Distribution and Services Agreement between Registrant Needham & Company, Inc.
(Previously filed as Exhibit 6 to Pre-Effective Amendment No. 1 to the Registration
Statement).*
6 -- Not applicable.
7 -- Form of Custodian Services Agreement between Registrant and PNC Bank, National
Association. (Previously filed as Exhibit 8 to Pre-Effective Amendment No. 1 to the
Registration Statement.)*
8(a) -- Form of Administration and Accounting Services Agreement between Registrant and PFPC
Inc. (Previously filed as Exhibit 9(a) to Pre-Effective Amendment No. 1 to the Registration
Statement.)*
8(b) -- Form of Transfer Agency Agreement between Registrant and PFPC Inc. (Previously filed as
Exhibit 9(b) to Pre-Effective Amendment No. 1 to the Registration Statement.)*
9 -- Opinion of Counsel as to Legality of Securities Being Registered.
10 -- Consent of Arthur Andersen L.L.P., Independent Auditors.
11 -- Incorporated by reference to the Fund's Annual Report for the year ended December 31,
1999.
12 -- Form of Initial Subscription Agreement between the Fund and Needham Investment
Management L.L.C. (Previously filed as Exhibit 13 to Pre-Effective Amendment No. 1 to
the Registration Statement).*
13 -- Plan of Distribution Pursuant to Rule 12b-1. (Previously filed as Exhibit 15 to Pre-Effective
Amendment No. 1 to the Registration Statement).*
14 -- Financial Data Schedule.
15 -- Not applicable.
16 - Code of Ethics.
- ---------------------
* Previously filed.
</TABLE>
Exhibit 9
[FULBRIGHT & JAWORSKI L.L.P. LETTERHEAD]
April 20, 2000
The Needham Funds, Inc.
445 Park Avenue
New York, New York 10022
Re: Registration Statement on Form N-1A
Securities Act File No. 33-98310
Investment Company Act File No. 811-9114
Gentlemen:
This will refer to the Registration Statement under the Securities Act of
1933 (File No. 33-98310) and Investment Company Act of 1940 (File No.
811-9114), filed by The Needham Funds, Inc. (the "Fund"), a Maryland
corporation, with the Securities and Exchange Commission and the further
amendments thereto (the "Registration Statement"), covering the registration
under the Securities Act of 1933 of an indefinite number of shares of beneficial
interest of the Fund (the "Shares").
As counsel to the Fund, we have examined such documents and reviewed such
questions of law as we deem appropriate. On the basis of such examination and
review, it is our opinion that the Shares have been duly authorized and, when
issued, sold and paid for in the manner contemplated by the Registration
Statement, will be legally issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the heading "Legal Counsel and
Independent Auditors" in the Prospectus filed as part of the Registration
Statement. This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the provisions of the Securities Act of 1933.
Very truly yours,
/s/ Fulbright & Jaworski L.L.P.
---------------------------
Exhibit 10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information - Experts" in the Prospectus in this
Registration Statement (Form N-1A. File No. 33-98310) of The Needham Funds, Inc.
/s/ ARTHUR ANDERSEN LLP
-------------------
ARTHUR ANDERSEN LLP
New York, New York
April 20, 2000
EXHIBIT 16
THE NEEDHAM FUNDS, INC.
CODE OF ETHICS
1. Statement of General Principles
This Code of Ethics expresses the policy and procedures of The Needham
Funds, Inc. (the "Fund"), its officers and its directors and is enforced to
ensure that no one is taking advantage of his or her position, or even giving
the appearance of placing his or her own interests above those of the Fund.
Investment company personnel at all levels must act as fiduciaries, and as such,
must place the interests of the shareholders of the Fund before their own. Thus,
we ask that when contemplating any personal transaction, you ask yourself what
you would expect or demand if you were a shareholder of the Fund.
Rule 17j-1(a) under the Investment Company Act of 1940 (the "Act"),
included as Appendix A attached hereto, makes it unlawful for certain persons,
in connection with the purchase or sale of securities, to, among other things,
engage in any act, practice or course of business which operates or would
operate as a fraud or deceit upon a registered investment company. In compliance
with paragraph (b)(1) of Rule 17j-1, this Code contains provisions which are
reasonably necessary to eliminate the possibility of any such conduct. We ask
that all personnel follow not only the letter of this Code but also abide by the
spirit of this Code and the principles articulated herein.
2. Definitions
"Access Person" shall mean any director, officer, general partner,
Portfolio Manager, Advisory Person or Investment Personnel of the Fund, who in
the ordinary course of his or her business makes, participates in or obtains
information regarding the purchase or sale of securities
-1-
<PAGE>
for the Fund or whose functions or duties as part of the ordinary course of his
or her business relate to the making of any recommendation to the Fund regarding
the purchase or sale of securities.
"Adviser" shall mean Needham Investment Management L.L.C., or such other
entity as may act as adviser or sub-adviser to the Fund.
"Advisory Person" of the Fund means any employee or officer of the Fund (or
of any company in a control relationship with the Fund) who, in connection with
his or her regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security by the Fund, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales, and shall include any natural person in a control
relationship with the Fund who obtains information concerning recommendations
made to the Fund with regard to the purchase or sale of a security.
The term "beneficial ownership" shall be interpreted in the same manner as
it would be in determining whether a person is subject to the provisions of
Section 16 of the Securities Exchange Act of 1934 and the rules and regulations
thereunder, except that the determination of direct or indirect beneficial
ownership shall apply to all securities which a person subject to this Code has
or acquires.
"Control" shall have the same meaning as that set forth in Section 2(a)(9)
of the Act.
"Disinterested Director" of the Fund shall mean a director thereof who is
not an "interested person" of the Fund within the meaning of Section 2(a)(19) of
the Act.
"Distributor" of the Fund shall mean Needham & Company, Inc.
-2-
<PAGE>
"Investment Personnel" of the Fund includes Fund Portfolio Managers and
those persons who provide information and advice to the Portfolio Managers
(e.g., securities analysts).
"Legal Compliance Officer" shall mean one or more persons designated by the
Fund to perform the functions described herein.
"Portfolio Managers" of the Fund shall mean those persons who have direct
responsibility and authority to make investment decisions for the Fund.
The term "security" shall have the meaning set forth in Section 2(a)(36) of
the Act and shall include options, but shall not include securities issued or
guaranteed by the United States government or its agencies or instrumentalities,
short-term debt securities which are "government securities" within the meaning
of Section 2(a)(16) of the Act, bankers' acceptances, bank certificates of
deposit, commercial paper, shares of registered open-end investment companies
and such other money market instruments as may be designated by the Board of
Directors of the Fund.
The "purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security.
Appendix B provides definitions of and supplemental information on the
following terms: beneficial ownership, control, interested person, security and
government securities.
3. Prohibited Transactions
The prohibitions described below will only apply to a transaction in a
security in which the designated person has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership.
-3-
<PAGE>
A. Blackout Trading Periods - Access Persons
No Access Person shall execute a securities transaction on a day during
which the Fund has a pending buy or sell order in that same security until that
order is executed or withdrawn. Any profits realized on trades within the
proscribed periods are required to be disgorged to the Fund.
B. Blackout Trading Periods - Portfolio Managers
No Portfolio Manager shall buy or sell a security within seven calendar
days before and after the Fund that he or she manages trades in that security.
Any profits realized on trades within the proscribed periods are required to be
disgorged to the Fund.
C. Ban on Short-Term Trading Profits - Investment Personnel
Investment Personnel may not profit in the purchase and sale, or sale and
purchase, of the same (or equivalent) securities as those of the Fund within 60
calendar days. Any profits realized on such short-term trades are required to be
disgorged to the Fund.
D. Ban on Securities Purchases of an Initial Public Offering - Investment
Personnel
Investment Personnel may not acquire any securities in an initial public
offering without the prior written consent of the Fund's Legal Compliance
Officer. The Legal Compliance Officer is required to retain a record of the
approval of, and the rationale supporting, any direct or indirect acquisition by
Investment Personnel of a beneficial interest in securities in an IPO.
Furthermore, should written consent of the Fund be given, Investment Personnel
are required to disclose such investment when participating in the Fund's
subsequent consideration of an investment in such issuer. In such circumstances,
the Fund's decision to purchase securities of the issuer should
-4-
<PAGE>
be subject to an independent review by Investment Personnel of the Fund with no
personal interest in the issuer.
E. Securities Offered in a Private Offering - Investment Personnel
Investment Personnel may not acquire any securities in a private offering
without the prior written consent of the Fund's Legal Compliance Officer. The
Legal Compliance Officer is required to retain a record of the approval of, and
the rationale supporting, any direct or indirect acquisition by Investment
Personnel of a beneficial interest in securities in a private offering.
Furthermore, should written consent of the Fund be given, Investment Personnel
are required to disclose such investment when participating in the Fund's
subsequent consideration of an investment in such issuer. In such circumstances,
the Fund's decision to purchase securities of the issuer should be subject to an
independent review by Investment Personnel of the Fund with no personal interest
in the issuer.
4. Exempted Transactions
A. Subject to compliance with preclearance procedures in accordance with
Section 5 below, the prohibitions of Sections 3A, 3B and 3C of this Code shall
not apply to:
(i) Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control, or in any
account of the Access Person which is managed on a discretionary
basis by a person other than such Access Person and with respect to
which such Access Person does not in fact influence or control such
transactions.
-5-
<PAGE>
(ii) Purchases or sales of securities which are not eligible for purchase
or sale by the Fund.
(iii) Purchases or sales which are non-volitional on the part of either the
Access Person or the Fund.
(iv) Purchases which are part of an automatic dividend reinvestment plan.
(v) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent
such rights were acquired from such issuer, and sales of such rights
so acquired.
(vi) Purchases or sales of 200 shares or less of the common stock of an
issuer whose common stock is listed on a major U.S. securities
exchange or the Nasdaq National Market.
(vii) All other transactions contemplated by Access Persons of the Fund
which receive the prior approval of the Legal Compliance Officer in
accordance with the preclearance procedures described in Section 5
below. Purchases or sales of specific securities may receive the
prior approval of the Legal Compliance Officer because the Legal
Compliance Officer has determined that no abuse is involved and that
such purchases and sales would be very unlikely to have any economic
impact on the Fund or on the Fund's ability to purchase or sell such
securities.
B. Notwithstanding Section 4A(vii), the prohibition in Section 3A shall not
apply to Disinterested Directors, unless a Disinterested Director, at the time
of a transaction, knew or, in the
-6-
<PAGE>
ordinary course of fulfilling his or her official duties as a director of the
Fund, should have known that the Fund had a pending buy or sell order in that
same security, which order had not yet been executed or withdrawn.
C. A transaction by Access Persons (other than Investment Personnel)
inadvertently effected during the period proscribed in Section 3A will not be
considered a violation of the Code and disgorgement will not be required so long
as the transaction was effected in accordance with the preclearance procedures
described in Section 5 and without prior knowledge of any Fund trading.
D. Notwithstanding Section 4A(vii), the prohibition in Section 3C shall not
apply to profits earned from transactions in securities which securities are not
the same (or equivalent) to those owned, shorted or in any way traded by the
Fund during the 60-day period; provided, however, that if the Legal Compliance
Officer determines that a review of the Access Person's reported personal
securities transactions indicates an abusive pattern of short-term trading, the
Legal Compliance Officer may prohibit such Access Person from profiting in the
purchase and sale, or sale and purchase, of the same (or equivalent) securities
within 60 calendar days whether or not such security is the same (or equivalent)
to that owned, shorted or in any way traded by the Fund.
5. Preclearance
Access Persons (other than Disinterested Directors) must preclear all
personal investments in securities. All requests for preclearance must be
submitted to the Legal Compliance Officer. Such requests shall be made by
submitting a Personal Investment Request Form, in the form annexed hereto as
Appendix C. All approved orders must be executed by the close of business
-7-
<PAGE>
on the day preclearance is granted. If any order is not timely executed, a
request for preclearance must be resubmitted.
Disinterested Directors need not preclear their personal investments in
securities unless a Disinterested Director knows, or in the course of fulfilling
his or her official duties as a director should know, that, within the most
recent 15 days, the Fund has purchased or sold, or considered for purchase or
sale, such security or is proposing to purchase or sell, directly or indirectly,
any security in which the Disinterested Director has, or by reason of such
transaction would acquire, any direct or indirect beneficial ownership.
6. Reporting
A. Access Persons (other than Disinterested Directors) are required to
direct their broker(s) to supply to the Legal Compliance Officer on a timely
basis duplicate copies of confirmations of all personal securities transactions
and copies of periodic statements for all securities accounts. Access Persons
(other than Disinterested Directors) of the Fund should also direct their
broker(s) to transmit to the Legal Compliance Officer of the Adviser duplicate
confirmations of all transactions effected by such Access Person, and copies of
the statements of such brokerage accounts, whether existing currently or to be
established in the future. A sample letter for this purpose is attached as
Appendix D. The transaction reports and/or duplicates should be addressed
"Personal and Confidential." The report submitted to the Legal Compliance
Officer may contain a statement that the report shall not be construed as an
admission by the person making such report that he or she has any direct or
indirect beneficial ownership in the security to which the
-8-
<PAGE>
report relates. Compliance with this Code requirement will be deemed to satisfy
the reporting requirements imposed on Access Persons under Rule 17j-1(c).
B. A Disinterested Director shall report to the Fund's Legal Compliance
Officer, no later than 10 days after the end of the calendar quarter in which
the transaction to which the report relates was effected, the information
required in Appendix E hereto with respect to any securities transaction in
which such Disinterested Director has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership in a security that such
Disinterested Director knew, or in the course of fulfilling his or her official
duties as a director should have known, during the 15-day period immediately
preceding or after the date of the transaction by the Disinterested Director, to
have been purchased or sold by the Fund or considered for purchase or sale by
the Fund. With respect to those transactions executed through a broker, a
Disinterested Director of the Fund may fulfill this requirement by directing the
broker(s) to transmit to the Legal Compliance Officer a duplicate of
confirmations of such transactions, and copies of the statements of such
brokerage accounts, whether existing currently or to be established in the
future. The transaction reports and/or duplicates should be addressed "Personal
and Confidential." The report submitted to the Legal Compliance Officer may
contain a statement that the report shall not be construed as an admission by
the person making such report that he or she has any direct or indirect
beneficial ownership in the security to which the report relates. Transactions
effected for any account over which a Disinterested Director does not have any
direct or indirect influence or control, or which is managed on a discretionary
basis by a person other than the Disinterested Director and with respect to
which such Disinterested Director does not in fact influence or control such
transactions, need not be
-9-
<PAGE>
reported. Further, transactions in securities which are not eligible for
purchase or sale by the Fund of which such person is a Disinterested Director
need not be reported.
C. Whenever an Access Person owns a security or is considering its purchase
or sale, such Access Person shall disclose such ownership or consideration
before recommending that the Fund purchase or sell such security.
D. On a quarterly basis Access Persons (other than Disinterested Directors)
will disclose all personal securities transactions. In addition, each Access
Person will be required to provide an initial holdings report listing all
securities beneficially owned by him or her no later than ten days after
becoming an Access Person, as well as an annual holdings report containing
similar information that must be current as of a date no more than thirty days
before the report is submitted. On an annual basis, Access Persons (other than
Disinterested Directors) will be sent a copy of the Fund's statement of such
Access Person's personal securities accounts to verify its accuracy and make any
necessary additions or deletions.
E. The Legal Compliance Officer is required to review all transactions and
holdings reports submitted by Access Persons and the Fund must maintain a list
of the name(s) of such person(s) responsible for such reviews.
F. All personal matters discussed with the Legal Compliance Officer and all
confirmations, account statements and personal investment reports shall be kept
in confidence, but will be available for inspection by the Board of Directors of
the Fund and by the appropriate regulatory agencies.
-10-
<PAGE>
G. The Adviser is required, at least once a year, to provide the Fund's
Board with a written report that (1) describes issues that arose during the
previous year under the Code or procedures applicable to the Fund, including,
but not limited to, information about material Code or procedures violations and
sanctions imposed in response to those material violations and (2) certifies to
the Fund's Board that the Fund has adopted procedures reasonably necessary to
prevent its Access Persons from violating its Code of Ethics.
7. Annual Certification
On an annual basis, Access Persons will be sent a copy of this Code for
their review. Access Persons will be asked to certify that they have read and
understand this Code and recognize that they are subject hereto. Access Persons
will be further asked to certify annually that they have complied with the
requirements of this Code and that they have disclosed or reported all personal
securities transactions required to be disclosed or reported pursuant to this
Code. A sample of the certification is attached as Appendix F.
8. Confidential Status of the Fund's Portfolio
The current portfolio positions of the Fund managed, advised and/or
administered by the Adviser and current portfolio transactions, programs and
analyses must be kept confidential. If nonpublic information regarding the
Fund's portfolio should become known to any Access Person, whether in the course
of his or her duties or otherwise, he or she should not reveal it to anyone
unless it is properly part of his or her work to do so.
If anyone is asked about the Fund's portfolio or whether a security has
been sold or bought, his or her reply should be that this is an improper
question and that this answer does not
-11-
<PAGE>
mean that the Fund has bought, sold or retained the particular security.
Reference, however, may, of course, be made to the latest published report of
the Fund's portfolio.
9. Nonpublic Material Information
From time to time, the Fund will circulate and discuss with Access Persons
the latest administrative and judicial decisions regarding the absolute
prohibition against the use of nonpublic material information, also known as
"inside information." In view of the many forms in which the subject can arise,
the Fund urges that a careful and conservative approach must prevail and no
action should be taken where "inside information" may be involved without a
thorough review by the Legal Compliance Officer.
Material inside information is any information about a company or the
market for the company's securities which has come directly or indirectly from
the company and which has not been disclosed generally to the marketplace, the
dissemination of which is likely to affect the market price of any of the
company's securities or is likely to be considered important by reasonable
investors, including reasonable speculative investors, in determining whether to
trade in such securities.
Information should be presumed "material" if it relates to such matters as
dividend increases or decreases, earnings estimates, changes in previously
released earnings estimates, significant expansion or curtailment of operations,
a significant increase or decline of orders, significant merger or acquisition
proposals or agreements, significant new products or discoveries, extraordinary
borrowing, major litigation, liquidity problems, extraordinary management
developments, purchase or sale of substantial assets, etc.
-12-
<PAGE>
"Inside information" is information that has not been publicly disclosed.
Information received about a company under circumstances which indicate that it
is not yet in general circulation and that it may be attributable, directly or
indirectly, to the company (or its insiders) should be deemed to be inside
information.
Whenever an Access Person receives material information about a company
which he or she knows or has reason to believe is directly or indirectly
attributable to such company (or its insiders), the Access Person must determine
that the information is public before trading or recommending trading on the
basis of such information or before divulging such information to any person who
is not an employee of the Adviser or a party to the transaction. As a rule, one
should be able to point to some fact to show that the information is generally
available; for example, its announcement on the broad tape or by Reuters, The
Wall Street Journal or trade publications. If the Access Person has any question
whatsoever as to whether the information is material or whether it is inside and
not public, he or she must resolve the question before trading, recommending
trading or divulging the information. If any doubt at all remains, the Access
Person must consult with the Legal Compliance Officer.
10. Gifts - Investment Personnel
Investment Personnel shall not receive any gift or other thing having a
value in excess of $250 per year from any person or entity that does business
with or on behalf of the Fund.
11. Services as a Director in a Publicly Traded Company - Investment Personnel
Investment Personnel shall not serve on the boards of directors of publicly
traded companies, absent prior authorization by the Fund's Board of Directors,
based upon a determination
-13-
<PAGE>
that the board service would be consistent with the interests of the Fund and
its shareholders. When such authorization is provided, the Investment Personnel
serving as a director will be isolated from making investment decisions with
respect to the pertinent company through "Chinese Wall" or other procedures.
12. Compliance Review
A. The Legal Compliance Officer shall compare the reported personal
securities transactions with completed and contemplated portfolio transactions
of the Fund to determine whether a violation of this Code may have occurred.
Before making any determination that a violation has been committed by any
person, the Legal Compliance Officer shall give such person an opportunity to
supply additional information regarding the transaction in question.
13. Sanctions
The Board of Directors of the Fund as the case may be, will be informed of
Code violations on a quarterly basis and may impose such sanctions as it deems
appropriate, including among other things, a letter of censure or suspension or
termination of employment of the Access Person or a request for disgorgement of
any profits received from a securities transaction done in violation of this
Code.
14. Fund Board of Directors Review
Annually, the Fund's Board of Directors shall receive the following:
A. A copy of the existing Code of Ethics.
B. A report completed by the Legal Compliance Officer identifying any
violations requiring significant remedial action during the past year
and as more fully set forth under Section 6G above.
-14-
<PAGE>
C. A list of recommendations, if any, to change the existing Code of
Ethics based upon experience, evolving industry practices or
developments in applicable laws or regulations.
The Fund's Board of Directors, including a majority of the independent
Directors, shall approve this Code of Ethics, as well as any material changes
thereto within six months of any such change. The Board shall base its approval
of the Code, or of such material change to the Code, upon a determination that
the Code contains provisions reasonably necessary to prevent "Access Persons"
(as defined in the Rule) from violating the anti-fraud provisions of the Rule.
-15-
[RULE 485(B) REPRESENTATION]
[FULBRIGHT & JAWORSKI L.L.P. LETTERHEAD]
April 20, 2000
VIA EDGAR
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Avenue, N.W.
Washington, D.C. 20549
Re: The Needham Funds, Inc. - 1940 Act File No. 811-9114
----------------------------------------------------
Gentlemen:
We refer to Post-Effective Amendment No. 7 to the Registration Statement
under the Securities Act of 1933 and Amendment No. 9 to the Registration
Statement under the Investment Company Act of 1940 on Form N-1A (the
"Amendment") of The Needham Funds, Inc. (the "Fund") filed pursuant to paragraph
(b) of Rule 485 promulgated under the Securities Act of 1933. We, as counsel to
the Fund, have assisted in the preparation and review of the Amendment.
In accordance with paragraph (b) of Rule 485, this will represent to you
that we are of the view that the disclosure provisions reflected in the
Amendment are not of the type which would render the Amendment ineligible to
become effective pursuant to paragraph (b) of Rule 485 under the Securities Act
of 1933.
We consent to the use of this representation as an accompaniment to the
Amendment. This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Amendment under the
provisions of the Securities Act of 1933 or that any other person other than the
Securities and Exchange Commission is entitled to rely on this representation
for any purpose.
Very truly yours,
/s/ Fulbright & Jaworski L.L.P.
---------------------------
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> The Needham Funds, Inc.
<SERIES>
<NUMBER> 01
<NAME> Needham Growth Fund
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 26,289,430
<INVESTMENTS-AT-VALUE> 44,467,177
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<NET-INVESTMENT-INCOME> (433,671)
<REALIZED-GAINS-CURRENT> 4,934,484
<APPREC-INCREASE-CURRENT> 12,836,170
<NET-CHANGE-FROM-OPS> 17,336,983
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (4,275,566)
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<NUMBER-OF-SHARES-SOLD> 1,219,648
<NUMBER-OF-SHARES-REDEEMED> (878,176)
<SHARES-REINVESTED> 211,197
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<GROSS-ADVISORY-FEES> 332,274
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