The
Kaufmann
Fund,
Inc.
Annual Report
-----------------
December 31, 1996
<PAGE>
THE KAUFMANN FUND, INC.
A SMALL COMPANY AGGRESSIVE GROWTH FUND
140 EAST 45TH STREET, NEW YORK, NEW YORK 10017
(800) 261-0555 (212) 922-0123 (212) 661-4699
Shareholder Services Executive Offices Current Net Asset Value
1996 ANNUAL REPORT
Dear Shareholder:
We are pleased to report that the Kaufmann Fund had a 20.9% gain in net
asset value per share for the year ending December 31, 1996. The Fund's
average annual returns for the five and ten year periods, were 18.9% and
19.3% respectively, net of all expenses and assuming the reinvestment of
dividends. We attribute the outstanding long-term performance of the
fund to the quality of the companies in the portfolio.
The latest performance figures in the table below demonstrate how well our
strategy has been working. The accompanying chart illustrates that a
$10,000 investment in the Kaufmann Fund made 10 years ago would be worth
$57,613 as of December 31, 1996.
- --------------------------------------------------------------
| Compounded Annualized Returns |
| |
| Russell 2000 S&P 500 Kaufmann |
| One year ........ 16.5% ......... 23.0% ...... 20.9% |
| Five year ....... 13.8% ......... 15.2% ...... 18.9% |
| Ten year ........ 10.4% ......... 15.3% ...... 19.3% |
| |
| per Lipper Analytical Services for periods ending 12/31/96 |
- --------------------------------------------------------------
A mountain chart is included on the cover page which shows the growth
of a hypothetical investment of $10,000 in The Kaufmann Fund over the
period from 12/31/86 - 12/31/96 assuming all distributions have been
reinvested. The scale on the bottom of the chart is in one year
gradations (as at year end) for period 12/87 through 12/96 and a
scale on the right side of the chart is in $10,000 gradations running
from $0 to $60,000. The chart contains a statement "$10,000 invested
in Kaufmann Fund for 10 years valued at $57,613."
The Fund's best performers among the top twenty holdings are listed below
in order of aggregate dollar appreciation. All of these companies were
originally purchased in the initial public offering (IPO). The majority
of our best investments come from IPOs which we buy and hold for the
long term.
Altera Corporation (semiconductors) ........ up 46% in '96, up 2,534% since
initial purchase 3/88
HFS, Inc. (consumer services) .............. up 46% in '96, up 1,502% since
initial purchase 12/92
Lincare Holdings, Inc. (home health care) .. up 64% in '96, up 485% since
initial purchase 3/92
MBNA Corporation (credit card issuer) ...... up 73% in '96, up 730% since
initial purchase 1/91
Global DirectMail Corp. (direct marketer)... up 59% in '96, up 149% since
initial purchase 6/95
<PAGE>
In addition, the acquisition of a number of our top twenty holdings had a
positive impact on the Fund's 1996 performance. For example:
Advantage Health Corporation ..... acquired by Health South, March '96
Pyxis, Corp .................... acquired by Cardinal Health, May '96
MediSense, Inc. .......... acquired by Abbott Laboratories, August '96
Life Partners Group Inc. ........ acquired by Conseco Inc., August '96
While the Fund makes investments based on the profitability, growth prospects
and management of each company, the so-called "bottoms up" approach,
historically we find that approximately 20% to 30% of the Fund's portfolio
is invested in Technology, 20% to 30% in Health Care and 15% to 25% in
Retailing. The balance of the portfolio is highly diversified in terms
of broad industry categories.
During the past year we made a number of investments in young companies in
prosaic industries. These companies acquire and assimilate other firms in
their fields, using state-of-the-art information systems and management
techniques to create greater sales opportunities and higher levels of
profitability. All of these companies were initially purchased in an IPO.
Some examples are:
Central Garden and Pet Inc. ... distributor of garden and pet supplies
Coach USA Inc. ....................... provider of motorcoach services
Suiza Foods Corporation .................. processor of dairy products
Watsco Inc. .................. distributor of central air conditioners
While the Fund does not engage in market timing, the cash position at year
end was approximately 14%, which is at the high end of its historical
range. Given the relatively high level of large-company valuations and
the fact that the stock market has not had a 10% correction since late
1990, this cash position should enable us to take advantage of buying
opportunities.
The trend toward free-market economies and free trade on a world-wide
basis, combined with the impact of technology (particularly semiconductors
and their effect on communication and information) leads us to believe
that economic growth can continue with low inflation and moderate interest
rates. We believe this favorable environment for equities will result
in a continuation of the secular bull market for the balance of the
decade. This economic environment will also continue to create many new
investment opportunities for the Fund.
We thank you for your continued support and look forward to serving you
in the years ahead.
Sincerely,
/S/ HANS P. UTSCH /S/ LAWRENCE AURIANA
Hans P. Utsch Lawrence Auriana
President Chairman
P.S. The Kaufmann Fund offers Automatic Investment, 403(b) and Payroll
Deduction Plans. These are convenient methods of "dollar-cost averaging"
which allow you to invest equal dollar amounts for additional shares
on a regular basis. Please refer to the Application Forms booklet for
details.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------
Year Ended December 31,
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF YEAR $ 5.05 $ 3.76 $ 3.45 $ 2.95 $ 2.65
- -----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss) (.030) (.060) (.060) (.049) (.050)
Net Realized and Unrealized
Gain (Loss) on Investments 1.083 1.445 .370 .584 .350
------- ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.053 1.385 .310 .535 .300
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From Net Investment Income - - - - -
From Net Realized Gain .263 .095 - .035 .000
------- ------ ------ ------ ------
TOTAL DISTRIBUTIONS .263 .095 .000 .035 .000
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 5.84 $ 5.05 $ 3.76 $ 3.45 $ 2.95
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN 20.91% 36.89% 8.99% 18.18% 11.32%
- ----------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Year (in millions) $ 5,341 $3,163 $ 1,593 $ 967 $ 314
Ratio of Expenses (after Expense
Reimbursement) to Average Net Assets (%) 1.93% 2.17% 2.29% 2.53% 2.94%
Ratio of Interest Expense to Average
Net Assets (%) .01% .01% .02% .03% .08%
------- ------ ------ ------ ------
Ratio of Expenses (after Expense
Reimbursement less Interest Expense)
to Average Net Assets (%) 1.92% 2.16% 2.27% 2.50% 2.86%
Ratio of Net Investment Income
(Loss) to Average Net Assets (%) ( 0.82%) (1.24%) (1.58%) (1.34%) (1.74%)
Portfolio Turnover Rate (%) 72% 60% 47% 55% 51%
Average Commission Rate + $ 0.09
- ----------------------------------------------------------------------------------------------------
BORROWINGS:
Debt Outstanding, End of Year
(in thousands) $ - $ - $ - $49,000 $ 4,016
Average Debt Outstanding during the Year
(in thousands) $ - $ - $ 3,776 $ 4,563 $ 3,260
Average Number of Shares Outstanding
during the Year (in thousands) - - 333,175 182,699 79,997
Average Debt Per Share during the Year $ - $ - $ .01 $ .03 $ .04
</TABLE>
+ For fiscal years beginning after September 1, 1995, the
Fund's average commission rate per share for security trades
on which commissions are charged requires disclosure.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
- ------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
- ------------------------------------------------------------------
Value
STOCKS - 85.0% Shares (000s)
- ------ ---------- ----------
COMPUTER HARDWARE & ACCESSORIES - 0.9%
- -------------------------------
ATI Technologies, Inc. (CAD) ^ * 50,000 $ 593
Applied Magnetics Corporation * 434,000 12,966
Encad, Inc. * 200,000 8,250
Kronos Inc. + * 410,000 13,120
Raster Graphics, Inc. * 15,000 178
Sandisk Corporation * 1,000 10
Transact Technologies Incorporated * 300,000 3,112
Viisage Technology, Inc. * 200,000 2,900
Xeikon N.V. * 525,000 3,937
----------
45,066
----------
COMPUTER SERVICES - 5.1%
- -----------------
Abacus Direct Corporation * 75,000 1,406
Affiliated Computer Services Inc. -
Class A + * 1,400,000 41,650
American Business Information, Inc. * 270,000 6,007
BA Merchant Services, Inc. * 150,000 2,681
Billing Information Concepts + * 750,000 21,563
Black Box Corp. * 400,000 16,500
CCC Information Services Group * 687,500 11,000
CHS Electronics, Inc. * 400,000 6,850
CSG Systems International, Inc. * 400,000 6,150
Concord EFS Inc. * 961,800 27,171
DecisionOne Corporation + * 1,670,000 27,555
ECsoft Group plc * 300,000 2,887
Forrester Research, Inc. * 35,000 901
Gartner Group Inc. - Class A * 10,000 389
Geac Computer Corporation
Limited (CAD) ^ * 100,000 2,001
May & Speh, Inc. * 400,000 4,900
Metromail Corporation * 415,000 7,574
OzEmail Limited + * 544,000 4,624
PC Service Source, Inc. * 3,500 27
QuickResponse Services, Inc. + * 700,000 19,950
Sabre Group Holdings Inc. * 500,000 13,938
Sterling Commerce, Inc. * 600,000 21,150
USCS International, Inc. * 500,000 8,437
Walsh International, Inc. + * 1,200,000 10,500
----------
265,811
----------
COMPUTER SOFTWARE - 6.9%
- -----------------
Adobe Systems, Inc. * 100,000 3,737
Analogy, Inc. * 300,000 1,350
CBT Group Publishing Ltd. + * 420,000 22,785
CFI ProServices, Inc. + * 25,000 356
Cadence Design Systems, Inc. * 100,000 3,975
Cellular Technical Services Company * 400,000 8,000
Coda Group plc (GBP) ^ * 450,000 829
Computer Associates International Inc. * 100,000 4,975
Computer Sciences Corporation * 400,000 32,850
Document Sciences Corporation * 50,500 499
Gensym Corporation + * 100,500 1,200
HPR Inc. * 117,500 1,616
Hummingbird Communications Ltd. + * 500,000 14,188
INSO Corp. * 305,000 12,124
Image Business Systems
Corporation - Wts # * 32,000 0
Indus Group, Inc. * 100,000 2,575
Intelligroup, Inc. * 500,000 5,500
JBA Holdings plc (GBP) ^ 700,000 6,416
JDA Software Group, Inc. * 295,000 8,407
Learmonth & Burchette
Mgmt. Sys. (GBP) ^ + * 1,355,000 1,741
Learning Company, Inc., The * 200,000 2,875
McAfee Associates Inc. * 1,050,000 46,200
Mercury Interactive Corporation * 200,000 2,600
Ovid Technologies Inc. * 200,000 1,750
Phoenix International Ltd., Inc. * 50,000 862
Phoenix Technology Ltd., Inc. * 450,000 7,256
Rational Software Corp. + * 2,000,000 79,125
Simulation Sciences, Inc. + * 650,000 9,669
Software 2000 Inc. * 150,000 1,256
Sterling Software, Inc. * 450,000 14,231
Synopsys Inc. * 450,000 20,812
Tecnomatix Technologies Ltd. * 100,000 2,650
Transaction System Architects Inc. -
Class A * 650,000 21,612
Transition Systems, Inc. * 200,000 2,825
Unison Software Inc. * 200,000 5,350
Veritas Software Corporation * 200,000 9,950
----------
362,146
----------
CONSUMER - DURABLES - .8%
- -------------------
Dal-Tile International Inc. * 400,000 8,150
Exide Corporation 700,000 16,100
Harley-Davidson, Inc. 100,000 4,700
Industrie Natuzzi S.p.A. ADR 600,000 13,800
----------
42,750
----------
CONSUMER - NONDURABLES - 3.3%
- ----------------------
Bacou U.S.A., Inc. * 400,000 6,650
Blyth Industries Inc. * 1,000,400 45,643
Department 56, Inc. * 500,000 12,375
Designer Holdings Ltd. + * 745,000 12,013
Gargoyles, Inc. * 300,000 2,587
Jones Apparel Group, Inc. * 500,000 18,687
Quilmes Industrial S.A. 910,000 8,304
Suiza Foods Corporation + * 900,000 18,225
Supreme International Corporation + * 300,000 4,350
Vans, Inc. * 300,000 3,750
Wolford AG (ATS) ^ * 23,905 2,892
Wolverine World Wide, Inc. + 1,300,000 37,700
----------
173,176
----------
DISTRIBUTION - 2.9%
- ------------
Aviation Sales Company + * 500,000 10,250
Barnett Inc. * 320,000 8,720
Cameron Ashley Building Products + * 561,900 7,867
Central Garden & Pet Company + * 1,000,000 21,063
FinishMaster Inc. + * 475,000 3,444
Kevco, Inc. + * 160,000 2,240
Keystone Automotive Industries, Inc. + * 500,000 7,875
MSC Industrial Direct, Inc. + * 800,000 29,600
ProSource, Inc. + * 1,192,500 14,161
Strategic Distribution Inc. + * 1,732,000 13,639
Watsco, Inc. 253,500 7,320
Wilmar Industries, Inc. + * 1,000,000 27,750
----------
153,929
----------
ELECTRONIC COMPONENTS - 1.9%
- ---------------------
Elamex S.A. de C.V. * 100,000 962
FEI Company * 213,500 2,002
Gemstar International Group Ltd. * 1,000,000 17,500
International Rectifier Corp. * 900,000 13,725
Lecroy Corp. * 139,900 5,246
PPT Vision, Inc. + * 600,000 5,250
PSC Inc. * 400,000 2,850
Planar Systems, Inc. + * 1,000,000 11,750
Richey Electronics Inc. + * 630,300 7,327
Sawtek, Inc. * 80,000 3,170
Smartflex Systems Inc. + * 200,000 3,300
Vicor Corp. * 1,500,000 25,031
----------
98,113
----------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
- ------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
- ------------------------------------------------------------------
(Continued)
Value
Shares (000s)
---------- ----------
ENVIRONMENT - 1.0%
- -----------
Culligan Water Technologies, Inc. * 500,000 $ 20,250
Ensys Environmental Products Inc. * 100,000 200
Philip Environmental, Inc. * 1,900,000 27,550
Stericycle Inc. * 90,000 1,035
Superior Services, Inc. * 200,000 4,075
----------
53,110
----------
FINANCIAL - DOMESTIC - 3.0%
- --------------------
Associates First Capital Corporation 100,000 4,413
Conseco Inc. 550,000 35,063
Duff & Phelps Credit Rating Co. + 478,966 11,555
Federal Agriculture
Mortgage Corporation * 95,000 2,921
First Investors Financial Svcs.
Group, Inc. + * 332,500 2,577
Insignia Financial Group, Inc. * 503,000 11,318
Interpool, Inc. 400,000 9,350
Kaye Group Inc. 236,600 1,242
MBNA Corp. 900,000 37,350
Mecury Finance Company 350,000 4,288
Metris Companies Inc. * 50,000 1,200
MoneyGram Payment Systems, Inc. + * 1,250,000 16,563
Philadelphia Consolidated Holding Corp. + * 600,000 13,950
Phoenix Duff & Phelps Corp. 600,000 4,275
Phoenix Duff & Phelps Corp. -
Pfd. Conv. Ser. A 60,000 1,500
Rental Service Corporation * 5,000 138
----------
157,703
----------
FINANCIAL - FOREIGN - 0.3%
- -------------------
Banco De Galicia Y Buenos
Aires S.A. de C.V. * 260,000 6,305
Central European Growth Fund (GBP) ^# 1,975,000 2,098
Central European Growth Fund -
Wts. (GBP) ^# * 400,000 75
Cho Hung Bank * 400,000 3,000
Min Xin Holdings (HKD) ^ 4,140,000 1,927
----------
13,405
----------
GAMING - 0.2%
- ------
Casino Data Systems, Inc. * 400,000 2,750
Grand Casinos, Inc. * 150,000 2,025
Players International Inc. * 835,000 4,488
----------
9,263
----------
INDUSTRIAL - 1.0%
- ----------
Aftermarket Technology Corporation * 286,000 4,934
Asahi/America, Inc. * 75,000 609
Computational Systems Inc. + * 375,200 7,223
International UNP Holdings Ltd. (CAD) ^# * 2,420,000 495
Kumagai Gumi Ltd. (HKD) ^ 1,086,000 1,264
Kumagai Gumi Ltd. - Warrants (HKD) ^ * 217,200 93
Lasertechnics, Inc. # * 903,974 1,045
Lasertechnics, Inc. - Preferred * 50 500
Liberty Technologies, Inc. + * 350,000 1,138
Miller Industries, Inc. * 7,500 150
Nuco2, Inc. * 210,000 2,796
O'Gara Company, The * 200,000 1,950
Simpson Manufacturing Company * 320,000 7,360
Treadco, Inc. 195,000 2,047
Triumph Group, Inc. * 300,000 7,163
Waters Corp. * 400,000 12,150
----------
50,917
----------
LODGING - 6.6%
- -------
Chartwell Leisure, Inc. + * 200,000 2,750
Doubletree Corporation * 100,000 4,500
Fairfield Communities, Inc. * 500,000 12,375
HFS Inc. * 3,750,000 224,063
Interstate Hotels Company + * 525,000 14,831
La Quinta Inns Inc. 300,000 5,738
Prime Hospitality Corp. * 600,000 9,675
Renaissance Hotel Group N.V. * 1,480,000 34,780
Signature Resorts, Inc. + * 747,500 26,349
Studio Plus Hotels Inc. + * 475,000 7,481
Suburban Lodges of America, Inc. * 199,500 3,192
Supertel Hospitality Inc. + * 200,000 1,800
----------
347,534
----------
MEDIA & ENTERTAINMENT - 1.6%
- ---------------------
Central European Media
Enterprises Ltd. * 200,000 6,350
Cinar Films Inc. - Class B + * 500,000 13,000
Family Golf Centers, Inc. + * 335,000 10,092
Film Roman, Inc. * 100,000 763
Grand Prix Association of
Long Beach, Inc. * 110,000 1,100
International Speedway Corporation + * 200,000 4,100
Lamar Advertising Company * 50,000 1,213
Matav-Cable Systems Media Ltd. - ADR * 50,000 781
Matav-Cable Systems Media Ltd. (ILS) ^ * 100,000 777
Metro Networks, Inc. * 300,000 7,575
Metrovision North America - Com. * 40,000 0
Metrovision North America - Com. # * 10,976 0
Metrovision North America - Pfd. # * 24,588 0
Outdoor Systems, Inc. * 15,000 422
Panavision Inc. * 625,000 12,969
Q-Zar, Inc. * 714,500 2,947
Regal Cinemas, Inc. * 440,000 13,530
Snyder Communications, Inc. * 1,000 27
TV Filme, Inc. * 280,000 3,570
Universal Outdoor Holdings, Inc. * 100,000 2,350
----------
81,566
----------
MEDICAL EQUIPMENT & SUPPLIES - 4.4%
- ----------------------------
Arrow International Inc. 400,000 11,500
Arterial Vascular Engineering, Inc. * 200,000 2,500
Boston Biomedica, Inc. * 200,000 1,350
Combact Diagnostics
Systems Ltd. (ILS) ^# * 22,502 1,000
Conmed Corp. * 450,000 9,225
Cytyc Corporation * 120,000 3,240
DePuy, Inc. * 970,000 19,643
ESC Medical Systems Limited + * 680,000 17,340
Endocare, Inc. # * 66,500 0
Haemonetics Coporation * 500,000 9,438
Imagyn Medical, Inc. * 86,200 700
Instrumentation Laboratory S.p.A. + * 1,000,000 10,125
Intelligent Medical Imaging, Inc. * 311,000 1,944
Lifeline Systems Inc. * 180,000 3,150
Minntech Corp. + * 900,000 10,350
OEC Medical Systems, Inc. * 100,000 1,500
Orthofix International N.V. * 338,500 2,793
Physician Sales & Service, Inc. * 900,000 12,937
Quantech Ltd. # * 600,000 125
Quidel Corporation * 154,200 694
Sabratek Corporation + * 750,000 11,906
Steris Corp. + * 1,505,000 65,467
Suburban Ostomy Supply Company, Inc. * 100,000 1,375
Sunrise Technologies Inc. - Warrants # * 11,500 0
Target Therapeutics, Inc. * 100,000 4,200
TECNOL Medical Products Inc. + * 1,000,000 15,125
Trex Medical Corp. # * 22,000 237
Uroquest Medical Corporation * 294,000 1,984
Vivus Inc. * 56,200 2,037
Xomed Surgical Products Inc. * 100,000 2,000
Zoll Medical Corp. + * 800,000 8,600
----------
232,485
----------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
- ------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
- ------------------------------------------------------------------
(Continued)
Value
Shares (000s)
---------- ----------
MEDICAL SERVICES - 11.6%
- ----------------
ABR Information Services, Inc. * 150,000 $ 5,906
Access Health Marketing, Inc. + * 900,000 40,275
Alternative Living Services, Inc. * 250,000 3,625
American Biogenetic Sciences, Inc. * 228,000 926
American Healthcorp, Inc. * 165,000 1,918
American Medical Response, Inc. * 700,000 22,750
Arbor Health Care Company * 200,000 5,200
Assisted Living Concepts + * 350,000 5,338
CRA Managed Care Inc. * 300,000 13,500
Cardinal Health, Inc. 825,000 48,056
Cholestech Corporation + * 1,000,000 5,625
Cohr, Inc. + * 502,500 13,568
Compdent Corp. + * 845,000 29,786
Cryolife Inc. * 50,000 625
Diagnostic Products Corp. + 883,600 22,863
Health Management Systems, Inc. + * 1,125,000 15,750
Healthdyne Technologies Inc. * 500,000 4,437
Healthsouth Corp. * 1,535,000 59,289
IDEXX Laboratories, Inc. * 100,000 3,600
Inphynet Medical Management Inc. * 500,000 9,000
Integrated Living Communities, Inc. * 300,000 1,725
Integrated Medical Resources, Inc. * 150,000 581
Isomedix Inc. + * 1,000,000 13,000
Kinetic Concepts, Inc. 1,200,000 14,700
Lincare Holdings, Inc. + * 1,595,000 65,395
MIM Corporation + * 650,000 3,250
Medical Resources, Inc. * 70,000 796
Medpartners/Mullikin, Inc. * 700,000 14,700
MedQuist, Inc. * 277,100 6,858
Medstone International, Inc. + * 485,500 3,581
Meridian Diagnostics, Inc. 50,000 650
National Dentex Corp. + * 180,000 3,623
National Surgery Centers Inc. * 400,000 15,200
Omnicare, Inc. 400,000 12,850
Orthodontic Centers of America, Inc. * 772,500 12,360
Pacific Health Laboratories, Inc. # * 140,000 525
Pediatric Services of America Inc. + * 550,000 10,656
Physician Reliance Network Inc. + * 3,775,000 29,256
Physicians Resource Group Inc. * 400,000 7,100
RTW Inc. + * 1,000,000 18,375
Raytel Medical Corp. + * 500,000 5,500
Serologicals Corp. + * 400,000 14,150
Sheridan Healthcare Inc. + * 800,000 4,700
Sola International Inc. * 299,000 11,362
Sterile Recoveries, Inc. + * 425,000 6,295
Sterling House Corporation + * 390,000 3,412
United Dental Care, Inc. * 92,500 2,810
Universal Health Services, Inc. * 450,000 12,881
Universal Standard Medical
Laboratories, Inc. + * 700,000 2,012
UroCor, Inc. * 100,000 956
Xenometrix Inc. # * 6,619 50
----------
611,346
----------
MISCELLANEOUS - 0.4%
- -------------
Buckeye Cellulose Corp. * 650,000 17,306
C.P. Pokphand Co. (HKD) ^ 9,998,000 3,910
Concepts Direct Inc. # * 8,500 0
----------
21,216
----------
NETWORKING - 1.2%
- ----------
Ascend Communications, Inc. * 100,000 6,213
Cisco Systems Inc. * 500,000 31,813
Fore Systems Inc. * 300,000 9,863
Shiva Corporation * 350,000 12,206
3Com Corp. * 20,000 1,468
Tellabs Inc. * 100,000 3,762
----------
65,325
----------
OFFICE & BUSINESS EQUIPMENT - 1.8%
- ---------------------------
American Pad & Paper Company * 600,000 13,575
Danka Business Systems plc ADR 1,750,000 61,906
Nu-Kote Holdings Inc. - Class A + * 2,007,000 20,572
----------
96,053
----------
OIL & GAS - 1.1%
- ---------
Abacan Resource Corporation * 600,000 5,213
Arakis Energy Corp. * 409,300 1,356
Atwood Oceanics, Inc. * 60,000 3,810
ENSERCH Corporation 100,000 2,300
Forcenergy Gas Exploration, Inc. * 100,000 3,625
Forest Oil Corporation * 116,000 2,045
HS Resources, Inc. * 310,702 5,127
Hardman Resources (AUD) ^# * 562,500 0
Hardman Resources Rights - (AUD) ^# * 140,625 0
Harken Energy Corp. * 538,100 1,614
NUMAR Corp. * 190,000 2,601
Oceaneering International, Inc. * 100,000 1,588
Rutherford-Moran Oil Corporation * 300,000 8,400
St. Mary Land & Exploration Co. 197,600 4,915
Snyder Oil Corp. 638,600 11,096
Union Texas Petroleum Holdings, Inc. 100,000 2,237
----------
55,927
----------
PHARMACEUTICAL & BIOTECHNOLOGY - .5%
- ------------------------------
Applied Analytical Industries, Inc. * 36,000 689
CN Biosciences, Inc. + * 419,500 7,656
CV Therapeutics, Inc. * 300,000 2,025
Digene Corporation * 50,000 525
Embrex, Inc. * 57,000 371
Incyte Pharmaceuticals Inc . * 40,000 2,060
Neose Technologies, Inc. # * 5,556 50
Peptech Ltd. (AUD) ^# * 31,250 0
Pharmacyclics Inc. * 188,500 3,016
QIAGEN N.V. * 100,000 2,575
R.P. Scherer Corporation * 100,000 5,025
Titan Pharmaceuticals Inc. - Pfd. # * 46,131 0
Urogen Corp. # * 66,500 0
----------
23,992
----------
REITS - 0.7%
- -----
FelCor Suite Hotels, Inc. + 200,000 7,075
First Commonwealth Inc. * 50,000 988
Manufactured Home Communities, Inc. + 900,000 20,925
Storage USA, Inc. 180,000 6,772
----------
35,760
----------
RESTAURANTS - 1.5%
- -----------
Buffets, Inc. * 75,000 684
Cheesecake Factory Inc., The * 250,000 4,531
Cracker Barrel Old Country Store, Inc. 100,000 2,538
Garden Fresh Restaurant Corporation * 100,000 1,013
Lone Star Steakhouse & Saloon * 200,000 5,350
Longhorn Steaks, Inc. * 180,000 3,398
PJ America Inc. * 194,000 3,492
PizzaExpress plc (GBP) ^# 950,000 8,585
PizzaExpress plc (GBP) ^ 705,000 6,371
Sonic Corp. * 200,000 5,100
Taco Cabana * 300,000 2,212
Wetherspoon (J.D.) Corp. (GBP) ^ 1,549,204 30,788
Wetherspoon (J.D.) Corp. (GBP) ^ * 150,000 3,032
----------
77,094
----------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
- ------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
- ------------------------------------------------------------------
(Continued)
Value
Shares (000s)
---------- ----------
RETAIL - 11.5%
- ------
Abercrombie & Fitch Company * 20,000 $ 330
Amway Asia Pacific Ltd. 700,000 29,663
Borders Group Inc. * 725,000 26,009
Carrefour S.A. (FRF) ^ 45,000 29,280
Charming Shoppes, Inc. * 100,000 506
Chico's Fas, Inc. + * 425,000 1,806
Claire's Stores, Inc. 500,000 6,500
Compucom Systems Inc. * 1,000,000 10,750
CompUSA, Inc. * 1,547,000 31,907
Copart, Inc. * 250,000 3,281
Cost Plus, Inc. + * 98,000 1,874
Cross-Continent Auto Retailers, Inc. * 10,000 209
Diamond Home Services, Inc. + * 500,000 13,750
Dollar Tree Stores Inc. * 117,500 4,494
Friedman's, Inc. + * 400,000 5,900
Gadzooks Inc. + * 400,000 7,300
General Nutrition Companies, Inc. * 1,100,000 18,563
Global DirectMail Corp. * 750,000 32,719
Grand Optical Photoservice (FRF) ^ 81,000 13,129
Grupo Elektra, S.A. de C.V. * 25,000 394
Gymboree Corp. * 1,000,000 22,875
Hollywood Entertainment Corp. * 500,000 9,250
Insight Enterprises, Inc. * 135,000 3,780
Kohl's Corp. * 800,000 31,400
The Maxim Group Inc. + * 1,000,000 17,500
Monro Muffler/Brake, Inc. + * 577,500 9,384
Moovies, Inc. * 2,000 10
Nine West Group, Inc. * 150,000 6,956
Nu Skin Asia Pacific, Inc. + * 805,000 24,854
O'Reilly Automotive, Inc. * 250,000 8,000
PETsMART, Inc. * 1,350,000 29,531
Proffitt's, Inc. * 200,000 7,375
Regis Corp. 900,000 14,625
Rush Enterprises, Inc. + * 500,000 6,000
Saks Holdings, Inc. * 200,300 5,408
Schein (Henry) Inc. + * 950,000 32,656
Staples Inc. * 1,000,000 18,063
Stein Mart, Inc. * 200,000 4,050
Sunglass Hut International, Inc. * 800,000 5,800
Trend-Lines, Inc. + * 529,100 2,513
Viking Office Products, Inc. + * 3,900,000 104,081
Williams-Sonoma, Inc. * 45,000 1,637
----------
604,112
----------
SEMICONDUCTOR & EQUIPMENT - 5.6%
- -------------------------
ASM Lithography Holdings NV * 1,000 50
Altera Corp. + * 1,800,000 130,838
Cymer, Inc. * 10,000 481
DuPont Photomasks, Inc. * 500,000 22,688
Etec Systems, Inc. * 520,000 19,890
Information Storage Devices, Inc. + * 500,000 3,688
Microchip Technology, Inc. + * 1,800,000 91,575
S3, Inc. * 175,000 2,844
Supertex, Inc. * 187,500 2,461
Trident International, Inc. * 210,000 3,412
Triquint Semiconductor, Inc. * 1,000 26
Vitesse Semiconductor Corp. * 300,000 13,650
Xilinx, Inc. * 100,000 3,681
Zoran Corporation * 1,000 18
----------
295,302
----------
SERVICE - 4.2%
- -------
Ambassadors International Inc. + * 787,000 7,378
Apollo Group, Inc. + * 1,500,000 50,156
Applied Graphics Technologies, Inc. * 500,000 14,563
Barrett Business Services, Inc. + * 265,000 4,041
CUC International, Inc. * 35,900 853
CYRK, Inc. + * 1,200,000 15,600
Caribiner International, Inc. + * 170,000 8,543
Children's Comprehensive
Services, Inc. + * 565,000 7,416
Cornell Corrections, Inc. * 300,000 2,663
Cort Business Services Corp. + * 900,000 18,563
Donnelley Enterprise Solutions Inc. + * 250,000 6,125
Employee Solutions Inc. * 400,000 8,200
Equity Corporation International Inc. * 400,000 8,000
F.Y.I. Incorporated * 225,000 4,697
Firearms Training Systems, Inc. * 191,600 2,251
Lason Holdings, Inc. * 50,000 1,025
NCO Group, Inc. * 305,500 5,155
PIA Merchandising Services, Inc. + * 165,000 1,733
Paychex, Inc. 100,000 5,144
The Profit Recovery Group
International, Inc. * 400,000 6,400
Rentokil Group plc (GBP) ^ 1,350,000 10,176
Sylvan Learning Systems, Inc. + * 1,100,000 31,350
----------
220,032
----------
TELECOMMUNICATIONS - 3.6%
- ------------------
ACT Networks, Inc. * 300,000 10,950
AML Communications, Inc. + * 132,500 1,772
Adtran, Inc. * 400,000 16,600
Advanced Fibre Communications * 10,000 556
Airtech plc (GBP) ^ * 300,000 524
AirTouch Communications, Inc. 200,000 5,050
CIDCO, Inc. + * 1,577,500 27,606
Celcore, Inc. # * 85,000 510
Comverse Technology Inc. * 100,000 3,781
Dialogic Corp. * 69,600 2,192
Excel Communications, Inc. * 1,250,000 26,250
LCC International, Inc. * 100,000 1,850
Lightbridge, Inc. * 437,500 3,746
Metro One Telecommunications + * 375,000 2,953
NICE-Systems Ltd. * 87,800 1,580
Omnipoint Corporation * 500,000 9,625
Premiere Technologies, Inc. * 200,000 5,000
Shared Technologies Fairchild, Inc. + * 540,324 4,931
Tadrian Telecommunications Ltd. * 1,000 22
Telco Systems, Inc. * 200,000 3,500
Teledata Communications Ltd. * 130,000 2,990
Teleport Communications Group Inc. * 250,000 7,625
Tel-Save Holdings, Inc. * 100,000 2,900
Teltrend Inc. + * 565,000 15,679
Transaction Network Services Inc. + * 1,095,000 12,592
U.S. Long Distance Corporation * 100,000 800
Uniphase Corp. * 341,000 17,903
Wegener Corp. * 392,000 1,544
----------
191,031
----------
TRANSPORTATION - AIR - 1.4%
- --------------------
AirNet Systems, Inc. * 400,000 5,900
Atlas Air Inc. * 235,000 11,221
Coach USA, Inc. + * 580,000 16,820
Eagle USA Airfreight, Inc. * 600,000 15,750
Expeditors International of
Washington, Inc. 160,000 3,680
Great Lakes Aviation, Ltd. + * 950,000 2,375
OMI Corp. * 1,273,900 11,147
Team Rent Group Inc. + * 539,500 8,699
----------
75,592
----------
TOTAL STOCKS (Cost $2,950,270) $4,459,756
==========
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
- ------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
- ------------------------------------------------------------------
(Continued)
Value
Amount (000s)
---------- ----------
CONVERTIBLE BONDS - 1.8%
- -----------------
Applied Magnetics Corporation
7% 03/15/2006 $20,000,000 $ 34,800
Central Garden & Pet Company
6% 11/15/2003 6,000,000 5,955
Exide Corporation
2.9% 12/15/2005 5,000,000 2,988
Kumagai Gumi Ltd.
4.875% 12/08/1998 500,000 476
Physicians Resource Group Inc.
6% 12/01/2001 45,000,000 43,650
Q-Zar, Inc.
7% 03/31/2001 # 2,500,000 2,500
Sales Dynamics, Inc.
8% 01/01/1997 # 1,000,000 500
Shangri-La Asia Ltd.
2.875% 12/16/2000 1,200,000 1,062
Sterling House Corporation
6.75% 06/30/2006 3,000,000 2,130
Universal Standard Medical
Laboratories, Inc.
8.25% 02/01/2006 5,000,000 4,700
----------
TOTAL CONVERTIBLE BONDS (Cost $87,651) $ 98,761
==========
Par Value
Value (000s)
----------- ----------
SHORT-TERM OBLIGATIONS - 13.2%
- ----------------------
Commercial Paper - 3.2%
- ----------------
Clipper Receivables Corp. $ 60,406,000 $ 60,362
5.32% 01/06/97
Clipper Receivables Corp.
5.619% 01/08/97 23,053,000 23,027
Clipper Receivables Corp.
5.31% 01/09/97 25,224,000 25,194
Clipper Receivables Corp.
5.39% 01/09/97 32,158,000 32,119
Clipper Receivables Corp.
5.41% 01/13/97 29,555,000 29,502
----------
170,204
----------
The accompanying notes are an integral part of these financial statements.
- ------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
- ------------------------------------------------------------------
Par Value
Value (000s)
---------- ----------
Repurchase Agreements - 10.0%
- ---------------------
State Street Bank and Trust Company,
5.35%, dated 12/27/96, due 01/03/97, $100,000,000 $ 100,000
(collateralized by Federal Agency
Securities)
State Street Bank and Trust Company,
5.35%, dated 12/26/96, due 01/02/97, 49,000,000 49,000
(collateralized by Federal Agency
Securities)
State Street Bank and Trust Company,
6.00%, dated 12/31/96, due 01/02/97, 223,950,000 223,950
(collateralized by U.S. Treasury
and Federal Agency Securities)
State Street Bank and Trust Company,
5.30%, dated 12/18/96, due 01/17/97, 150,000,000 150,000
(collateralized by Federal Agency ----------
Securities)
522,950
----------
TOTAL SHORT-TERM OBLIGATIONS (Cost $693,154) $ 693,154
==========
TOTAL INVESTMENTS - 100% (Cost $3,731,075) $5,251,671
==========
LEGEND
% Represents percentage owned of total portfolio
* Non-income producing during the year
+ Affiliated company (See Note 7 of Notes to
Financial Statements)
# Restricted security - investment not registered
under the Securities Act of 1933
(see Notes 1 and 2 of Notes to
Financial Statements)
^ Foreign-Denominated Security:
ATS - Austrian Schilling
AUD - Australian Dollar
CAD - Canadian Dollar
FRF - French Franc
GBP - British Pound
HKD - Hong Kong Dollar
ILS - Israeli Shekel
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
- ------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT
DECEMBER 31, 1996
- ------------------------------------------------------------------
Value
Shares (000s)
-------- ----------
STOCK
- -----
Access Health Marketing, Inc. 210,300 $ 9,411
Acxiom Corporation 25,000 600
Affiliated Computer Services Inc. - Class A 73,600 2,190
Apache Medical Systems, Inc. 5,000 53
Apollo Group, Inc. 1,500,000 50,156
Billing Information Concepts 16,700 480
Breed Technologies, Inc. 100,000 2,600
BroadBand Technologies, Inc. 20,000 295
CBT Group Publishing Ltd. 391,500 21,239
C/Net, Inc. 11,000 319
Centennial Technologies, Inc. 22,000 1,144
Cisco Systems Inc. 40,000 2,545
Concord EFS Inc. 61,800 1,746
Cybercash, Inc. 6,700 154
Fila Holding S.p.A. 55,000 3,197
Genesis Health Ventures, Inc. 100,000 3,112
Healthsouth Corp. 35,000 1,352
Heartport, Inc. 10,000 229
Heartstream Inc. 85,000 1,062
Immunex Corporation 85,000 1,658
Lamar Advertising Company 50,000 1,212
Liposome Company, Inc. 50,000 956
McAfee Associates Inc. 750,000 33,000
Navistar International Corporation 100,000 913
Neuromedical Systems, Inc. 225,000 2,981
Physician Computer Network, Inc. 35,000 298
Quintles Transnational Corporation 10,000 662
Rational Software Corp. 1,483,800 58,703
Raytel Medical Corp. 25,000 275
Roadway Express, Inc. 25,000 484
Safeco Corporation 20,000 789
Serologicals Corp. 50,000 1,769
Signature Resorts, Inc. 47,500 1,674
Sterile Recoveries, Inc. 25,000 370
ThermoLase Corporation 60,000 945
Transaction System Architects Inc. - Class A 450,000 14,963
Ugly Duckling Corporation 50,000 975
Uniphase Corp. 41,000 2,153
Uromed Corporation 10,000 98
Veritas Software Corporation 100,000 4,975
Vitesse Semiconductor Corp. 5,000 227
VISX, Inc. 100,000 2,212
Williams-Sonoma, Inc. 45,000 1,637
Zitel Corporation 87,800 3,896
Zoltek Companies, Inc. 10,000 364
----------
TOTAL SECURITIES SOLD SHORT $ 240,073
==========
The accompanying notes are an integral part of these financial statements.
- ---------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- ---------------------------------------------------------------------
Amounts in thousands
(except per-share amount)
Assets
Investments in securities at value (including
repurchase agreements of $522,950) (Cost
$3,731,075) - See accompanying schedule .............. $5,251,671
Cash and cash equivalents .............................. 54,061
Deposits with custodian bank for securities sold short.. 31,500
Receivable from brokers for securities sold short....... 241,324
Receivable for investments sold ........................ 20,757
Receivable for fund shares sold ........................ 11,324
Dividends and interest receivable ...................... 3,154
Receivable from Investment Advisor ..................... 331
Other receivables ...................................... 210
U.S. Treasury obligations, at value, held as
collateral for securities loaned ..................... 349,771
----------
Total assets ..................................... 5,964,103
----------
Liabilities
Securities sold short, at value (Proceeds $200,294) -
See accompanying schedule ............................ 240,073
Payable for investments purchased ...................... 17,322
Payable for fund shares redeemed ....................... 13,337
Other payables and accrued expenses .................... 2,289
Collateral on securities loaned, at value .............. 349,771
----------
Total liabilities ................................ 622,792
----------
Net Assets ............................................. $5,341,311
==========
Net Assets consist of:
Paid in capital ...................................... $3,828,073
Accumulated net investment loss ...................... ( 16,152)
Accumulated undistributed net realized gain
on investments and foreign currency transactions ... 48,575
Net unrealized appreciation on investments
and assets and liabilities in foreign currencies ... 1,480,815
----------
Net assets, for 914,522 shares outstanding ............. $5,341,311
==========
Net Asset Value Per Share
(based on 914,522 shares outstanding,
2,000,000 shares authorized with $.10
per share par value) ................................. $5.84
=====
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
- ---------------------------------------------------------------------
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------------------------
Amounts in thousands
Investment Income
Dividends, net of $199 of foreign taxes withheld
(including $2,606 received from affiliated
issuers) ............................................. $ 10,292
Interest (including income on securities
loaned of $96) ....................................... 38,364
Other (Note 3) ......................................... 849
---------
Total income ......................................... 49,505
---------
Expenses
Investment advisory fee (Note 3) ....................... 66,207
Distribution fee (Note 3) .............................. 14,073
Shareholder servicing costs ............................ 4,271
Service fees (Note 4) .................................. 3,642
Custodian fees and expenses ............................ 446
Printing and office expenses ........................... 291
Registration fees ...................................... 485
Accounting and audit fees .............................. 330
Administrative costs ................................... 213
Legal fees ............................................. 134
Non-interested directors' fees and expenses ............ 175
Dividends on securities sold short ..................... 396
Loan commitment fee (Note 8) ........................... 339
Miscellaneous expenses ................................. 149
---------
Total expenses before reimbursement .................. 91,151
Expense reimbursement by Investment Advisor (Note 3).. ( 5,844)
---------
Net expenses ......................................... 85,307
---------
Net investment loss ...................................... ( 35,802)
---------
Realized and Unrealized Gain (Loss)
Net realized gain on:
Investment securities ................................ 266,524
Foreign currency transactions ........................ 357
---------
266,881
=========
Changes in net unrealized appreciation
(depreciation) on:
Investment securities ................................ 515,725
Assets and liabilities ............................... ( 1)
---------
515,724
---------
Net gain ............................................... 782,605
---------
Net increase in net assets resulting from operations.... $ 746,803
=========
The accompanying notes are an integral part of these financial statements.
- ------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- ------------------------------------------------------------------
Amounts in thousands
1996 1995
----------- -----------
Increase (Decrease) in Net Assets
Operations
Net investment loss ................ $( 35,802) $( 28,568)
Net realized gain .................. 266,881 118,808
Change in net unrealized
appreciation ..................... 515,724 634,381
----------- -----------
Net increase in net assets resulting
from operations .................. 746,803 724,621
----------- -----------
Distributions to shareholders
From net investment income ......... -- --
From net realized gain ............. ( 223,874) ( 56,051)
----------- -----------
Total distributions................. ( 223,874) ( 56,051)
----------- -----------
Share transactions
Net proceeds from sales of shares... 2,201,589 1,280,126
Reinvestment of distributions....... 215,627 53,274
Cost of shares redeemed............. ( 762,144) ( 431,211)
----------- -----------
Net increase in net assets resulting
from share transactions .......... 1,655,072 902,189
----------- -----------
Total increase in net assets...... 2,178,001 1,570,759
Net Assets
Beginning of year .................. 3,163,310 1,592,551
----------- -----------
End of year ........................ $ 5,341,311 $ 3,163,310
=========== ===========
Other information
Shares:
Sold .............................. 385,291 290,668
Issued in reinvestment of
distributions ................... 37,370 10,763
Redeemed .......................... ( 134,739) ( 98,939)
----------- -----------
Net increase ........................ 287,922 202,492
=========== ===========
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
- --------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Kaufmann Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as
an open-end management investment company. The Fund is
incorporated in Maryland. The financial statements have been
prepared in conformity with generally accepted accounting
principles which permit management to make certain estimates and
assumptions at the date of the financial statements. The
following summarizes the significant accounting policies of the
Fund:
SECURITY VALUATION
Securities for which exchange quotations are readily available are
valued at the last sale price, or if no sale price, at the closing
bid price. Securities, including restricted securities, for which
exchange quotations are not readily available are valued primarily
using dealer-supplied valuations or at fair value as determined
in good faith under consistently applied procedures established
by the Board of Directors. Short-term securities with remaining
maturities of sixty days or less, for which quotations are not
readily available, are valued at amortized cost or original cost
plus interest, which both approximate current value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars.
Investment securities and other assets and liabilities denominated
in a foreign currency are translated into U.S. dollars at the
prevailing rates of exchange at period end. Income receipts and
expense payments are translated into U.S. dollars at the
prevailing exchange rate on the respective dates of the
transactions. Purchases and sales of securities are translated
into U.S. dollars at the contractual currency exchange rates
established at the time of each trade.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of
forward currency contracts, dispositions of foreign currencies,
and the difference between the amount of net investment income
accrued and the U.S. dollar amount actually received. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain
or loss on investment securities.
INCOME TAXES
As a qualified regulated investment company under Subchapter M of
the Internal Revenue Code, the Fund is not subject to income taxes
to the extent that it distributes substantially all of its taxable
income for its fiscal year. Accordingly, no provision for Federal
income taxes is required.
INVESTMENT INCOME
Dividend income is recorded on ex-dividend date. Non-cash
dividends included in dividend income, if any, are recorded at the
fair market value of the securities received. Interest income is
accrued as earned. Investment income is recorded net of foreign
taxes withheld when recovery of such taxes is uncertain.
SECURITY TRANSACTIONS
Security transactions are recorded on trade date, which is the
date the order to buy or sell is executed. Gains and losses on
securities sold are determined on the basis of identified cost.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions are recorded on ex-dividend date.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally
accepted accounting principles.
Permanent book and tax differences relating to shareholder
distributions may result in reclassifications to paid in capital
and may affect the per-share allocation between net investment
income and realized and unrealized gain/loss. Undistributed net
investment income and accumulated undistributed net realized
gain/loss on investments and foreign currency transactions may
include temporary book and tax differences which reverse in
subsequent periods. Any taxable income or gain remaining at
fiscal year end is distributed in the following year.
2. OPERATING POLICIES
FOREIGN CURRENCY CONTRACTS
The Fund uses foreign currency contracts to facilitate
transactions in foreign securities. Losses may arise from changes
in the value of the foreign currency or if counter parties do not
perform under the contract terms. The U.S. dollar value of
foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade.
The cost of the foreign currency contracts is included in the cost
basis of the associated investment.
REPURCHASE AGREEMENTS
The Fund, through its custodian, takes possession, through the
Federal Reserve Book Entry System, of the collateral pledged for
investments in repurchase agreements. The underlying U.S.
Treasury or Federal Agency Securities are valued daily on a mark-
to-market basis to ensure that the value, including accrued
interest, is at least equal to the repurchase price. In the event
of default of the obligation to repurchase, liquidation and/or
retention of the collateral may be subject to legal proceeding.
11
<PAGE>
- --------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------
(Continued)
RESTRICTED SECURITIES
The Fund is permitted to invest in securities that are subject to
legal or contractual restrictions on resale. These securities
generally may be resold in transactions exempt from registration
or to the public if registered. Disposal of these securities may
involve time-consuming negotiations and expense, and prompt sale
at an acceptable price may be difficult. At December 31, 1996,
the Fund held restricted securities with an aggregate value of
$17,795,594, which represented 0.3% of net assets.
SHORT SALES
Short sales are transactions in which the Fund sells a security
it does not own, in anticipation of a decline in the market value
of that security. To complete such a transaction, the Fund must
borrow the security to deliver to the buyer upon the short sale;
the Fund is then obligated to replace the security borrowed by
purchasing it in the open market at some later date. The Fund
will incur a loss if the market price of the security increases
between the date of the short sale and the date on which the
borrowed security is replaced. The Fund will realize a gain if
the security declines in value between those dates. All short
sales must be fully collateralized. The Fund maintains the
collateral in a segregated account with its custodian, consisting
of cash sufficient to collateralize the market value of its short
positions. The Fund may also sell short "against the box" (i.e.
the Fund enters into a short sale as described above, while
holding an offsetting long position in the same security). If the
Fund enters into a short sale against the box, it will segregate
an equivalent amount of securities owned by the Fund as collateral
while the short sale is outstanding. At December 31, 1996, the
market value of securities segregated to cover short positions was
$210,076,650. For the year ended December 31, 1996, the cost of
securities purchased to cover short sales and the proceeds from
securities sold short were $319,766,602 and $400,614,044,
respectively. Securities sold short at December 31, 1996 and
their related values are set forth in the Schedule of Securities
Sold Short.
3. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Edgemont Asset Management Corporation ("Edgemont") is the
investment advisor to the Fund. Edgemont's investment advisory
fee is calculated on an annual basis at 1.5% of the Fund's average
net assets and is payable monthly. For the year ended December
31, 1996, the Fund paid $66,206,955 for investment advisory
services. Certain officers and directors of the Fund are
affiliated with Edgemont. Edgemont has voluntarily agreed to
reimburse the Fund for expenses, to the extent of the investment
advisory fee, if the Fund's annual expenses (other than brokerage
commissions, other capital items, interest, taxes, extraordinary
items and other excludible items) are in excess of any
jurisdictional prescribed limitation. A reimbursement of
$5,843,847 was made for the year ended December 31, 1996.
Edgemont has voluntarily agreed to continue to provide this
reimbursement in the future.
DISTRIBUTION FEE
The Fund has adopted a Plan pursuant to Rule 12b-1 under the 1940
Act whereby the Fund or Edgemont may finance activities which are
primarily intended to result in the sale of the Fund's shares,
including, but not limited to; advertising, printing of
prospectuses and reports for prospective shareholders, preparation
and distribution of advertising materials and sales literature,
and payments to dealers and shareholder servicing agents who enter
into agreements with the Fund or Edgemont. The Fund or Edgemont
may incur such distribution expenses at the rate of .75% per annum
on the Fund's average net assets. For the year ended December 31,
1996, distribution expenses of $14,072,876 were paid by the Fund,
equivalent to .32% per annum of the Fund's average net assets.
REDEMPTION FEE
The Fund imposes a redemption fee of .2% on the redemption price
of the Fund's capital stock shares redeemed, if such shares were
purchased after February 1, 1985. The redemption fee is intended
to be applied to the Fund's aggregate expenses allocable to
providing redemption services, including, but not limited to;
transfer agent fees, postage, printing, telephone and related
employment costs. Any excess fee proceeds are added to the Fund's
assets. For the year ended December 31, 1996 redemption fees of
$2,085,255 were charged by the Fund of which $1,540,295 were
allocated to cover the cost of redemptions. Excess fee proceeds
of $600,000 were added to the Fund's assets.
BROKERAGE COMMISSIONS
During 1996, the Fund placed a portion of its portfolio
transactions with Bowling Green Securities, Inc. ("Bowling
Green"), for which brokerage commissions of $66,520 were paid.
Certain officers and directors of the Fund are affiliated with
Bowling Green.
4. SERVICE FEES
The Fund has adopted an Authorization Agreement for the payment
of a service fee, not to exceed .25% per annum of the Fund's
average net assets, to broker-
12
<PAGE>
- --------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------
(Continued)
dealers that provide liaison services to investors such as
responding to client inquiries and providing information on
investments. For the year ended December 31, 1996, service fees of
$3,641,665 were paid by the Fund.
5. INVESTMENTS
PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of securities (excluding short-term
investments and securities sold short) aggregated $3,506,812,130
and $2,493,916,296, respectively.
PORTFOLIO TURNOVER RATE
Portfolio turnover rate, which is calculated on the lesser of the
costs of investments purchased or the proceeds from investments
sold (excluding short-term investments and securities sold short)
measured as a percentage of the Fund's average monthly portfolio
was 72% for the year ended December 31, 1996.
TAX BASIS OF INVESTMENTS
As of December 31, 1996, the aggregate cost, for Federal income
tax purposes, of investment securities and proceeds of securities
sold short was $3,731,075,677 and $200,293,513, respectively.
Accumulated net unrealized appreciation aggregated $1,480,815,669,
of which $1,679,536,312 related to appreciated investment
securities and $198,720,643 related to depreciated investment
securities.
6. SECURITY LENDING
The Fund loaned securities to certain brokers who paid the Fund
negotiated lenders' fees. These fees, less costs to administer
the program, are included in interest income and amounted to
$96,000 for the year ended December 31, 1996. The Fund receives
U.S. Treasury obligations and/or cash as collateral against the
loaned securities, in an amount at least equal to 102% of the
market value of the loaned securities at the inception of each
loan. This collateral must be maintained at not less than 100%
of the market value of the loaned securities during the period of
the loan. At December 31, 1996, the value of the securities
loaned and the value of collateral was $338,457,945 and
$349,770,984, respectively.
7. TRANSACTIONS WITH AFFILIATED COMPANIES
An affiliated company is a company in which the Fund has ownership
of at least 5% of the voting securities. Transactions with
companies which are or were affiliates are as follows:
AMOUNTS IN THOUSANDS
PURCHASES SALES DIVIDEND
AFFILIATE COST COST INCOME VALUE
AHI Healthcare Systems Inc.* $ 1,206 $ 8,469 $ - $ -
AMBAR, Inc.* - 5,032 - -
AML Communications, Inc.* - 3,018 - 1,772
AMRE Inc.* 2,976 5,045 - -
Access Health Marketing, Inc.* - 10,300 - 40,275
Advantage Health Corp.* - 10,264 - -
Affiliated Computer
Services Inc.-CL A* 4,764 4,354 - 41,650
Alpha Industries Inc.* 935 3,804 - -
Altera Corp.* 9,167 24,623 - 130,838
Ambassadors International Inc.* 3,508 - - 7,378
Apollo Group, Inc.* 4,219 14,751 - 50,156
Assisted Living Concepts* 6,570 - - 5,338
Autotote Corp. - Class A* - 4,454 - -
Avant! Corp.* 12,083 9,819 - -
Aviation Sales Company* 14,786 4,993 - 10,250
Barrett Business Services, Inc.* 2,294 2,719 - 4,041
Bellwether Exploration Co.* - 4,232 - -
Billing Information Concepts* 12,293 2,315 - 21,563
CBT Group Publishing Ltd.* - 185 - 22,785
CFI ProServices, Inc.* - 8,143 - 356
CIDCO, Inc.* 21,434 1,908 - 27,606
CN Biosciences, Inc.* 5,386 - - 7,656
C.P. Clare Corp.* - 5,164 - -
CYRK, Inc.* 148 1,523 - 15,600
Cameron Ashley Building Products* 565 621 - 7,867
Caribner International, Inc.* - 1,417 - 8,543
Central Garden & Pet Company* 13,126 1,955 - 21,063
Chartwell Leisure, Inc.* - 4,351 - 2,750
Chico's Fas, Inc.* 3,349 - - 1,806
Children's Comprehensive
Services, Inc.* 11,200 2,485 - 7,416
Cholestech Corporation* - - - 5,625
Cinar Films Inc. - Class B* 6,449 1,343 - 13,000
Coach USA, Inc.* 11,264 580 - 16,820
Cohr, Inc.* 9,008 704 - 13,568
Compdent Corp.* 11,948 3,604 - 29,786
Computational Systems Inc.* 3,035 52 - 7,223
Consolidated Delivery & Logic* 2,256 3,509 - -
Cort Business Services Corp.* 9,400 3,423 - 18,563
Cost Plus, Inc.* 8,023 8,212 - 1,874
DecisionOne Corporation* 13,413 - - 27,555
Designer Holdings Ltd.* 4,185 - - 12,013
Diagnostic Products Corp. 9,371 - 177 22,863
Diamond Home Services, Inc.* 7,890 350 - 13,750
Donnelley Enterprise
Solutions Inc.* 6,262 - - 6,125
DonnKenny, Inc.* 888 13,637 - -
Duff & Phelps Credit Rating Co. - - 57 11,555
ESC Medical Systems Limited* 17,957 8,104 - 17,340
Family Golf Centers, Inc.* 4,725 2,685 - 10,092
FelCor Suite Hotels, Inc. - 12,544 704 7,075
FinishMaster Inc.* 1,100 - - 3,444
First Investors Fin. Svcs.
Group, Inc.* 1,729 223 - 2,577
Franklin Electronic
Publishers, Inc.* 14,535 7,282 - -
Friedman's, Inc.* 7,640 5,072 - 5,900
GT Bicycles Inc.* 888 5,218 - -
Gadzooks Inc.* 5,206 3,143 - 7,300
Gensym Corporation* 5,557 3,548 - 1,200
Globe Business Resources, Inc.* 2,945 2,160 - -
Grant Geophysical Inc.* 2,067 69 - -
Great Lakes Aviation, Ltd.* 1,710 - - 2,375
Health Management Systems, Inc.* 12,805 3,913 - 15,750
Hummingbird Communications Ltd.* 1,498 3,103 - 14,188
Information Storage Devices, Inc.* 4,181 - - 3,688
Innkeepers USA Trust 5,463 9,438 45 -
Instrumentation Laboratory S.p.A.* 11,819 - - 10,125
(continued)
13
<PAGE>
- --------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------
(Continued)
AMOUNTS IN THOUSANDS
PURCHASES SALES DIVIDEND
AFFILIATE COST COST INCOME VALUE
Integrated Micro Products
plc ADR* $ - $ 4,991 $ - $ -
International Speedway Corporation* 4,184 - - 4,100
Interstate Hotels Company* 5,625 5,187 - 14,831
Isomedix Inc.* 4,093 - - 13,000
Kevco, Inc.* 1,924 - - 2,240
Keystone Automotive
Industries, Inc.* 2,395 - - 7,875
Kronos Inc.* 8,618 - - 13,120
Learmonth & Burchette Mgmt.
Systems plc* - 1,914 - 1,741
Liberty Technologies, Inc.* 1,418 - - 1,138
Life Partners Group, Inc. - 26,860 74 -
Lincare Holdings, Inc.* 3,734 3,131 - 65,395
MIM Corporation* 8,671 148 - 3,250
MSC Industrial Direct, Inc.* 16,119 2,874 - 29,600
Manufactured Home
Communities, Inc. 1,443 9,983 1,304 20,925
The Maxim Group Inc.* 7,650 1,068 - 17,500
MediSense, Inc.* - 48,641 - -
Medstone International, Inc.* 3,512 - - 3,581
Metro One Telecommunications* 4,754 1,524 - 2,953
Microchip Technology, Inc.* 19,924 21,989 - 91,575
Minntech Corp. 3,504 95 90 10,350
MoneyGram Payment Systems, Inc.* 16,184 - - 16,563
Monro Muffler/Brake, Inc.* - - - 9,384
National Dentex Corp.* - 1,243 - 3,623
National Lodging Corp.* - 1,509 - -
Norton McNaughton, Inc.* 4,092 2,667 - -
Nu-Kote Holdings Inc. - Class A* 3,310 11,809 - 20,572
Nu Skin Asia Pacific, Inc.* 23,139 - - 24,854
Oak Technology Inc.* 2,505 19,683 - -
OzEmail Limited* 8,050 - - 4,624
PIA Merchandising Services, Inc.* 4,443 827 - 1,733
PPT Vision, Inc.* 7,152 521 - 5,250
Pediatric Services of America Inc.* 5,289 1,408 - 10,656
The Pet Practice Inc.* - 4,570 - -
Philadelphia Consolidated
Holding Corp.* 4,137 283 - 13,950
Physician Reliance Network Inc.* 18,840 1,233 - 29,256
Planar Systems, Inc.* 5,511 - - 11,750
ProSource, Inc.* 15,886 - - 14,161
Pyxis Corp.* - 36,544 - -
QuickResponse Services, Inc.* - 5,338 - 19,950
RTW Inc.* 7,084 699 - 18,375
Rational Software Corp.* 4,141 5,895 - 79,125
Raytel Medical Corp.* 1,003 - - 5,500
Richey Electronics Inc.* 4,659 1,404 - 7,327
Rush Enterprises, Inc.* 3,100 - - 6,000
Sabratek Corporation* - 762 - 11,906
Schein (Henry) Inc.* 7,787 1,943 - 32,656
Schnitzer Steel Industries* 5,928 5,248 - -
Serologicals Corp.* 5,204 - - 14,150
Shared Technologies
Fairchild, Inc.* 731 - - 4,931
Sheridian Healthcare Inc.* 4,533 579 - 4,700
Signature Resorts, Inc.* 14,031 8,933 - 26,349
Simulation Sciences, Inc.* 6,368 - - 9,669
Smartflex Systems Inc.* 1,039 2,120 - 3,300
Sterile Recoveries, Inc.* 4,915 1,100 - 6,295
Steris Corp.* 32,678 - - 65,467
Sterling House Corporation* 1,488 - - 3,412
Strategic Distribution Inc.* 3,960 - - 13,639
Studio Plus Hotels Inc.* 4,321 935 - 7,481
Suiza Foods Corporation* 13,249 170 - 18,225
Summa Four, Inc.* - 4,647 - -
Supertel Hospitality Inc.* 850 902 - 1,800
Supreme International Corporation* 5,020 - - 4,350
Sylvan Learning Systems, Inc.* 3,097 5,721 - 31,350
Team Rent Group Inc.* 4,772 1,205 - 8,699
TECNOL Medical Products Inc.* 5,589 - - 15,125
Tekelec, Inc.* 1,788 10,468 - -
Teltrend Inc.* 8,179 - - 15,679
Transaction Network
Services Inc.* 11,154 75 - 12,592
Trend-Lines, Inc.* 2,274 - - 2,513
Universal Standard
Medical Labs, Inc.* - - - 2,012
Viking Office Products, Inc.* 39,133 2,575 - 104,081
Walsh International, Inc.* 14,544 8 - 10,500
Wilmar Industries, Inc.* 16,087 2,481 - 27,750
Wolverine World Wide, Inc. 2,085 11,872 155 37,700
Zoll Medical Corp.* 383 4,482 - 8,600
-------- -------- ------ -------
$792,506 $538,124 $2,606 $1,848,841
======== ======== ====== ==========
* Non-income producing during the year
8. LINE OF CREDIT
The Fund has a $200,000,000 committed secured leverage line of
credit with its custodian bank. The Fund pledged 75% of its
assets as collateral against the line. Borrowings are charged
interest at 0.75% over the current overnight Federal Funds Rate.
The Fund incurs a commitment fee of 0.1925% per annum on the
unused portion of the line of credit, payable quarterly. There
were no borrowings under the line of credit during the year ended
December 31, 1996.
14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and
Board of Directors of
The Kaufmann Fund, Inc.
We have audited the accompanying statement of assets and
liabilities of The Kaufmann Fund, Inc., including the schedules of
investments and securities sold short, as of December 31, 1996, and the
related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is
to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of December 31, 1996, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of The Kaufmann Fund, Inc. as of December 31, 1996,
the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then
ended, in conformity with generally accepted accounting principles.
Abington, Pennsylvania SANVILLE & COMPANY
January 31, 1997 Certified Public Accountants
15
